Encountering Chinese Networks

Chapter 2

Standard Oil Company

On January 22, 1882, John D. Rockefeller formed the Standard Oil Trust and led Western businesses down the path from personal capitalism to managerial capitalism. As characterized by Chandler, Standard Oil was "the first of the great industrial consolidations" in America and the world.[note 1] As early as the mid-1880s, from its headquarters at 26 Broadway in New York City, Standard Oil's "extensive managerial hierarchy began to coordinate, monitor, and plan for this global industrial empire." Its "interrelated three-pronged investment in production, distribution, and management...made it a first mover on a global scale.[note 2] In the vanguard of businesses blazing a new trail, Standard Oil adopted a policy of extending its managerial hierarchies abroad as well as at home, and it thus might well seem, in retrospect, to have set the stage for a dramatic encounter between Western and Chinese business practices in China during the late nineteenth century.

In the event, Standard Oil postponed this dramatic encounter until the early twentieth century. Although the company carried out its policy of establishing foreign affiliates in all of the world's other major markets by 1891, it did not do so in China until more than a decade later.[note 3] In the meantime, in China it surrendered almost all control over the marketing of its kerosene to a sole Chinese agent between 1883 and 1893, and it then took at most indirect control over marketing by delegating authority to Chinese compradors between 1893 and 1903. For these twenty years, 1883-1903, it withheld its corporate hierarchy from China and delegated authority for the distribution of its goods to Chinese social networks.

Marketing through a Chinese Agent, 1883-1893

After forming a trust in 1882, Standard Oil appointed a Chinese merchant, Ye Chengzhong, to be its sole agent in China from 1883 to 1893 and left kerosene distribution for China entirely in his hands. Before 1883 Standard Oil had relied on Western trading companies to market its kerosene, which was virtually all burned in lamps for illumination in East Asia, and in the 1870s and early 1880s it had made a very sluggish start in China compared to Japan and the Dutch East Indies. As shown in table 1, by 1880 U.S. exports of kerosene (nearly 100 percent of which came from Standard Oil) included only 97,000 barrels delivered to China compared to 3.3 times more to Japan and 5.5 times more to the Dutch East Indies. By contrast, in 1885, two years after Standard Oil transferred its account to Ye, exports to China shot up to 551,000 barrels--5.7 times more than in 1880--and surpassed the amount shipped to either Japan or the Dutch East Indies. Thereafter, in the early 1890s, exports to China grew steadily, if less spectacularly.

Ye was more successful than Standard Oil's distributors in other countries because of the nature of his control over marketing in China. In analyzing the roles played by Ye and other Chinese distributors of foreign goods, it is tempting to characterize them as mere "compradors"--in-house middlemen between East and West--who were marginal figures in China's economy and society, and historians have attached this label to Ye.[note 4] But between 1883 and 1893 Ye reached far beyond the confines of Standard Oil's Shanghai office and managed the marketing of its kerosene every step of the way throughout at least three of China's regions--the Lower and Middle Yangzi and North China. As the historian Hao Yen-p'ing has perceptively observed, figures like Ye should be considered as at least "comprador-merchants", because "the comprador was not only a commercial middleman but also usually an independent merchant in one way or another."[note 5] Even this designation is not adequate as a description of Ye because it does not convey the large scale of his operation.

Ye Chengzhong's Interregional Trade

Before landing Standard Oil's account in 1883, Ye Chengzhong at age forty-three had already created a flourishing interregional chain of shops. Although wealthy at this relatively young age, he had not been heir to a family fortune. On the contrary, his family had been impoverished for several generations, and in his youth his own generation at first seemed equally ill-fated. Born in Zhenhai County, Ningbo prefecture, in 1840, he was only five when his father died, and at eight he received less than six months of formal education in a village school before going to work to help support his mother and his four sisters and brothers. Certainly no scion of an elite family, he acquired his wealth in a remarkable mid-nineteenth-century rise from rags to riches.

