China’s baddest billionaire builder by Scott Cendrowski @FortuneMagazine July 7, 2014, 7:35 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons By the time the VIP guests arrive, the meeting hall at the Yunnan Zhenzhuang Guest House in the southern city of Kunming is jammed with Communist Party officials and onlookers—some 200 of them, each in the party uniform of black suit and white button-down shirt, all gathered for an announcement from the local party boss. Maybe it’s the nervous chatter of small talk—or perhaps that the theme song to Titanic is playing mournfully, majestically, over the hotel speakers—but there’s little doubt the news will be a doozy. Celine Dion doesn’t lie. If that isn’t a giveaway, the presence of Yan Jiehe (pronounced Yen Geah-huh) surely is. Yan, the lone private businessman in the front row and the founder of Pacific Construction Group, China’s largest privately owned builder, doesn’t do anything small. Within seconds of entering the room, the grinning, gray-haired, 54-year-old billionaire has an arm wrapped around someone’s shoulder. His face is reddened with energy. His voice is booming—to the point that when a party official grabs the microphone to settle the crowd, he’s barely as loud as Yan. And just like the man, the news on this Sunday morning in early June is oddly, exponentially larger than life. Pacific will build the foundation of a $60 billion industrial and technology hub in this southern Chinese region—an amalgam of entirely new residential and business districts, complete with bridges, and tunnels, encompassing an area twice the size of Los Angeles. To Pacific alone, the Kunming contract is worth at least $10 billion and perhaps as much as $17 billion, depending on how the final plans shake out. It took just 30 days to iron out the terms. (For comparison, the largest-ever private real estate deal in the U.S., Related’s Hudson Yards project in New York City, was valued at $20 billion last year; see our story.) China to flatten 700 mountains for new metropolis in the desert. Pickup from ImagineChina Neil Harris That’s what makes it a Yan Jiehe deal. Big. Fast. Dizzying. If the name Yan Jiehe isn’t familiar outside China, it isn’t by Yan Jiehe’s choice. He’s a buddy of Bill Clinton and former Australian Prime Minister John Howard, both of whom have gone to his annual CEO forum in Shanghai. With a net worth estimated at some $3 billion, Yan has a prominent spot on Hurun Report’s list of China’s richest people—a fact that, unlike some other wealthy compatriots, he makes no effort to hide. At his sprawling villa compound outside Nanjing, China’s former capital, Yan readily shows off a pair of chairs (“The most expensive wood in the world,” he says), then the gilded bathroom spa tub that fits eight, then the massive marble columns (made from single slabs) that hold up the living room—and then the spot where he’s building his helicopter pad. When he describes plans to carve out a new writing den in the backyard, he is quick to say that it will resemble the Sydney Opera House, if a tad smaller. Accompanying that ostentation is an outspokenness that has put the businessman at risk on occasion. He has publicly bashed the country’s founding father, Chairman Mao, and nearly gone to jail after an angry business dispute with government officials. He and his wife, Zhang Yunqin, have a 31-year-old daughter and a 28-year-old son; having the latter required Yan to pay a fine of 18,000 renminbi, or about $6,000 at the time, for violating China’s one-child policy. For the past two decades Yan has relied on such brass and gumption to out do well-entrenched rivals in the Chinese construction industry, most of which are state-owned enterprises (SOEs) with close party ties. That his firm won as many big projects as it did over that period was surprising enough. In the past couple of years, however, the scope of Yan’s wins has gotten mind-bogglingly bigger. In addition to the $10 billion Kunming agreement he signed in June, his company is building a new city for 1 million people in Lanzhou, in the country’s arid northwest (see graphic above). Down in Dali, a southern vacation city of 3.6 million at the edge of a deep-blue lake, Pacific is creating a second city center to handle what the government predicts will be an influx of 300,000 residents during the coming decade. As the founder sums up for Fortune with a grandiose swing of his arms: “Boeing builds planes. We are in the business of building cities.” Last year Pacific’s sales reached $59.6 billion dwarfing revenues for San Francisco–based