“If mankind eradicates the habitat of the giant panda, then the panda ceases to exist in the wild. The IMF package is a mandate to eradicate the existing habitat of Asia’s corporates.” — Russel Napier, a strategist at Credit Lyonnais Securities Asia
Morris Chang was the father of Taiwan’s semiconductor industry. As a young graduate of the Massachusetts Institute of Technology, he was hired by Texas Instruments in 1958. He stayed for 25 years, rising to the position of vice president in charge of the group’s semiconductor activities worldwide. By 1985, he was running a company called General Instrument Corp. when he was called home by the Taiwan government and given the chairmanship of the Institute for Industrial Technology Research.
It was one of those think-tanks established by the Chinese Nationalist government with the aim of making the island a center of industrial excellence. He ran the institute until 1994. But Dr. Morris Chang, who did his doctorate at Stanford University in 1964, was no armchair researcher. “I am a professional manager myself,” he used to say.
In 1987, he became one of the founders of Taiwan Semiconductor manufacturing Co. Ltd. (TSMC), where he was managing director until becoming chairman in 1997. But before being a business — nothing less than the world’s top manufacture, in its own way, of semiconductors — TSMC was a concept, and a rather clever one too.
The semiconductor industry was outrageously expensive, devouring huge amounts of capital investment. Launching a new production line could require more than a billion dollars in fresh money. The really expensive process was the fabrication of silicon wafers, on which the semiconductors were stamped.
Globally focused on a single activity and extremely profitable with a return on shareholder funds estimated at 40 percent, TSMC symbolized the New Age of Asian industry. It was also representative of a model of development — Taiwan Inc. — that showed an exceptionally strong ability to resist the virus of the Asian crisis.
Asian way on trial
In June 1998, the Japanese business daily Nihon Keizai Shimbun had the bright idea of inviting Morris Chang to Tokyo to speak at a conference on the “Advantages and Disadvantages of Asian-style Management.”
The newspaper also decided to invite some representatives from the dinosaurs of Asian industry, those creatures from the golden age when conglomerates ruled the region. On stage with Chang were Kim Woo Choong, the chairman of South Korea’s Daewoo, and the high priest of Japanese-style management himself, NEC Corp. Chairman Tadahiro Sekimoto.
From his long stay in the United States, Morris Chang hadn’t just brought impressive technical and management expertise back to Asia. He also had a refreshingly frank way of speaking.
“So-called Asian-style corporate management has to change fundamentally. It may be difficult to change for old established companies with entrenched Asian styles but new companies are emerging,” the Taiwanese businessman told the audience, including his Japanese and Korean colleagues.
“TSMC does not follow so-called Asian style-corporate management. Competition is global in nature and to survive requires a company with global standards,” he said.
The Taiwan company’s management style was “also applied in most world-class companies even if some of those are not traditionally emphasized in traditional Asian companies.”
At TSMC, the working language most widely used was English and the board worked efficiently. It wasn’t a room for recording the decisions of the chairman, like in a South Korean conglomerate, or the Japanese-style “parliament” with 40 members of the board trying to achieve a group consensus. The TSMC board set the general direction but left the day-to-day running of the business to the managers.
“Our profit is very much a function of our management, in which we emphasize innovation and individualism,” Chang said. “We encourage an open environment in which everybody is free to speak his mind.”
TSMC’s cost structure was the lowest in the industry worldwide. Salaries represented only 8 percent of costs and were supplemented with stock options, for which TSMC was one of the pioneers in Taiwan. “A middle-level manager can make a million dollars over a few years,” Chang said. In 1998, TSMC had the third-largest market capitalization of all companies in emerging markets with the exception of Hong Kong and Singapore.
“It is time to take stock of the whole thing of Asia management,” Chang said. “The world cannot wait for us to change very slowly. There are very good Asian values, such as closeness of families and emphasis on education. But those values are certainly eliminating cronyism and promoting openness. A lot of people are talking about culture as something that is very slow to change. Look at mainland China: today they are as capitalistic as anybody. Culture can change very rapidly,” he said. “Companies used to grow on the ground of their connections with the government. That model has crashed.”
The persistent Mr. Kim
If you followed Dr. Chang’s lesson and did exactly the opposite, the result might be something like Daewoo — diversification in every direction, weak or negative profitability, a mediocre level of technology, intense concentration of personal power, management based on obedience, and obscure accounting practices.
Among the big corporate bosses in South Korea, Kim Woo Choong distinguished himself as someone who learned nothing from his mistakes. At 61, he was one of the last chaebol founders who still exercised absolute power.
