UK: CHINESE WALLS.

UK: CHINESE WALLS. - The business empires of the Far East have a tradition of keeping it in the family. But yesterday's strengths may become tomorrow's limitations if companies do not experiment with new structures.

by Simon Caulkin.
Last Updated: 31 Aug 2010

The business empires of the Far East have a tradition of keeping it in the family. But yesterday's strengths may become tomorrow's limitations if companies do not experiment with new structures.

'Progress Destruction' reads the company name on a demolition site near the top of Hong Kong's Victoria Peak. Nothing could more eloquently sum up the programme of the Chinese-dominated companies which are thrusting the new Asian economies to the forefront of world trade. 'The Chinese business network, not just China, will emerge as the region's dominant commercial force in the next century,' prophesies John Naisbitt, author of Megatrends Asia. 'They are the greatest entrepreneurs in the world.' Adds Peter Drucker: 'Just as the Japanese succeeded in turning the modern corporation into a family, I think the Chinese and overseas Chinese will succeed in turning the family into a modern corporation ... with the emergence of that economic power, we will see the emergence of a new form of corporate governance.'

Discontents with western models of capitalism, as well as the phenomenal growth rates of many east Asian nations - Thailand, Singapore, Hong Kong, Malaysia and the Philippines as well as China itself - help explain the attention now being enviously directed to the East, seemingly so unaffected either by Eurosclerosis or the problems of American polarisation. What kind of company is it that makes the Asian economies tick?

As the Peak demolition practice suggests, the first attribute is a ferocious commitment to Darwinian capitalism. The second is Chineseness. Since the symbolic moment in 1979 when Li Ka-Shing emerged as the first Chinese head of a great Hong Kong trading firm, Hutchison Whampoa, it has become ever clearer that not just in Hong Kong but all over east Asia, burgeoning family companies owned by ethnic Chinese are energetically spinning the flywheel of development of both national economies and the region as a whole.

Asia's current startling growth rates have their distant origins in Chinese penury. Driven by poverty and political disturbance, waves of families, clans or groups linked by village or language loyalties have periodically fled the mainland to form tight Chinese enclaves in countries all over the region. The dense web of networks that they formed - thrifty, self-reliant and profoundly distrustful of outsiders - proved remarkably well adapted to the needs of survival. They also underwrote later business success. Says Gordon Redding, a professor at Hong Kong University Business School and a long-time student of Chinese firms: 'Small-scale Chinese family businesses are perfect mechanisms for surviving in uncertainty.

They can operate without heavy infrastructure - they don't even need banks.

Keep small, keep hedged, keep moving, keep it in the family; they are guerillas, survivors.'

Decentralised and fluid, networks of such companies cut transaction costs and speed information about profitable opportunities while remaining impenetrable to outsiders, enabling them to flourish in chaotic trading conditions which cripple less agile operators. China is the classic example but the networks also cross national boundaries, providing contacts, sources of finance and influence all over Asia. Much of the food trade of the region is in the hands of people who speak the same Chinese dialect, for example.

Relationships, not contracts, are the currency that matters.

In economic terms, the results of this furious networked enterprise are stunning. At macro level, the notional GDP contribution of the 51 million or so overseas Chinese may be as much as $700 billion (over £450 billion).

In the individual economies, ethnic Chinese account for 1% of the population but 20% of the economy in Vietnam, 1% and 40% in the Philippines, 4% and 50% in Indonesia and 32% and 60% in Malaysia. Their assets and capital resources are equally deep. To take just one example: Chinese-dominated Hong Kong is now the fourth-biggest supplier of foreign direct investment on the globe.

Foreign investment by overseas Chinese is behind the thousands of small entrepreneurial firms which have appeared all over southern China - in effect, points out Redding, a reverse takeover by Hong Kong. This development is blurred, however, by the behaviour of the companies at the other end of the scale, the huge conglomerate family fiefdoms which ramify through east Asia's interconnected economies. Li Ka-Shing, now Hong Kong's most famous billionaire, can stand as the archetype. Li was born in China before moving to Hong Kong, went to work at 12 to support the family, started his own plastics factory and now controls an empire comprising property, construction, retail, telecoms, infra-structure and energy activities. His sons are prominently employed in the business. The family retains control of a master company, Cheung Kong, which in turn has controlling shareholdings in dozens of other companies, including the publicly quoted conglomerate Hutchison.

Up to 20 tightly held family companies, structured similarly and likewise centred on a combination of real estate, trading, infrastructure, hotels and energy, dominate the east Asian economies (see p68). Many of these groups have cross shareholdings in each other, and joint investments in China. Reinforcing the links, mainland Chinese are enthusiastic investors in the businesses of their overseas compatriots: one of the wealthiest of all Chinese business people, for instance, is mainlander Larry Yung, son of China's vice-president Rong Yiren, who is chairman of Beijing's premier investment vehicle in Hong Kong, CITIC Pacific. Among its shareholders: Li Ka-Shing and Robert Kuok of the Kuok Group.