Like many others suffering from Ningbo prefecture's economic decline in the mid-nineteenth century, Ye set out as a sojourner to seek his fortune in Shanghai, 150 kilometers northwest of his native place. In 1853, at age thirteen, with the help of an old family friend, he became an apprentice at a grocery store in Shanghai's French Concession and began making deliveries on the Huangpu River in his employer's sampan. Within three years, he raised enough capital to open his first store, a small shop in the Hongkou district of Shanghai, and six years later, in 1862, he was able to start a larger store called Shunji Imports (Shunji yanghuo hao), which specialized in hardware (wu jin).[note 6]

From this base, Ye proceeded to build up an interregional chain of eighteen stores, all specializing in the import and export of hardware. He identified these as chain stores by giving them names that contained "Shunji" (the name of his original store) plus a character representing the store's location; for example, his store in Hankou was known as Han Shunji, the one in Tianjin was named Jin Shunji, and the one in Nanshi, the southern district of Shanghai, was called Nan Shunji (South Shunji). In the Lower Yangzi he introduced eleven such stores, six in Shanghai and one each in Ningbo, Wenzhou, Nanjing, Wuhu, and Zhenjiang. In the Middle Yangzi he owned three, two at Hankou and one at Jiujiang. In South China he opened one at Guangzhou. In North China he had two more, one each at Tianjin and Yantai. And in Northeast China he had yet another, at Yingkou. To supply these stores, he gradually acquired a fleet of ten large junks that were seaworthy for coastal as well as riverine shipping.[note 7] By the time of his death in 1899, his assets were valued at between six and eight million ounces of silver (taels).[note 8]

Thus, despite his humble origins, Ye Chengzhong developed one of China's biggest businesses and used his stores as wholesalers and retailers to distribute Standard Oil's kerosene. He built up this chain of stores and exercised his authority over and beyond it by taking advantage of strong connections with associates from his native place.

Ye's Native-Place Ties

If Ye's ancestors did not bequeath wealth to him, they did give him a native place that was famous for its members' financial success and subethnic solidarity. Since the tenth century his birthplace, Ningbo prefecture, had been known for producing merchants with commercial acumen and fierce loyalty to their native place, and in the nineteenth century, after Shanghai eclipsed Ningbo as a port, Ningbo merchants created an extensive network of native-place associations that dominated finance in Shanghai and managed trade between the Lower Yangzi and other regions.[note 9] Themembers of these and other native-place associations preferred to confine their dealings to fellow natives from their home localities because they spoke each other's local dialect and expected eventually to return home where the reputations of their families, lineages, and native places were at stake.[note 10] As an heir to Ningbo's long tradition and as a participant in Ningbo merchants' nineteenth-century networking, Ye took full advantage of his native-place connections to manage interregional distribution of Standard Oil's goods.

At the highest managerial level of his operation, Ye entrusted fellow Ningbo men with responsibility for distribution of Standard Oil's kerosene. In the Middle and Upper Yangzi regions, his Ningbo associate was Ding Shen'an. Based at one of Ye's Hankou shops, Ding took responsibility for marketing goods delivered to Yangzi River ports west of Jiujiang (leaving Yangzi ports east of Jiujiang under Ye's own supervision from Shanghai). In North China Ye assigned comparable responsibilities to another trusted Ningbo associate, Wang Minghuai. Before sending Wang north, Ye had employed Wang in Shanghai at his first import-export shop, Old Shunji (Lao Shunji), and in 1880, on opening his branch in North China at Tianjin, he sent Wang to manage it.[note 11]

While delegating responsibility to Ningbo men such as Ding and Wang, Ye kept their operations strictly subordinate to his own. Ye retained absolute authority in Shanghai to place all orders with Standard Oil (including those for the Middle and Upper Yangzi, North China, and other regions) and made all decisions about allocations of available supplies to every distributing point in China. He settled accounts with Ding, Wang, and other regional distributors on a monthly basis and paid them sales commissions of 2 to 3 percent. On these terms, Ye distributed Standard Oil's kerosene through his subordinates as long as he served as Standard Oil's agent, and subsequently the company retained Ding as a comprador until 1915.[note 12]