Bechtel ($37.9 billion), the largest U.S. construction company, and ranking Pacific at No. 166 on Fortune’s 2014 Global 500. At the current trajectory of growth, sales for the company could easily hit $100 billion in five years. With nearly 300,000 employees, the company is now as massive as its government-supported competitors, yet it’s efficient enough to move a team for a project like Kunming’s across the country in days. There’s little doubt about it: The man the newspapers have called “China’s No. 1 Madman” is the most unusual, the most dynamic, and arguably the best businessman in what will, any year now, be the world’s biggest economy. The only thing stranger than the man’s membership in China’s corporate elite is how he got here. A black Rolls-Royce Phantom is barreling down a one-lane road in one of the poorest areas of China. Scooter drivers do double takes, and trucks veer over when the hulking sedan flashes in their rearview mirrors. A brown river runs alongside the road. Ramshackle houses crowd the other side. “You’ve never been to a rural area,” says Yan from the front passenger seat, “and now you’re going to the worst place.” That place is Huai’an. Tucked between Beijing and Shanghai, Huai’an is not exactly “rural.” It’s one of China’s poorest cities, where 2.5 million people live in a rundown urban center and 3 million on the land surrounding it, working the rice paddies and wheat fields. Annual income here averages $2,000 a year for the outlying residents and $4,000 for the lucky ones in the center. This is Yan’s hometown. The youngest of nine children, Yan says his earliest memory is of going hungry. His parents were schoolteachers who were persecuted during China’s Cultural Revolution in the 1960s, when Mao targeted “intellectuals.” They were forced to work in the fields and often ate little, surviving on rice husks normally fed to pigs. By the time Yan was of college age, Mao was dead and the economic reformer Deng Xiaoping had assumed power. Deng soon re- instated the country’s college entrance exam, which gave Yan the chance to attend People’s University of China in Beijing. Today he praises Deng almost as a demigod; for Mao, Yan harbors nothing but contempt. “I think Mao was illiterate,” he says. “Mao Zedong made the country to be very poor, whereas Deng Xiaoping made it to be prosperous and powerful.” It’s unusual to hear that kind of criticism of modern China’s revolutionary founder, especially from a man whose business depends on the goodwill of Communist Party officials. The American equivalent, a consultant told me, would be a Fortune 500 CEO bashing George Washington. Yan says he’s been so openly critical that Mao’s grandson, a major general in the People’s Liberation Army, called a Pacific employee to ask that he stop. But Yan doesn’t appear concerned. “The one and only risk to me is Chairman Mao’s resurrection from his crystal coffin,” Yan says with a grin. “That’s my only risk of being too open.” After working as a high school Chinese teacher, Yan became the head of a cement factory in his hometown. There he instilled his own brand of management techniques and caught the eye of government officials who saw he had a knack for restructuring SOEs that were bleeding money. Soon the government hired Yan to reform a handful of small, almost bankrupt state-owned companies. Each business was different—one manufactured lawn mowers exported to the U.S., another made machinery—but they shared the traits of inefficient, bureaucratic vessels. The first thing Yan did was change the HR policies. “The way it used to be, you can’t fire people and you can’t promote good people over the people who have worked there for a long time,” he says. He also introduced a concept that was utterly foreign to many of the companies: selling. “SOEs used to wait for buyers!” he exclaims. At one manufacturer, he sweetened the pitch by giving customers a trial period. To attract better personnel, he paid better performers more, even as he boosted the minimum wage by 50%. And most important, he changed the management structure so that middle executives didn’t always need to come to him for approval. Yan signs a book he wrote on Confucius-like aphorisms for business. Pickup from ImagineChina Neil Harris Li Bingfeng, the local party secretary at the time, recalls competitors blocking the road to Yan’s office with desks and rocks. Their companies were getting killed. “Suddenly this guy called Yan is getting all the business,” he says. Yan’s ascent wasn’t without payback. When he led the machinery maker, he says, thugs beat him up