XINHUI, China (AFX) - The sour smell of fermenting soy beans hangs in the air at the Lee Kum Kee sauce factory as company Chairman Eddy Lee explains why he's haunted by a famous Chinese saying: 'Wealth doesn't go beyond the third generation.'
The family firm -- which began making sauces more than 100 years ago and is now a major global brand -- is already being run by the fourth generation. And the fifth wave is showing no interest in taking over, Lee says.
'There are so many family businesses that fail to continue. We want to break that curse,' Lee, 50, says from a sofa in the living room of his bungalow on the factory's grounds, with a huge green lawn and a grove of banana trees.
It's the classic succession issue -- one of the most serious challenges facing family businesses around the world. How do you groom the next generation, restructure the company for new leadership and avoid the familial feuding that has sunk so many others?
The Lee family has decided to take a bold step: hiring an outsider to be the chief executive by the end of this year. Until now, most top management spots have been filled by family members or longtime employees.
'We believe the company is becoming big enough that it's not an easy job to do anymore. It requires more management skills,' said Lee, whose round face flashes a boyish grin between earnest, cautious remarks about the business.
It's a huge move for a company founded in 1888. The first product was oyster sauce, a salty and sweet condiment that's one of the key ingredients of Cantonese cooking.
Lee's great grandfather developed the sauce recipe by accident. The restaurateur left a pot of oyster soup boiling too long and discovered the broth had been reduced to a thick, dark brown sauce that was tastier than the soup. It's now a popular ingredient in stir fries and a variety of other dishes in southern Chinese cuisine.
The company moved to Hong Kong in 1946 and began quickly expanding its global business, selling its premium sauces to wealthy Chinese living in San Francisco, London, New York and Hawaii who could afford the luxury product.
Now Lee Kum Kee sells nearly 300 types of sauces and condiments, including chili garlic sauce, minced ginger, sesame oil and soy sauce, in grocery stores worldwide.
Lee is tightlipped about the company's financials and only shares vague figures about sales and production.
'Every year, we have 15 percent to 20 percent, at the most 25 percent, growth,' Lee said. 'But this is not what we want. We want breakthroughs all the time.'
Lee said the company is making a big push to become the leader in China's huge soy sauce market.
'I think if we can be No. 1 in China, we have a good chance to be No. 1 in the world in Asian or Chinese sauces. We are not far away. We're currently No. 2,' said Lee. The main competition is Chinese rival Haitian Flavoring Co. Ltd.
Lee Kum Kee produces about 100,000 metric tons of soy sauce each year, he said. The plant in Xinhui, a muggy city in southern China, employs about 1,400 people and has several football field-sized spaces with rows of silo-like fermentation tanks that each hold enough soy sauce to fill 100,000 bottles. The company has a sauce factory in Hong Kong, two in China and distribution centers and sales offices in the U.S. and Europe.
Although the business is humming along, Lee said the family can't stop worrying about the Chinese saying 'Fu bu guo san dai' or 'Wealth doesn't go beyond the third generation.' He's collected similar sayings in German, Spanish and several other languages.
Joachim Schwass, a professor and expert on family run companies at the IMD business school in Lausanne, Switzerland, said the challenge of handing off companies to the next generation involves the way the businesses evolve.
Companies are often started by entrepreneurs who are unhappy with the present environment and want to create something new, Schwass said. 'They have this huge motivation that drives them,' he said.
But Schwass says the founders often tell the next generation to just keep doing what they did and not to touch anything. 'Very often, the next generation is ill prepared for the changes and challenges,' he said.
There's also a shift from parents who control the power to a new power-sharing structure among the children.
'So very often the next generation is badly prepared for the sharing of power and the moment the parents aren't there anymore, you see fights erupting,' Schwass said. 'The next generation goes to the model they're most familiar with, namely power control. They try to vie for total control.'
Lee said that his company tries to work out problems by having regular family retreats.
'Every three months, we sit down for five days. No other business. Usually we stay at a golf course. We discuss all our issues,' he said.
The family -- four brothers, a sister and two parents -- also holds an election every two years for the chairmanship, said Lee, who serves until 2008.
Lee said the company has had a difficult time searching for a CEO. It needs someone -- preferably ethnic Chinese -- with global experience who understands Chinese food culture and the sauce business. The person also has to understand how to work with the family, he said.
This is a tough time to be looking for such a person, said Maris Martinsons, associate professor of management at City University of Hong Kong.
'The Chinese economy is booming and lots of other companies are looking for the same profile,' he said.
Martinsons said Lee Kum Kee was smart to be seeking leadership from the outside, but said there are risks for executives considering the job.
'If the company is not publicly listed, it hasn't been properly vetted by the outside investment community,' he said. 'There may be skeletons in the family business' closet and that would make the executive think twice before he or she takes the job.'
Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.