Ye was also inclined to recruit Ningbo men for lower-level staff positions. Favoring people from one's native place was typical of nineteenth-century Ningbo traders who, in the words of the historian Susan Mann, relied on "a close-knit and carefully controlled system for recruiting Ningpo [Ningbo] youths into trade in Shanghai."[note 13] In fact, even by the standards of Ningbo chauvinists, Ye ranked above the rest. Within Shanghai he aligned himself with Ningbo people by becoming a leader of Shanghai's Ningbo guild (Siming gongsuo) and by making major donations to several of Shanghai's Ningbo charities: 200,000 taels to establish an elementary school, Chengzhong Xuetang (named after himself); 20,000 taels to set up a charitable hall, Huai De Tang, to care for widows and children of deceased members of his staff; 30,000 taels for a Shanghai cemetery reserved for burials of Ningbo people; plus annual contributions to these and other charities that provided food, clothes, medicine, and coffins for Shanghai's poor.[note 14]

Meanwhile Ye contributed directly to his native place by building several schools and vaccination clinics, buying 400 mou of land for his ancestral temple, and donating 30,000 taels to establish a charitable hall, Zhong Xiao Tang, for housing and feeding destitute members of his own lineage. As noted by one of Ye's eulogists after his death in 1899, "His intense love for his fellow provincials of Chekiang [Zhejiang province, home of Ningbo prefecture], among whom no one ever appealed to him in vain, has made his name idolized by them."[note 15]

Ye's Relations with Westerners

Ye made an effort from an early age to cultivate relationships with Westerners. Before arriving in Shanghai at age thirteen in 1853, he had no preparation for dealing with Westerners, but thereafter he consciously trained himself for the task. On his first job delivering groceries in the French Concession, he began to learn pidgin English, and ten years later, in the early 1860s, after opening his first small shop, he hired instructors to teach him and his staff English, commercial law, and customs regulations at night.[note 16] Through this self-training, Ye learned to deal with foreigners in person and in English, and after becoming Standard Oil's agent in 1883, he regularly used his learning to protect and enhance his position, especially in holding his own against Jardine, Matheson and Company, China's leading British trading firm, which coveted the kerosene trade in general and Ye's account with Standard Oil in particular.

Although enthusiastic about selling kerosene, Jardine's was reluctant to commit itself to major oil schemes in China without Ye's cooperation. Jardine's was optimistic about the future of the kerosene trade because it was impressed by China's rising imports, especially after 1882, when a cheap kerosene-burning lamp was produced by Chinese manufacturers in Guangzhou (Canton) and sold widely in China. In a report prepared by Jardine's in 1884, its managers could barely contain their excitement over the prospects for imported kerosene:

The chief portion...is due to provincial demand, 511,770 gallons having been sent into the interior under transit pass (1/2 of import duty), of which 380,780 were sent by Chinese. The above facts are remarkable as showing no prejudice against the foreign origin of any article will prevent a ready sale, provided its price, quality and general utility show it is adapted to the wants and purses of the most numerous class of consumer.[note 17]

Eager to make this "ready sale," Jardine's presented a series of proposals to Ye.

Ye commanded deference from Jardine's such that his endorsements confirmed some proposals and his opposition killed others. In the mid-1880s, for example, as soon as he consented to a joint account with Jardine's, it was used to import as much as 380,000 gallons of kerosene per annum. Then, early in 1890, when he vetoed a plan by John Macgregor of Jardine's to import refined oil from the United States, it was promptly dropped. By the same token, later in the year when he agreed to buy stock in the proposed London & Pacific Petroleum Company through which Jardine's intended to develop oil-bearing property in Peru, this new firm was established and put into operation, albeit only briefly, until 1894.[note 18]

In each of these cases, Ye demonstrated his capacity to prevail over the foreign managers of the most powerful Western trading company in China. In addition, this evidence points to the conclusion, as Edward LeFevour has observed in his study of Jardine's, that Ye's "hold on the kerosene market in China was usually unchallenged in the eighties and nineties."[note 19] During these two decades, Ye's net profits from the sale of Standard Oil's kerosene amounted to more than 100,000 yuan per year.[note 20]

Ye's Dismissal and Legacy

Despite Ye's iron grip on China's kerosene market during his ten years as Standard Oil's sole agent, the company finally fired him. It dismissed him on the grounds that he and his Chinese associates had abused their credit privileges and had committed fraud.