and pulled out his hair. He motions to the top of his head, where underneath an almost full head of hair a patch is missing. His wife and children were threatened too. Later, he says, he even fought policemen who were sent to rough him up. When asked who was behind the attacks, Yan shrugs. He says the old managers had lots of power and wanted to keep their jobs. Despite the violence and threats, he used the brand of one of the SOEs to establish his own company in 1995. His first project, building culverts in Nanjing, was valued at a paltry 300,000 renminbi, or $36,000. Wanting to make it a high-quality endeavor, Yan put all his resources into it and lost more than a quarter of that amount in the process. But his work ethic and attention to detail so impressed Nanjing officials that they awarded him more deals. Those were worth millions of dollars. As Yan’s success grew, so did his competition. By 2006 Pacific’s rise was known, and SOEs wanted to buy the company instead of competing against it. A string of construction and energy firms approached Yan about selling. He refused. Soon unflattering stories appeared in the Chinese press: Pacific was delinquent on high- dollar loans, they said, even as its founder—“China’s No. 1 Madman”—was spending lavishly. (Yan says that the money owed was old debt from companies Pacific had acquired, and that the bank was eventually repaid.) The fallout was immediate. News reports said authorities in Beijing ordered Yan to avoid extravagances like luxury cars and told him not to leave the country. His reputation took a serious hit, and a slew of government customers avoided the company, which bled more than $1 billion over the next couple of years. The catastrophe for Pacific, however, turned out to be short-lived. After the global financial meltdown of 2008, China’s government began an unprecedented stimulus package that called for $600 billion in infrastructure spending. Just as swiftly as it had gone out of favor, Pacific’s business was back in demand. The stories in the newspapers seemed to fade away. For five square kilometers along the Yellow River in Lanzhou, a dusty city in northwestern China, the earth is a ragged plain. Not long ago, in this same spot, were dozens of mountains, which Pacific Construction lopped off and leveled for development. A state-run business magazine once boasted that Yan would flatten 700 mountains for the job—a figure that still fills press accounts. But the company now says it is too high. (Hilltops, says Pacific, are tough to count.) In any case, 3,000 machines and 6,000 workers moved 100 million cubic meters of dirt, hauling the tops of mountains to fill the ravines, says Pacific’s director of projects in the region, Xu Shengmei, who hails from Yan’s hometown. For years the government had wanted to raze Lanzhou’s surrounding mountains. Part of the reason was to relieve pollution; the hills hemmed in the city’s thick, sooty air. A more pressing concern, though, was to create new living space in a city that is nearly as congested with high rises as Shanghai. A number of SOEs tried and failed to decapitate the mountains in the ’90s. Funding always seemed to dry up. When Lanzhou’s government resurrected the idea recently, estimating that another 1 million residents would move into the city of 3.9 million over the next five to 10 years, Pacific was the only company willing to take on the challenge. Yan declared that Lanzhou’s “New Town” would incorporate the watery landscape of Venice and the desert oasis of Las Vegas. It would be a home to schools, ponds, high rises, and parks. His theatrical pitch helped Pacific win the project. So did the company’s willingness to put up more than $3 billion in funding for the deal itself. It was the same sort of financing arrangement that drove Yan’s early success. In the mid-1990s, when Yan formed his own company, he started using a concept called “build to transfer,” which was hugely popular with local governments that couldn’t get Beijing’s banks to lend them money. Under the terms, Pacific invested its own cash in the project. Once the construction was done, it sold the land back to governments, which could then resell it to others. Pacific still uses the model today, and though other Chinese companies have tried to replicate it, none has been as successful. Last September the first phase of construction in Lanzhou was completed. The project had been expected to take two years; it was done in nine months. To speed things along, Pacific had lobbied the government to allow it to work during the winter months, when