He was also the flag carrier of resistance of the conglomerates to the restructuring prescribed by the International Monetary Fund and endorsed by the new administration of President Kim Dae Jung. As fate would have it, the Daewoo chairman was also head of the Federation of Korean Industries at the height of the crisis.
And Kim Woo Choong was happy to drag his feet even more than his main rivals — Hyundai, Samsung, LG, and Sunkyong — when it came to cleaning up Daewoo, whose debts amounted to almost five times shareholder funds. Using the principle that the best line of defense was to attack, he decided to accelerate.
So Daewoo Motors, the group’s automobile division, took over failed carmaker Ssangyong Motors at a time when the economic crisis had halved its sales (and those of its competitors). “Daewoo will overcome the crisis by expanding,” he told his employees.
Such obstinate voluntarism was typical of South Korean economic development. But the founder of Daewoo didn’t know how to speak any other language. “What is important for the region today is self confidence,” Kim said in his response to Morris Chang at the conference in Tokyo. “We have to grow out of this pessimism, regain courage for the future. But rather than confidence, we see confusion around us.”
“Many changes are now being imposed on the basis of U.S. economic rights and wrongs,” he said. But South Korean productivity was only a third of American productivity. “It is an excessive comparison to say that Korea is a complete failure. We have been trying very hard to improve our competitiveness. This kind of comparison will only discourage us.”
In South Korea, “the concept of competition, which is the basis of the market economy, has not been established and that stands in the way of corporate transparency,” Kim said.
And then came a confession that shed some light on the South Korea disaster. “Somehow, we did not expect the financial industry to become an element of competition. It is basically based in advanced countries,” Kim said. “The cost of money will be the big element in the 21st century. We did not have enough time for capital formation compared to advanced countries — we were depending on leading world banks for financing.”
Kim said governments in South Korea had prevented big companies from going into finance. “That why we are very behind. Korean companies had to pay for their capital three times as much as Western countries,” he said.
A year later, South Koran creditors put Daewoo under an emergency rescue program to avert bankruptcy, with the company agreeing to sell off 12 of its 25 subsidiaries to raise cash. The bill for Kim Woo Choong’s reckless expansion came to $50 billion.
The Korean chaebol, the Japanese keiretsu, the Indonesian monopolies, and even the family-run empires of the Chinese diaspora in Southeast Asia were born and grew up in a well-defined environment. One of the main factors was the importance of “relations” — what some people called “crony capitalism” and what Chinese called guangxi or connections.
Other factors were determined protectionism even with the appearance of open economies and cheap capital provided by a captive banking system helped by asset price inflation, especially in the property sector.
And then there was the existence of government approved monopolies and oligopolies that distorted business activities and the more or less general absence of bankruptcy laws or the inability to apply them. And then there was the final ingredient, currency stability.
“Anybody who has read the IMF package for the distressed jurisdictions must be struck by the massive structural changes that it demands or implies,” said Russel Napier, the Credit Lyonnais Securities Asia strategist. “It is a mandate to eradicate the existing habitat of Asia’s corporates.”
The new environment was based on free and open competition along with transparency. The environment was deflationary with asset prices falling. The cost of capital was higher and exchange rates were flexible. Bankers would be independent and bankruptcy would be an effective sanction, depriving Asian companies of their traditional defenses.
“If mankind eradicates the habitat of the giant panda, then the panda ceases to exist in the wild,” Napier said. “Deprived of the ability to graze in the bamboo groves of Sichuan, the giant panda does not have the option to retrain as an orthodontist and move to Milton Keynes.”
Asian companies were going to have to learn to live in a new environment, exposed to their most formidable predators, the big multinational companies. And they didn’t have much time, whereas their Western predecessors had one or two decades.
Who should they follow — Morris Chang or Kim Woo Choong?
“We believe Taiwan Inc. will accelerate market share gains against Korea Inc. and Japan Inc. due to more focused, competitive management, closer ties with U.S. companies and greater financial strength at both a macro and corporate level,” wrote Goldman Sachs, the American investment bank. “Ultimately, we believe the Taiwanese model (low leverage, self-financing, niche focus) will aid continued accelerating gains over the Korean and Japanese model (vertically integrated, diversified, size focus) and the Korean and Japanese companies will have to operate more like Taiwanese companies to survive.”
Victor Fung, head of the Hong Kong Trade Development Council, made similar remarks. Speaking at the Asia Society in Hong Kong in mid-1998, he said the writing was on the wall for the age of the conglomerates where families operated in protected markets comfortable in the knowledge that they enjoyed special relationships. What Asia needed, Fung said, were well-targeted companies capable of meeting the challenge of global competition.
