The father-son beef that is rattling the world’s largest pork processor

In recent months, a bitter dispute between 81-year-old Wan Long, the WH Group founder nicknamed “China’s No. 1 butcher,” and his 52-year-old son, Wan Hongjian, a now-fired WH Group executive who was once seen as the elder Wan’s successor, has grabbed the attention of the Chinese public and frightened away global investors.

“It’s a classic Chinese family drama,” says Lorraine Tan, director of equity research for Asia at Morningstar.

WH Group is split into two firms: the Chinese pork processor Shuanghui, which Wan Long founded in 1958, and Smithfield, which WH Group purchased for $7.1 billion in 2013. The family feud has already cost WH Group hundreds of millions of dollars in market value; resulted in the expulsion of Wan Hongjian from the family business; and unearthed potentially damaging allegations about the firm.

But the battle may have implications beyond who has control over the sprawling pork empire. WH Group’s ownership of Smithfield means that the U.S. pork industry, too, has a stake in the outcome of a family struggle taking place thousands of miles away.

The battle

The tumult began in June when WH Group announced that it had fired Wan Hongjian, then-executive director and Wan Long’s eldest son.

In a statement to the Hong Kong stock exchange on June 17, WH Group said that Wan Hongjian engaged in “aggressive behaviors against the company’s properties” and disclosed that it had stripped him of all roles with the firm. WH Group declined Fortune’s request for comment.

Wan Hongjian told Chinese media that he was angered by a “particular managerial choice” made by Wan Long at a meeting in Hong Kong on July 3. He then said he lost control and grew violent enough that he had to be subdued by bodyguards at the office.

After Wan Hongjian’s ouster, WH Group announced on Aug. 12 that Wan Long would step down from his role as chief executive but would retain his role as chairman of the company’s board of directors. WH Group said longtime executive Guo Lijun would be promoted to chief executive while another son of Wan Long’s, Wan Hongwei, would take over as executive director.

Days later, on Aug. 17, Wan Hongjian posted an article via a pork industry media outlet that included a series of wide-ranging allegations against WH Group and his father. Wan Hongjian said that WH Group’s 2013 acquisition of U.S. pork giant Smithfield was aimed largely at helping Wan Long and other top executives get money out of China. He also said that the company had for years evaded taxes and mismanaged its business, and that the incoming chief executive was unqualified to take the reins.

After Wan Hongjian made his initial allegations on Aug. 17, WH Group’s stock price fell from 6.71 HKD to 5.57 HKD, a 17% drop on the Hong Kong stock exchange, costing the firm $1.4 billion in market value.

“We don’t know whether [Wan Hongjian’s allegations] are true…The key is whether there will be an investigation into them initiated by the government,” says Anson Chan, director of equity research at Daiwa Capital Markets.

On Aug. 18, WH Group called Wan Hongjian’s allegations “untrue and misleading.” On Monday, the firm issued a statement rebutting five of Wan Hongjian’s allegations.

One of Wan Hongjian’s key allegations centered on a deal struck in February in which, Wan Hongjian alleged, WH Group paid higher than market prices to import over 100,000 tons of pork products from the U.S., resulting in a $123 million loss at WH Group’s China business. WH Group said that it had paid for the imports at “prevailing market prices” and that the transaction was carried out within the “normal course of business.”

Investors, at least, appear to agree. Since WH Group denied the allegations, its stock has risen 10% to $6.17 HKD.

“The accusations at least on the company business level…are really just complaints. I don’t think there’s anything nefarious in the business itself,” says Tan. Still, betting on WH Group’s recovery may remain risky, given that there is always the possibility that an aggrieved Wan Hongjian could further damage the company’s reputation.

“I don’t know whether there’s any more [allegations] that he wants to churn out,” says Tan.

Underlying business

The uncertainty over the pork empire also raises questions about the future of WH Group’s subsidiary Smithfield and the U.S. pork industry.

Smithfield controlled 26% of the U.S. pork processing market and 15% of the hog production market as of 2019, according to credit rating agency Fitch.

Usha Haley, chair of international business at Wichita State University, says that further prioritization of WH Group’s China operations under new leadership could be detrimental to the U.S. market. She notes that Smithfield continued to export pork to China even as the U.S. dealt with meat shortages last year owing to COVID-19 outbreaks at U.S. slaughterhouses.

“Smithfield and the U.S. pork industry are in for a wild ride,” says Haley.

But analysts are optimistic that WH Group may once again be able to balance its interests in the U.S. and China, especially now that pork markets are stabilizing after years of chaos.

In addition to COVID-19 outbreaks forcing the temporary closure of Smithfield facilities last year, the African swine fever epidemic has devastated pig populations in China since 2018. WH Group partially benefited from the reduced pig supply, resulting in higher-priced pork, but fewer pigs also meant WH Group’s China unit, Shuanghui, had fewer pigs to process.

Now that hog stocks are rebounding in China, the price of pork has dropped, but Shuanghui reported that it processed 13% more pigs in the first half of this year compared with last year. In the first six months of 2020, WH Group reported, its overall revenues increased nearly 7% in comparison with the previous year. “The negative impacts from ASF [African swine fever] and the COVID-19 pandemic are retreating,” Wan Long said in a press release about the results.

If WH Group’s leadership stabilizes, the company is poised to benefit from loosening trade tensions between the U.S. and China after the U.S.-China trade war. At the peak of the trade war in 2018 and 2019, China imposed a 72% tariff on U.S. pork exports to China. The “Phase 1” trade deal, concluded by the U.S. and China in January 2020, reduced tariffs on U.S. pork exports to 25%.

Tan says that freer trade allows WH Group to fully realize the advantages of operating a pork company between the U.S. and China.

“The U.S. has got excess pork supply” it can send to China, says Tan. “That’s the reason why [WH Group] works.”

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