Since becoming an agent for Standard Oil, Ye had perennially violated the company's rules. For example, he had regularly taken advantage of its policies to gain more access to liquid capital than the company allowed. Whereas he was given a grace period of 90 to 100 days between his acceptance of goods and his payment for them, he gave his agents a grace period of only 25 to 30 days and used the credit during the interim to finance his own investments.[note 21]

After repeatedly complaining about Ye's financial manipulations, the company was prompted to act in 1893. In this instance Ye hoarded kerosene while the company's price was low, sold it at a higher price after market demand had risen, and pocketed the difference between the company's specified retail price and the actual sales price. Exasperated with Ye and determined to widen its Chinese sales force beyond his network, Standard Oil refused to renew his appointment.[note 22]

As soon as Ye was fired, Jardine's jumped at the chance to take his place as Standard Oil's agent. "The [Jardine] firm's interest in kerosene is now quite a full one," one of Jardine's executives wrote privately to another in 1893,[note 23] and in the same year Jardine's presented to Standard Oil a comprehensive plan that would have made it the sole agent throughout Asia for both Standard Oil and one of Standard Oil's affiliates, American Tidewater Company. But once Standard Oil ceased to rely on Ye, it finally began to consider extending its own worldwide marketing system to China. After negotiating for nine months, it declined Jardine's offer.[note 24]

Marketing through Chinese Compradors, 1894-1903

Between 1894 and 1903 Standard Oil faced its first serious competition in China, but it responded to the challenge by creating only a small-scale marketing system there. In 1893 it belatedly extended its administration for worldwide marketing into China, assigning responsibility for China (and the rest of Asia) to Standard Oil of New York, and this subsidiary, in turn, set up the company's first offices and appointed its first Western salaried sales representatives in China. But these Western sales representatives did little more than transfer responsibility for marketing from Ye Chengzhong to Chinese compradors. The superficiality of this change was evident in the contrast between Standard Oil's approach and the more aggressive tactics of its new rivals for China's market.

Standard Oil's Marketing System

Between 1894 and 1903 Standard Oil continued to rely on no more than a handful of Western salaried representatives in China. In 1893, on dismissing Ye Chengzhong, it hired British merchants in Shanghai and Hong Kong, provided them with minimal logistical support, and found that they, in turn, delegated authority to Chinese compradors in those two cities and to a foreign trading company in Hankou.

In Shanghai Standard Oil chose as general manager of its China headquarters an Englishman named Henry J. Everall. In residence at Shanghai since the 1880s, Everall had studied the Chinese language and had worked in Shanghai for the American Trading Company--a firm later characterized by Standard Oil's in-house magazine as the "repository from which so many of the Company's North China pioneers were drawn."[note 25] Like other foreign general managers of trading companies, Everall hired a Chinese comprador as a salaried employee to recruit other Chinese employees for the firm and to guarantee their personal integrity and business transactions.

Perhaps in reaction against Ye, Everall did not recruit compradors from Ye's native Ningbo. Instead he turned to Shanghai's other leading merchant group, the Cantonese from Xiangshan (later known as Zhongshan), a coastal county that contained Macao and was near Hong Kong and Guangzhou in South China. If Everall expected to avoid the kind of favoritism that Ye had shown toward family and native place, then he was mistaken to choose the Cantonese from Xiangshan. Between the 1860s and the 1890s, they had come to dominate the ranks of Shanghai's compradors by recommending family members and native-place associates to foreign firms, and, on their retirement, they had regularly bequeathed their own positions to relatives and other Xiangshan men. In fact, they had become so dominant that the very term "Xiangshan men" was used in the late nineteenth century to designate "the comprador class."[note 26]

Whether or not Everall was aware of the Cantonese compradors' network of family members and native-place connections, he enmeshed Standard Oil in it by seeking advice from Wei Wenpu, a leading Xiangshan man who by the 1890s had long served as comprador for one of Shanghai's oldest Western-owned financial institutions, the Chartered Bank of India, Australia, and China. Predictably, Wei recommended Chen Yichi, who was Wei's own son-in-law and the son of another well-connected Xiangshan comprador, Chen Shutang (a.k.a. Asong). In 1894, although Chen was only twenty-four years old at the time, Everall accepted Wei's recommendation, appointed Chen comprador, retained him throughout the late 1890s and early 1900s, and thus made Standard Oil's Shanghai office as dependent on a social network of Xiangshan compradors and distributors as it had previously been on Ye's social network of Ningbo merchants.[note 27]