The bamboo network
The overseas Chinese diaspora in Southeast Asia had unrivaled economic power. If it was a single country, it would have had about as many inhabitants as France — between 50 million and 60 million people (including Hong Kong and Taiwan). And if it was a single economy, it would have almost been as big as China with GDP of around $450 billion and a population 1/20 the size.
In Southeast Asia, the local Chinese communities represented less than 10 percent of the total population. But ethnic Chinese accounted for almost 90 percent of the billionaires (in dollars). Whether they had kept their original names, like the Kuok family of Malaysia or the Liem family in Indonesia, or whether they had “localized” them, like the Cojuangco family in the Philippines or the Sophonpanitch family in Thailand, the large merchant families of the diaspora had an economic weight that went well beyond the demographics of population. It was still the case in Malaysia, where the Chinese accounted for almost a third of the population but had less economic dominance than before as a result of an affirmative action program favoring the indigenous majority which had given birth to a new class of ethnic Malay entrepreneurs.
The immigrants were a fairly homogenous group in the sense that they nearly all came from the two southern coastal provinces of Guangdong and Fujian as well as the southern island of Hainan (now a province). Links were not primarily between Chinese as such but between people from the same area in China and the distinctive dialect groups that tended to be mutually unintelligible despite sharing the same writing system.
Immigration over the generations was controlled by clans. And the Chinese clans established their own mutual support groups that came to play an important economic role.
“Mutual help societies assisted new arrivals to settle and lent money to members for specific purposes,” according to “Overseas Chinese Business Networks In Asia,” a study prepared by Michael Backman for the Australian Department for Foreign Affairs and Trade.
“In this manner, the ethnic Chinese created a cohesive web of interlocking organizations and relationships that provided a firm and stable framework within which traditional society could be recreated, maintained, and developed and whose individual members could prosper far from home. This characteristic of Chinese settlement in East Asia significantly underpinned the ethnic Chinese business community’s later commercial ascendancy,” the study reported.
Management was highly centralized and the strategy for expanding was thin margins offset by high volumes, strict controls, and rapid rotation of stock to reduce capital requirements. The Chinese networks minimized transaction costs and financing was internal, as were legal and other services such as research and development.
Modern management techniques were gradually introduced as the abacus gave way to the computer.
“Nevertheless, today many of these business — even the largest regional conglomerates — continue to reflect a family-oriented structure, including an essentially patriarchal style of top-level management in which individual members of the controlling family still play a key role,” the Australian study said.
But their success wasn’t entirely their own doing. “Governments have also played an important role in creating a suitable environment for the commercial flair of ethnic Chinese entrepreneurs,” the Australian study said.
“In some cases, their advantage is enhanced through developing symbiotic relations with local indigenous elites.” And some of the tieups were devastating — such as Indonesia’s President Suharto with Liem Sioe Liong, and Philippine President Ferdinand Marcos with Eduardo Cojuangco.
The financial fury that devastated East Asia tore up entire patches of the Chinese bamboo network. It was most obvious in Indonesia where the breakup of Suharto Inc. and anti-Chinese riots carried a heavy cost, not just for prominent figures like Liem Sioe Liong but to tens of thousands of Chinese entrepreneurs and merchants. In Thailand, some of the leading Chinese families were ruined or greatly impoverished by the crisis. Their domination of the banking and the industrial landscape would never be the same.
Compared with the South Korean conglomerates, the big family-owned Chinese groups of Southeast Asia had the advantage of spreading their risks across the entire region while using the Chinese citadels of Hong Kong and Singapore as havens of security.
The Indonesian group Salim controlled by Liem Sioe Liong had powerful links with the First Pacific group in Hong Kong. The Riady family, the big Chinese family of Jakarta that was questioned over its contributions to the Democratic Party coffers and U.S. President Bill Clinton’s presidential campaign, also had a powerful presence in Hong Kong, notably through the Lippo group.
If the IMF managed to impose new rules — ranging from ending monopolies to introducing transparent accounting, normal financial systems, and effective corporate laws — the survival of the giant panda would be seriously compromised.
More transparent, more universal, and more global, the new rules of the game could also challenge the role of overseas Chinese as the inescapable and onerous intermediaries and partners used by multinational companies wanting to do business in Southeast Asia.
The Asian jungle would never become a French garden. In any case, the manicured geometry of the French garden was hardly representative of the market economy that required greater imagination and freedom, like an English garden. To let good specimens flourish, gardeners had to trim the surroundings and sacrifice the less worthy specimens. Sometimes a storm did the job.
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