Spring 2007, Volume 17, No. 1

Yudahua: The Growth of an Industrial Enterprise in Modern China (1870-1958)

Peng Juanjuan

From the present to the past: a revisit to China's early industrialization

Since 1990s, Chinese economic development has become an overheated topic. At least two recent events triggered American, both popular and academic, interests in Chinese economy: China's economic boom following the 1979 economic reform and US trade deficit with China started from 1990s. While the country maintained an average two digital growth rate for more than two decades and created over 200 billion US dollar trade deficit for its US partner in 2006,¹the stories about China and its economy frequented every newspaper and journal in the U.S.

These widely published journal articles on Chinese economy, however, share one common mistake. They tend to focus exclusively on post-reform period, and depart an energetic new China from its turbulent past. This public misunderstanding could easily find its roots in academia, which maintained a divided picture of China's modern development. On the one hand, some of the most influential books about Chinese economic history are still books that deal with "China's tardy industrialization," which conflicts with the new image of China as a rising economic power. On the other hand, the whole picture is further fallen apart because historians like to end their search for China modern development before the 1937 Japanese invasion, while the economists tend to focus on the post-1979 period.² This leaves the four critical decades in between a blank. To make it worse, economists and historians use different research approaches, and they seldom make efforts to engage in dialogue.

Therefore, one of the most urgent tasks in the field of Chinese economic history is to search for an integrated picture of China's modern development and to connect Chinese recent growth with its early industrial efforts. To achieve this goal, the first thing we need to do is to revisit China's early industrialization, and to offer a more positive and probably less biased view of China's pre-1949 economic development. This is the main agenda of my dissertation.

In order to revisit China's early industrialization, I adopt a case study approach and focus on the history of a specific company. My research target, Yudahua, is a Republican-era Chinese enterprise in cotton textiles, which was considered the "king" in early industries. The company represents a success story. Within half an century, it developed from a small textile company to a business group with six cotton mills, one national bank with more a dozen of branches, one coalmine and one trading firm. As a leader in the industry, the company showed the path that other Chinese businesses might have followed if China's economic development had not been interrupted by political events in the 1950s and 1960s, which possibly offers some historical explanations for China's recent economic growth. Also, unlike the well-studied Chinese industries in Shanghai, this inland company had little foreign connection. Thus, it might reveal more about an indigenous Chinese pattern. At last, I chose this case because it has a long uninterrupted history. The business started in late 19^th century right after the introduction of modern industry in China, has survived the vicissitudes of the 20th century, and still exists in the 21^st. At first, it was a government sponsored business, and then it was privatized in early 20th century. Later on, in the 1950s, it was nationalized again during the communist regime. Recently, after the economic reform, the company has been privatized again in the 1990s. The history of the company, to some degree, represents the history of China's modern business development. Although my dissertation project ends in late 1950s, the case itself offers me opportunities to later expand my dissertation to include the post-1950s period.

The history of Yudahua follows a simple line. At first, there was a state-owned textile company sponsored by late Qing reformers during the self-strengthening movement. When the business went bankrupt, it was leased to a group of private merchants, who originally specialized in trans-regional trade on the Yangzi River. During the First World War, these businessmen made a fortune from the leased company. So, after their lease was expired, they decided to found their own mill. It turns out that, in the early 1920s, two twin mills were established at the same time: One in metropolitan Wuhan and the other in small town Shijiazhuang. They were both owed by the same group of shareholders; both were established based on the financial and managerial resources of the same parent company. However, they were registered independently and managed separated as two business ventures. Much of the difference in management was due to their very different social context. Then, in the 30s, an industry-wide crisis forced the two companies to reconsider cooperation. Consequently, a "jituan" (Chinese business group) with shared sales and purchasing networks came into shape. During the 40s, this business group expanded vertically and horizontally to include six cotton mills, one national bank, one coalmine and one trading firm. This sudden growth created a new management crisis which inspired further managerial innovations. A central office was established to institutionalize regular coordination among companies. And gradually, managerial hierarchy had replaced social networks to be the norm inside the business. When the story ended right after the nationalization movement of early 50s, this business group was broken into pieces again. The central office was dismissed and the connections among different companies inside the business group no longer existed. All the mills now belonged to the local government. Surprisingly, the Communist government functioned quite similar to the central office in the capitalist business, and it started to distribute resources among all the local mills which previously owned by different business groups. Within the industry, the methods of coordination were inherited although the ownership of individual mills had been changed.