Outside Shanghai Standard Oil's marketing system for China had only one other office before the early twentieth century. Located in Hong Kong, it, like the one in Shanghai, was opened in 1894 as a district office (qu hang) with a Western general manager who depended for marketing on a Chinese comprador, Huang Zhaorong. Known as the Hong Kong and South China Branch, this office was responsible for sales in Southeast, South, and Southwest China, whereas the Shanghai office, known as the Shanghai and North China Branch, covered all of the rest of the country except the Middle and Upper Yangzi.[note 28]

In the Middle and Upper Yangzi regions, Standard Oil had no office of its own, entrusting its distribution there to the Hankou office of C. Melchers and Company. This firm was well positioned to market Standard Oil's product because it had opened offices in Hong Kong in 1866, in Shanghai in 1877, and in Hankou in 1884 and had become the biggest German-owned trading firm in China during the late nineteenth century.[note 29] Like other German trading companies, Melchers specialized in opening China's market to newly introduced products,[note 30] and in Hankou it promoted kerosene by taking daring measures not tried by Standard Oil's own offices. For example, after evaluating Chinese commercial houses and designating sales territories for them, it confirmed their appointments as distributing stores (jingxiao dian) by boldly allowing each to take a certain amount of kerosene without making a security deposit. Besides granting credit, it protected the sales stores against price fluctuations between the time of kerosene delivery and the settlement of accounts. If prices rose in the interim, Melchers allowed distributing stores to pay the original (lower) price for the goods, and if the price fell, it allowed them to pay the current (also lower) price. Melchers' commissions to these Chinese distributing stores varied according to each one's volume of business and location and ranged between 2 and 5 percent.

To enhance the Chinese stores' appeal to customers, Melchers advertised widely, putting up posters, painting walls, handing out colored cards, and selling cheap German-made wall lamps (chiang deng). In Melchers' territory it identified Standard Oil's kerosene with its home country of Germany by labeling the product "German" and thus implied (misleadingly) that it produced as well as distributed the goods. As a Chinese former employee of Standard Oil later recalled, Melchers' sales techniques "stimulated great interest at Standard Oil," and it retained this German trading company as its agent in the Middle and Upper Yangzi until 1912.[note 31]

Although Melchers' Hankou office was more innovative than Standard Oil's offices at Shanghai and Hong Kong, the combined efforts of all three did not increase the company's sales in Hong Kong and China as fast as its sales were rising worldwide. As shown in table 2, between 1884 and 1894, under Ye's agency, Standard Oil's sales in China as a percentage of its worldwide exports had jumped from 3.5 to 11.3 percent and had risen in Hong Kong from 3.2 to 7.8 percent. Between 1894 and 1903, by contrast, despite its investments in marketing, the company's worldwide exports to China and Hong Kong between 1899 and 1903 slipped downward to an average of 8.8 and 6.6 percent respectively. Meanwhile, as the share for China of Standard Oil's worldwide sales diminished, the American company faced a challenge there from European oil companies.

European Oil Companies and the Introduction of Bulk Distribution

In the late 1890s, compared to American-owned Standard Oil, European oil companies introduced new and more effective techniques for supplying kerosene to China. As shown in table 3, in 1889, with the arrival of the first imported kerosene from Russia, the United States had ceased to be China's sole supplier of kerosene, but before the company's dismissal of Ye Chengzhong and its installation of its own marketing system in 1893, the American share had still amounted to a full three-fourths of the market. Between 1895 and 1904, by contrast, as kerosene began reaching China from Sumatra as well as Russia, the American share dropped from 75 percent to an average of 45.8 percent per annum.

Since Standard Oil supplied almost 100 percent of the kerosene exported from the United States to China throughout the period, this decline in the American share deeply concerned the company's management. In 1897 W. H. Libby, Standard Oil's well-traveled troubleshooter for overseas operations, suggested trying "almost anything that would foreshadow and advertise some new and aggressive Eastern policy."[note 32] In the same year one of his colleagues, F. Q. Barstow, grumbled, "Every day makes the situation more serious and dangerous to handle," and he predicted, pessimistically, "If we don't get control of the situation soon, the Russians, Rothschilds [a Paris-based combine that dominated oil production in Russia], or some other party may."[note 33] In fact, by 1897 two of Standard Oil's rivals had already begun to "get control of the situation" in China.