Many of these family empires have prospered by leveraging their relationships with officialdom into lucrative franchises - energy or communications supply or infrastructure projects - which effectively exclude competition in an operational sense. To replicate this success in the biggest market of all, it is not surprising that they should now be queuing up to demonstrate commitment to China, usually with large mainland investments but sometimes via other means. Li, for instance, is constructing a large new building in central Hong Kong to house the new Chinese administration in 1997.

Logically, shifting loyalties show up most visibly in Hong Kong. Witness governor Chris Patten's public dressing-down of business for taking China's side in the argument over his democratic reforms. Most business people reply that these are irrelevant, that from a business point of view, integration with southern China took place years ago. The priorities of most are clear: 'I'm not against democracy, but when it comes to making money, I prefer to go to the countries where democracy is not the rule,' declares the robust Ronnie Chan, head of Hang Lung Development.

The driving forces of Chinese capitalism have generated undeniably impressive concentrations of wealth. Peter Woo, western-educated son-in-law of the legendary Sir Y.K. Pao and chairman of Wheelock and Co, another former British hong, notes that Chinese firms, unlike western ones, are owner-managed and driven by insecurity, not greed. Control is a fetish.

'Overseas Chinese always feel insecure, so the only thing they can trust is their own savings,' he notes. 'Our motivating force is asset accumulation, not short-term profit.' Wheelock, which accounts for only a quarter of the late Sir Y.K.'s empire, has assets worth $12 billion. It is predicted that one of the ethnic Chinese business families will some time in the next 20 years produce the world's first dollar trillionaire.

Although there is much talking-up of the superiority of Asian values in the East, more reflective spirits accept that the Asian multinational is not about to rule the world.

For this there are both internal and external reasons.

Externally, suggests Dr Victor Fung, chairman of Hong Kong's Trade Development Council and boss of Li & Fung, a long-established Chinese trading firm, Asian companies would do well to remember that much of their past success has come from the rising tide of overall growth, from low factor costs, and from special relationships and protected markets. None of these can be taken for granted in future. Indeed in some areas such as Hong Kong, costs are now alarmingly high. Competition is increasing as governments deregulate and tariff barriers come down, while some of the advanced markets are becoming increasingly saturated. Trevor MacMurray, managing partner of McKinsey in Hong Kong, adds that with the actual or prospective changing of the political guard in many Asian countries, 'some groups may lose their political leverage, making it more difficult for them to manage competition'.

Internally, too, yesterday's strengths can easily become tomorrow's limitations.

It's not just that it is harder to manage the multinational, multicultural corporations that have sprung from the tightly-defined family enterprise, although that's true. The question is one of kind rather than scale. As Woo acknowledges, a corollary of Asian opportunism and entrepreneurial insecurity is shallow roots, and shallow roots effectively rule out the development of capital-intensive high-tech industries dependent on sustained spending on R&D. Similar reluctance to invest in marketing means that Chinese companies have created few consumer brands.

At the heart of it is the question of ownership. While western companies, in theory, are assumed to exist for themselves, owner-managed Chinese firms have always been operated as vehicles to service the family. They have now come to a crossroads. If they stick to traditional, tight family control, says Woo, they are likely to split among male heirs at the death of the controlling patriarch. This is not necessarily a disadvantage to economic activity since 'the wealth is still preserved and passed on to be used for other opportunities - that's what Hong Kong is all about'.

But it does jeopardise continuity and the long-term economic endeavour which depends on it.

Taking the other route will lead Asian companies inexorably towards western models. Up till now, they have been able to tap directly into Asia's phenomenal savings rates. But even these pockets are not deep enough to meet the continent's insatiable infrastructure needs, estimated at $1 trillion to the year 2000 alone. When Asian companies come to global capital markets, they will find them less accepting of traditionally opaque accounting and governance standards than heretofore. Meanwhile recruiting top-class managers to fend off increasing competition will speed the move towards professionalism, better sharing of information, strategic thinking and, not least, pay. Already one much-quoted study shows that Chinese managers much prefer working for western companies, finding them (not surprisingly) more open and supportive of outside talent. As even Chan concedes, Chinese companies can't live forever on 'brute shrewdness'.

Many are already experimenting with new structures and strategies. At third-generation Li & Fung, the Harvard-trained management has replaced family members in the company with professional managers, imported performance-related pay and and instituted an open, western-style management regime.

It accepts the need for stakeholding and transparent governance.

At Wheelock, Woo is also taking steps to ensure succession and professionalise management. But he insists that different styles should be encouraged, not suppressed. 'Companies like ours can be a window and bridge for western multinationals,' he believes. Joint ventures combining eastern entrepreneurialism and knowhow and western institutional strength 'recognise diversity and turn it into a plus,' he says, pointing to ventures with NatWest in banking, Fosters in brewing and Virgin in record stores.