Based on the history of this company, I would like to take my reader to a brief tour of China's early industrialization. On the one hand, I will review the existing scholarships on some major issues. On the other hand, I will offer my own answers to the same questions, which challenge or try to complement the old view.

A discussion on China's early industrialization would have to start with a definition of early industrialization. How early did the early industrialization start in China? Naming his most influential book "China's early industrialization," Albert Feuerwerker certainly has an answer to this question. To him, China's early industrialization started with the late Qing reformers' efforts to introduce foreign machines and factories to China. Madeleine Zelin might not agree with Feuerwerker. She sees China's handicraft industry, notably the salt industry, as the prototype of China's later industrial development, although the transition from handicraft to machine manufacturing sometimes appeared atypical comparing to the experience of the West.³Some other scholars might emphasize foreign businesses and Chinese compradors, arguing that China's modern development started with Western economic presence.⁴Depending on which one is identified as the main source of China's industrial development, discussions on early industrialization could start with old handicraft industry, "self-strengthening" enterprises, or compradors and western presence. In this research, while acknowledging the influence of other sources, I follow Feuerweker's method, and take the "self-strengthening" movement as the starting point of China's industrialization.

But I highlight the "self-strengthening" enterprises for different reasons from Feuerwerker and his followers. Feuerwerker studied "self-strengthening" enterprises because it was the first government effort to catch up with the West militarily and economically, and because it could have successfully turned the country into a predominantly industrialized economy if China responded to the Western impact in the same way as their Japanese neighbor did.⁵ Published in 1960s under the influence of Fairbank's impact-response paradigm, Feuerwerker's China's early industrialization became one of the most influential books in Chinese economic history and created a new genre of literature on "self-strengthening" enterprises. His early followers, though fault these self-strengthening enterprises for different problems, all agree that they failed China's early industrial efforts and thus caused China's tardy industrialization.⁶ Since 1990s, the assessment of these early efforts of industrialization was gradually shifted from negative to positive. Chi-kong Lai's study on the China Merchants' Company, for example, notes that its initial success was due to a healthy balance between government financial support and enterprise autonomy.⁷ However, the performance of "self-strengthening" enterprises was still evaluated to decide the economic conditions in the nineteenth century, whether a total failure or a conditional success. On the issue of this early industrial effort, if there is anything more important than asserting judgment on their performance, it is the long-lasting impact of "self-strengthening."

While acknowledging the managerial problems of the "self-strengthening" enterprises, I notice that many of them did not close the business after they went bankrupt in 1890s. Either rented to or purchased by Chinese merchants, they nurtured the first generation of China's industrial capitalists, who later build the foundation of China's economic development during the twentieth century.⁸ Among the various government enterprises that privatized would have to include China Merchants' Steam Navigation Company, Hanyeping Coal and Iron Company, and Hengfeng Spinning Mill. My research subject, Yudahua Business Group, also started as a privatized "self-strengthening" enterprise, Zhang Zhidong' Hubei Textile Company. Inheriting trained workers, seed capital, and new management strategies from the old state-sponsored enterprise, the new private business expanded rapidly during the Republican period. By 1949, it already expanded to include six cotton mills located in Wuhan, Shijiazhuang, Xi'an, Chongqing, Chengdu, and Guangyuan. Wherever it went, this business became an industrial leader. In Wuhan and Chongqing, they were among the biggest employers and taxpayers in town, who dominated the local economy. In Xi'an and Chengdu, they were the early industrial companies and directly shaped the industrial development of the cities. In Shijiazhuang and Guangyuan, the places grew from a small village into a big city because of this pioneer industrial company. Even today, cotton textile is still the leading industry there. In sum, although "self-strengthening" movement was not a notable success if measured in the number of new firms or the national impact of these industrial firms, in the long run, it successfully introduced a modern industry that gradually expand to have a profound social and economic impact in China.