One of these rivals, Marcus Samuel of the English trading firm M. Samuel and Company, was the first to introduce bulk distribution of kerosene into China. In the early 1890s Samuel had cut the costs of handling and transportation in Asia by shipping kerosene in tank steamers, railroad tank cars, and horse-drawn tank wagons and by storing it in tanks installed in Asian cities. In 1891 he had won from the Rothschilds a ten-year contract that had allowed him to distribute their Russian oil as long as he sold it east of Suez. The next year, 1892, he had convinced operators of the Suez Canal to lift the ban on the shipping of bulk oil through the canal, and by the end of 1894, this Russian bulk oil had been carried to China by tank steamers and pumped into newly built storage tanks in the coastal ports of Shanghai, Xiamen, Shantou, and Hong Kong. Under the management of Samuel's affiliate, Arnhold, Karlberg and Company, this Russian bulk oil became available on arrival in China at two-thirds the price of Standard Oil's kerosene.[note 34]

Samuel gained this price advantage over Standard Oil in China because in the nineteenth century the American company shipped bulk oil in tank steamers only to Europe. In the 1890s (as in the 1870s and 1880s) it continued to transport all of its exports to Asia in wooden cases that each contained two five-gallon tins of kerosene. Although Samuel was initially surprised to discover that Chinese wholesalers greatly valued Standard Oil's wooden cases and tin cans and refused to supply their own containers, he overcame this problem by building canneries in several Chinese ports where Chinese workers had the task of transferring kerosene from large tanks to small tins.[note 35]

Immediately after Standard Oil's kerosene monopoly in China was broken by this English trading company, the American firm was also challenged by a Dutch firm, Royal Dutch (an English translation of Koninklijke, an abbreviation of Naamlooze Vennootschap Koninklijke Nederlandsche Maatschappij tot Exploitatie van Petrleumbronnen in Nederlandsch-Indie). Like Samuel, Royal Dutch transported oil in bulk using tank steamers, and it added an organizational innovation by operating these steamers within a comprehensive wholly owned industrial consolidation. Hence, from the oil's point of origin in Sumatra to the kerosene's distributing points in China (and other countries), Royal Dutch kept procurement, refinement, transportation, and distribution under its ownership. Reducing transportation costs to China was easier for Royal Dutch than for Standard Oil, because, as noted by Henri Deterding, Royal Dutch's sales manager in the late 1890s, "compared with Pennsylvania, Sumatra and Java was 'just around the block' from Shanghai and Hong Kong."[note 36]

More difficult, Deterding recognized, was the task of lowering the cost of local distribution within Asia, and he gave it top priority. "The first step I want to take," the thirty-year-old Deterding announced on assuming his position with Royal Dutch in 1896, "is replacing the [Singapore] Straits agents by private employees....I am thinking of a larger and better-regulated sale."[note 37] In China, as in the Straits settlement, he assigned salaried employees to replace trading companies as managers of kerosene transactions, and by the end of 1897 he established offices in several Chinese cities--not only Shanghai and Hong Kong but also Hankou, Zhenjiang, Tianjin, Fuzhou, Xiamen, and Shantou.

Under Deterding's management, Chinese imports from Sumatra doubled in 1897 and again in 1898, bringing Royal Dutch no less than one-third of China's kerosene trade by 1901. This meteoric rise prompted Standard Oil to dispatch two of its top executives to Asia to investigate, and from them the American company received confirmation of Royal Dutch's remarkable record. "In the whole history of the oil business," the awed Americans reported to their superiors at Standard Oil's headquarters in New York, "there has never been anything more phenomenal than the success and rapid growth of the R. D. Co."[note 38]

If Standard Oil was troubled by Royal Dutch and Marcus Samuel as separate threats in the late nineteenth century, it felt still greater competitive pressure when its two rivals joined forces in the first years of the twentieth century. Between 1900 and 1902, while they were still separate, Standard Oil tried to drive them out of the market by cutting prices. As C. M. Pratt of Standard Oil bluntly stated the company's strategy, "We want to keep and enlarge the gallonage rather than increase profits."[note 39] But this strategy backfired. Not only did it bring down Standard Oil's own profits (resulting in book losses for the company in China and other Asian markets during 1901 and 1902), it also caused Samuel (by then head of Shell Transport and Trading Company) and Royal Dutch to band together with each other and with Rothschilds to form a joint marketing company