A third, less obvious example is courier DHL International, whose co-founder, Po Chung, is yet another of Hong Kong's paddy-fields-to-penthouse stories. DHL, he maintains, has convincingly internalised the best of western and eastern values. 'Our belief is that the organisation is an extension of the family. DHL cares for its employees as if we were an extended family in the Asian tradition.

We expect loyalty and hard work. In return, we give personal loyalty, commitment, care and respect for the individual.'

As ever, Hong Kong may provide the first signs of whether the ethnic Chinese firms will continue to remain polarised between the teeming mass of tiny firms and the vast but short-lived leviathans or graduate to more permanent corporate forms. In pre-modern economies where trust is limited to immediate family or clan, suggests Redding, middle-ranking companies have difficulty gaining a purchase between the hyperactive minnows and the government-backed monsters. 'The lack of civil society guaranteeing stable exchange relations confines you to trading and light manufacturing, which isn't an economic system that can get you to sustainable high income levels. Will civil society continue to accrete to allow the middle to develop?' There are indications, he warns, that under the intense gravitational pull of China, Hong Kong's progression in that direction may be slowing or even slipping into reverse.

There is an analogous issue for big companies. Managing complexity means co-opting and co-ordinating huge amounts of intelligence. It can't be done in secret by a single intuitive family head. 'To be efficient, you have to trust people enough to give them the information to make the system work,' says Redding. 'The way economic history has played out so far has made that hard for Chinese firms to do. The jury is out whether they can finally make that leap.'

Simon Caulkin edits the Management page of the Observer

Charoen Pokphand - An intricate web of companies that grew from a few seeds

The pervasive geographical and temporal ramifications of the overseas Chinese network are well illustrated by the Thai firm Charoen Pokphand (usually known by its initials CP).

CP had its origins in a small seed firm set up in southern China in the 1920s. When the communists took over the country in 1949, the founding Chia brothers departed for Bangkok, at the same time changing their name to Chearavanont.

Characteristically, CP owed its big break to another overseas Chinese-controlled company - the Bangkok Bank, of which the influential Sophonpanich family owns one-third. Through the bank, CP assumed control of a bankrupt chicken farm in the 1970s, after which it grew rapidly in poultry and sectors such as feed and restaurant distribution.

From agribusiness CP has branched laterally into a wide range of other industries. Apart from property, CP has picked up interests in businesses ranging from petrochemicals to telecoms, where in a joint venture with the US firm Nynex it has a 25-year licence to instal and operate two million telephone lines in Bangkok. CP has since added businesses in mobile phones, cable TV and satellite launch.

Over the years the group has expanded steadily into Indonesia, Taiwan and the Philippines and even further afield in Turkey and Portugal. Like many of its overseas brethren, however, its main investment thrust is now in mainland China.

Each of the company's nine divisions is represented in the People's Republic, making it the single largest investor in China. Its flexibility and opportunism are perfectly demonstrated by its decision in 1985 to set up a motorcycle manufacturing plant using Honda technology, Chinese labour and its own connections. CP now has a 15% share of the Chinese motorcycle market and is aiming for more when it opens up a new plant this year in Shanghai.

CP's intricate web of privately held companies is almost impossible for outsiders to understand. Of the group total of more than 200 separate companies, only a dozen are publicly quoted. Financial information is scanty, but 1993 revenues were reported as passing the $5 billion mark. Thailand accounted for just half the total, with another 25% coming from China.

THE MOST INFLUENTIAL OVERSEAS CHINESE FAMILIES

Family Main company Businesses Country

Chearavanont Charoen Pokphand Agribusiness, telecoms,

beer, property Thailand

Gokongwei JG Summit Hldgs Property, banking, oil Philippines

Kuok Kuok Group Property, hotels,

shipping, publishing Malaysia,

Hong Kong

Kwok Sun Hung Kai Property Hong Kong

Lee Shau Kee Henderson Land Property Hong Kong

Li Ka-Shing Cheung Kong Property, telecoms,

ports, energy, retail Hong Kong

Liem Sioe

Liong Salim Group Property, cement, food,

consumer goods Indonesia

Lim Goh Tong Genting

International Gaming, plantations,

tourism Malaysia

Ong Beng Seng Hotel Properties Hotels, property, food,

distribution Singapore

Quek/Kwek Hong Leong Property, finance Malaysia,

Singapore

Prajogo

Pangestu Barito Timber, banking Indonesia

Riady Lippo Group Property, finance,

tourism Indonesia

Sophonpanich Bangkok Bank Banking, finance Thailand

Sy SM Prime Hldgs Retail, property,

banking Philippines

Tsai Wan-Lin Cathay Life Ins Insurance Taiwan

Wang Nina Chinachem Group Property Hong Kong

Wang Yung-

Ching Formosa Plastics Plastics,

petrochemicals Taiwan

Wee Cho Yaw United Overseas

Bank Finance,

pharmaceuticals, leisure Singapore

Widjaja Eka

Tijpta Sinar Mas Pulp, paper, edible

oils, property Indonesia

Wu Gordon Hopewell Hldgs Infrastructure Hong Kong.

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