From late Qing to early Republican, the same business which failed during the late-Qing reform achieved unprecedented success during the first three decades of the twentieth century. Who created the "golden age of the Chinese bourgeois?" Marie-Claire Bergère has an answer to this question. Among other factors, she emphasized the loosed government control during the warlord period. To her, the temporary removal of government intervention gave the Chinese entrepreneurs a precious opportunity to pursue their economic goals.⁹ Based exclusively on businesses in the Shanghai region, Bergère's argument could overemphasize the negative effects of the Nationalist government. When testing her theory in the business of inland cities, I notice that the Nanjing government did not have much influence on economies beyond the Lower Yangzi Delta until the war started in 1937. However, the inland cities experienced similar industrial decline in the early 1930s. So the international events, from WWI to Great Depression, could be a more important factor, comparing to the national economic policy, in determining the success of a business. At first, the WWI withdrew the European companies from the China market, which offers an opportunity for the growth of Chinese national industry. Later on, the Great Depression affected Chinese industries in two ways. First, the dropping agricultural exports reduced the purchase power of Chinese peasants. Second, the internal economic problems led Japan to further economic aggression in China, which significantly increased foreign competition in Chinese market of manufactured goods. However, neither these international events nor the changing political policies directly caused the rise and the decline of China's national industries. Rather, they simply offered a temporary opportunity for the Chinese entrepreneurs to create their own golden age.

Republican China, from Nanjing decade to Wartime, is an understudied period for economic historians. The Communist historians, for their own political agenda, have downplayed Nationalists' economic efforts. To them, the Nanjing Decade could be simplified as the rise of the bureaucratic capitalists: Allied with the comprador capitalists, they collected the wealth from the Nationalist capitalists and use them for their own good. Then, when the war started, the Nationalist, comprador and bureaucratic capitalists were all withdrawn from the stage because it seems so obvious to many scholars that the wartime period was dominated by political struggles and military conflicts, and economic development was hardly a major theme. Only occasionally, wartime inflation was mentioned as an evidence of the inefficiency of the Nationalist government. Shared by the Western scholars, this view had dominated the China field until very recently, when the improved relationship between Mainland and Taiwan encouraged a more positive view of Nationalists' economic policies, and consequently a more positive view of the economic development during the Republican era. A couple of pioneer studies have observed active business expansion both in the home front and under the Japanese occupation.¹⁰ Some other scholars also argue that the Nationalists party could have led Chinese economy to a better direction, if only the coporativists led by Wang Jinwei won over the militarists led by Jiang Jieshi during the succession struggle after Sun Zhongshan's death.¹¹ Unlike most of the recent studies, my dissertation focuses more on the activities of entrepreneurs rather than the state. On the one hand, it joins this new scholarship and argues that Republican China had experienced some fundamental economic changes, and the Nationalist government had made a lot of efforts to shape this new economy. On the other hand, it highlights the agency of National capitalists, suggesting that they were also playing an important role. From family firm featured by social networks to large-scale multidivisional enterprise with impersonal hierarchy, these Chinese entrepreneurs had showed a new direction for Chinese businesses.

If the wartime development had created a new economic pattern in China, what kind of changes and continuities Chinese economy had experienced when the "1949-divide" was crossed? On this issue, early scholarship had already made the changes clear. It has been long believed that after "Liberation" the new communist government wholesale borrowed the soviet pattern and built a new planned economy in China. Morris Bian's recent study on state-owned enterprises in ordnance and heavy industry challenges this old view and argues that it was the wartime crisis in the 1940s, instead of the Soviet influence in the 1950s, that shaped the original form of the state enterprise system ---a system that dominated new planned economy.¹² By focusing on a private business in textile industry, this research further expands Bian's argument and finds continuities in factories, markets, and industries. On the one hand, it observes some fundamental changes in the business world after "Liberation," such as the emergence of a new management-labor relationship, a controlled market, and a new mechanism for resource allocation inside the industry. All these changes were part of the shift to a planned economy that dominated China for the next three decades. On the other hand, the research also suggests that some of the major changes that took place right after "Liberation" actually had their roots during the decade before "Liberation." A new management-labor relationship that favored the workers' interests can be traced back to the wartime shortage of experienced workers. A controlled market had already been tested as part of the Nationalists' wartime policy. The new Textile Industry Administrative Bureau, to some degree, mirrored the Central Office in "big businesses" that emerged in the 1940s. In short, the wartime legacy shaped China's post-1949 economy in ways that foreshadowed changes in the ideological and political spheres.