pollution regulations require construction to stop because of concerns about the dust. The company added another 120 industrial water sprayers to the site to keep dust down and the machines going. Some critics have wondered how moving 100 million cubic meters of dirt could be environmentally sound. While Lanzhou’s government declined to comment to Fortune, Zheng Xinli, vice chairman of the China Center for International Economic Exchanges, one of the government’s top think tanks, says Lanzhou’s government received environmental approval from China’s central authorities. “Every assessment that needs to be done has been done by the government,” he said. “Creation is destruction,” says Yan in response to his environmental critics. “This way of doing things is welcomed in the U.S.” A two-hour plane ride south of Lanzhou, there’s a frenetic pace at another Pacific site in Dali. Trucks moving dirt cause traffic jams with water-spraying trucks trying to contain the construction dust. Some 1,700 men work in three shifts a day; only the 6 a.m. to 7 a.m. hour is quiet. In Dali the government wants to relieve a crowded old town by building a new city from scratch. “There will be immigrants from west of the province, in the mountains, even Tibetans,” says Cheng Yongjun, the party official in charge of Dali’s new district, of the expected influx of settlers. Cheng, who has close-cropped hair and the expression of a guy in a hurry, says that his government chose Pacific to lead the construction on 120 kilometers of roads, five bridges, and six tunnels because it could move people and equipment quickly. Indeed, within a week of signing the deal, the company had brought resources into the area. “Their strongest advantage is their speed and efficiency,” he says. Cheng later explains that worker payments from an SOE are basically fixed. “You don’t get more if you work more or harder,” he says. What Pacific provides with its hiring, firing, and promotions is the incentive to do the work fast. Less discussed is another of Pacific’s competitive edges. The company invites government clients to opulent private dinners where officials are served choice raw salmon and bountiful amounts of Moutai, the most expensive brand of the strong Chinese spirit bai jiu. (Pacific orders bottles by the crate load directly from the factory, lest they be counterfeit.) The perks extend to Pacific’s management as well. The company pays salaries five times those of its competitors and ferries its execs in a fleet of black Mercedes-Benzes. “The key difference between private companies and SOEs isn’t low-level workers,” says Xuan Xiaowei, an expert on SOEs at China’s Development Research Center. “The key is the upper-level workers. The culture is different—how they promote. SOE culture is a bureaucracy.” Yan Jiehe, left, attends the 2012 groundbreaking ceremony for Pacific’s huge mountain-leveling project in Lanzhou. Pickup from AP Neil Harris Such extravagances have raised eyebrows, naturally. The Chinese press has persistently speculated about the propriety of Yan’s business dealings. The scrutiny intensified last year, when another construction boss was arrested, and the mayor of Nanjing removed from office, for suspected bribery. (In January the former mayor was expelled from the Communist Party after an investigation found him “morally corrupt.”) Yan talks openly about the subject. “The industry we’re in is the dirtiest one,” he says. “But what we do is very transparent, very pure. What really happens is that if some people bribe officials, they get imprisoned.” Yan says he’s friends with top officials now in jail. And because Pacific walks away from deals if officials ask for bribes, he’s not concerned about the government’s current crackdown. A related question is whether Yan himself is starting to walk away from the business he founded. Three years ago he passed on the chairmanship of Pacific to his son, Yan Hao. (In typical fashion he presented the title as a gift at his son’s wedding.) Recently the elder Yan began stepping back from day-to-day management and turning toward newer projects. In the next few years he’s planning to open a business school that he claims will “fix” what Harvard and other Ivy League schools get wrong: hiring faculty without real-world experience. Yan says he will go all-out to make it great—and a big business, of course. Says Yan with a sly smile: “I dream of having two companies in the top 500 in the world.” There is little in the man’s past to suggest that it won’t come true. This story is from the July 21, 2014 issue of Fortune.