Limited by my research topic, the picture I just presented here is far from complete. However, it suggests a continuous growth of China's early industries which was driven by Chinese industrial entrepreneurship. I hope to use this picture to complement an early image of China's modern economic development, which was largely shaped by state interventions, and was thus divided into broken pieces by dynastic changes.

From a small family firm to a big business group: the growth of an industrial enterprise

As the basic unit in the business world, company was one major research subject for American business historians. To a certain degree, it was Chandler who created the new genre of scholarship on American firms in 1960s. His research on big business has attributed American economic development in the twentieth century to the success of American corporations.¹³ Specifically, Chandler points out that the institutional development of American firms, or the rise of big businesses, has been the major competitive advantage of American economy. Based on this framework, Chandler's followers later added entrepreneurs and state into the picture, suggesting entrepreneurship and government intervention, besides the new technology pointed out by Chandler, also contributed to the development of business institutions.¹⁴ In short, historians of American firms might disagree on the motivation of these institutional changes; they all agree that this institutional development inside the firms is critical in shaping the economic pattern outside the firms.

At the same time, company history has draw increasing attention in China for a totally different reason. After Deng Xiaoping's Southern tour of 1992, China started to promote a socialist market economy, in which the state-owned enterprises were gradually transformed into a revised version of Modern Corporation. To offer the theoretical guide for this new transition, Chinese scholars turned to look at the business practice both in the West and in the past. A considerable amount of studies on company history was produced during this period. One of the major agenda of these researches was to justify the reform policy by discovering the similar "capitalist" practices in indigenous Chinese businesses---so the new reform would appear ideologically more "Chinese" and less "capitalistic." In late 1990s, when the economic reform was deepened and the privatization movement has already started, economic historians in China had little ideological confusion left. Influenced by Chinese economists, who borrowed institutional economics from the West, they continued to study the history of Chinese enterprises but with a new interest in their institutional development.¹⁵

Both new academic trends in the two fields have shaped the research interests of Chinese business historian in America, who began to focus on Chinese firms as a business institution. During the past decade or two, a few case studies of Chinese firms emerged. Interestingly, while most of the scholars started their projects as a comparative study hoping to find one Chinese business model, many of them concluded, after exploring the dynamics and the complexity of Chinese business world, that the unique Chinese pattern did not exist. Sherman Cochran suggests that, in his Encountering the Chinese Networks, the Chinese contexts favored particularly neither Western corporation hierarchy nor Asian social networks. Depending on the specific business situation, either pattern could work well in China. Madeleine Zelin discovers many institutional arrangements, such as vertical integration, in salt lineage of Zigong that may look familiar to Western readers.¹⁶ She even finds parallels between late-nineteenth-century Chinese salt industry and early-nineteenth-century U.S. textile manufacturing. In both of these two researches, some particularly Chinese features are still acknowledged, such as a special business-state relationship featured with a dominant government influence, an emphasis on family values within family firms and their modern versions, the absence of a commercial code until the twentieth century, and China's exposure to foreign influence as a latecomer to industrialization. However, as Zelin points out, one should not overemphasize this Chinese character. The experience of Western firms was not either a linear progress from "traditional" to "modern." Things that do not fit in specific context of an ideal Western corporation were not necessarily non-Western.

The rejection of a unique Chinese pattern reflects an effort to correct some early mistakes in academia. On the one hand, some American business historians have challenged Chandler's theory and argued that the rise of the big businesses was only one among several paths toward America's modern development, and it might not even be the most efficient one.¹⁷ If there was no single theory of development in American, there should be no Chinese model either. On the other hand, Max Weber's theory of a unique China shaped by a unique Chinese culture had dominated the field of Chinese social and economic history for too long. From accusing Chinese culture for China's late industrialization to crediting Chinese culture for China's recent economic success, historians eventually realize that culture might not be the most decisive factor in shaping China's economic development. Set the "mysterious" Chinese culture aside, the Chinese business environment was as complex as that of the West. Therefore, the modern development of Chinese firms could be studied just as those of the West.

According to Zeline, "if there were no one Chinese business model, one comparative case that has played an important role in the development of single or narrow track theories of development is removed."¹⁸ But does this mean we can not generalize one particular path of development that had been shared by at least a certain group of enterprises? From a small cotton mill to a giant business group, Yudahua experienced many dynamic changes in its managerial structure during the first half of the twentieth century. Can we find a clear path of Yudahua's institutional growth? To which extend this development track can represent the history of Chinese enterprises? Besides the original agenda to revisit China's early industrialization and to search for continuities in a seemly fragmented picture, this study also has a second agenda in order to fit in the existing scholarship on Chinese firms. It aims to trace the institutional development of Yudahua, and to situate Yudahua's experience within the larger history of Chinese firms.

Joining some pioneer studies on Chinese firms, this research compares China's experience with that of the West, and then rejects a unique Chinese pattern. As it shows in the story, Chinese entrepreneurs possessed the same entrepreneurs' instinct as their Western counterparts, and they would respond to similar problems related to new social, political, economic, and technological situations with some similar innovations in managerial arrangements. However, unlike some early studies, my dissertation suggests a linear path of institutional development of this particular enterprise. It is a path from small to big, from personal to contractual, and from traditional to modern.¹⁹ Eventually a "jituan" or Chinese business group appeared in 1940s with a multidivisional structure under the control of a central office. As my narrative will show, the creation of a "jituan" was a response to a series of business crises the enterprise faced in 1930s and 1940s. Many of institutional innovations started as an expedient arrangement targeting one temporary problem, and were maintained after the particular crisis was relieved. Ironically, this new business institution was hardly influenced by the newly-enforced Chinese company law or the efforts of early-twentieth-century reformers, two topics that have been well studied to understand China's modern business development.²⁰ In fact, according to the company law, "jituan" was not even a legally recognized form of business organization. Again, entrepreneurship is emphasized as the main driving force for the institutional development of this industrial enterprise.

To which extend the creation of this Chinese business group represents the modern experience of Chinese business enterprises? According to Elizabeth Koll and Kai Yiu Chan, the story of some other early-twentieth-century enterprises, such as Zhangjian's Dasheng enterprises and Liu Hongsheng's business empire, partially confirm my argument.²¹ Like Yudahua, they both developed from a single enterprise to a multidivisional business empire. Both of them had created some new institution, like the central office in Yudahua, to coordinate business operation among different units. However, one of major features that distinguish these early studies from my case is the persistency of a traditional family business pattern during their business expansion and institutional change. Although I also found long-lasting tension between personal relationships and contractual relationships, I believe there was a slow, but gradual transition from one pattern to another. This difference could have a simple explanation. Compared to the other two companies, Yudahua had a longer history and developed into a big business relatively late, which allows enough time to make the transition observable. Besides these two case studies, Zhang Zhongmin's new book on Chinese corporation also points out the emergence of many big business groups during the 1930s and 1940s.²² Labeled as "xi," "xitong," or "jituan," they seem as the variations of the Chinese business group depicted in this research. However, unlike Yudahua, many of these business groups were controlled by the local or central government, rather than the private owners.

Even though we can proof their existence, business groups did not prevailed in China's business world during the early twentieth century. On the eve of the Communist Takeover, the great majority of Chinese firms were still small businesses. The experience shared by Yudahua and some other big businesses could only represent one facet of China's modern business development. But this might be the most important facet. As the leaders and the winners in the industries, these business groups showed the path other enterprises might have followed if China's economic development had not been interrupted by political events in the 1950s and 1960s. When Chinese business group reemerged in China after 1980s, it rapidly expanded to dominate Chinese economy. As it showed in the Chinese stock market, almost half of the companies listed there were labeled "jituan" or business group. Not surprisingly, Chinese business group has drawn increasing attention among scholars who is interested in China's recent development.²³ This study, by tracing the development of this early twentieth-century business group, hopefully can offer a historical perspective for their discussion, which is often ignored by economists, sociologists, and political scientists who were too impressed by rapid changes of today's China.

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1. Chinese economic growth rates for the past two decades came from International Monetary Fund, World Economic Outlook Database, April 2007. According to U.S. Census Bureau, U.S. trade deficit with China was 232 billion U.S. dollars in 2006.
2. For example, two influential historical studies, Albert Feuerwerker's The Chinese Economy, 1870-1949. and Thomas Rawski's Economic Growth in Prewar China both focus primarily on the prewar economic development. Another two influential economics studies, Justin Yifu Lin's The China Miracle: and Barry Naughton's Growing out of the Plan: Chinese Economic Reform both emphasize the post-1979 period.
3. Madeleine Zelin, The Merchants of Zigong, Industrial Entrepreneurship in Early Modern China.
4. For example, see Hao Yen-p'ing's The Commercial Revolution in Nineteenth-century China : the Rise of Sino-Western Mercantile Capitalism and The Comprador in Nineteenth Century China: Bridge between East and West.
5. Albert Feuerwerker, China's Early Industrialization: Sheng Hsuan-huai (1844-1916) and Mandarin Enterprise.
6. For example, Wellington Chan argues, in his Merchants, Mandarins and Modern Enterprises in Late Ching China, that the lack of coordination between the central and local governments was the major reason for the failure of these enterprises.
7. Chi-kong Lai, "Li Hung-chang and Modern Enterprise: The China Merchants' Company, 1872-1885," in Samuel Chu & Kwang-ching Liu, ed. Li Hung-chang and China's Early Modernization.
8. In his new book China and Capitalism: a History of Business Enterprise in Modern China, David Faure suggests the privatized central government enterprises and the modernized family firm were two major sources of China's modern firm during the early twentieth century.
9. Marie-Claire Bergère, The Golden Age of the Chinese Bourgeoisie, 1911-1937, pp. 6-10.
10. Morris Bian's new book, The Making of the State Enterprise in Modern China: the dynamics of institutional change deals with the wartime development in the home front. Parks Coble's Chinese capitalists in Japan's New Order, the Occupied Lower Yangzi, 1937-1945, writes about business activities under the Japanese Occupation.
11. See Margherita Zanasi's Saving the Nation: Economic Modernity in Republican China.
12. Morris Bian, The Making of the State Enterprise in Modern China: the dynamics of institutional change
13. Alfred Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise and The essential Alfred Chandler: essays toward a historical theory of big business.
14. Daniel Nelson, "Western Business History: Experience and Comparative Perspectives," in Robert Gardella ed. Chinese Business History: Interpretive Trends and Priorities for the Future.
15. For example, Zhang Zhongmin, Jiannan de bianqian---jindai zhongguo gongsi zhidu yanjiu, and Li Yu, Wanqing gongsi zhidu jianshe yanjiu.
16. Madeleine Zelin, The Merchants of Zigong, Industrial Entrepreneurship in Early Modern China.
17. For example, see Michael J. Piore & Charles F. Sabel, The second industrial divide: possibilities for prosperity.
18. Madeleine Zelin, "Guest Editor's Introduction," Enterprise & Society 6.3 (2005) 357-363
19. Here "traditional" and "modern" simply imply the changes are progressive.
20. For some major studies on Chinese company law, see William Kirby, "China Unincorporated: Company Law and Business Enterprise in Twentieth-Century China," The Journal of Asian Studies 54, no. 1 (Feb. 1995):43-63; and David Faure, "Company law and the emergence of the Modern Firm," in his China and Capitalism: a History of Business Enterprise in Modern China.
21. Elisabeth Köll, From Cotton Mill to Business Empire: The Emergence of Regional Enterprises in Modern China and Kai Yiu Chan, Business Expansion and Structural Change in Pre-war China: Liu Hongsheng and his Enterprises, 1920-1937.
22. Zhang Zhongmin, Jiannan de bianqian---jindai zhongguo gongsi zhidu yanjiu (Corporations in modern China), pp. 182-196.
23. Chinese business group or "jituan" is the main research subject of Lisa A. Keister's new book Chinese Business Groups: The Structure and Impact of Interfirm Relations during Economic Development. But she fails to identify the historical origin of this business institution, and thus mistakenly takes it as a post-reform creation of Chinese government who simply tried to learn the lessons from their Japanese and Korean neighbors.

 Last Updated On: 5/25/07