What does every Asian family business want? A conglomerate, of course. Thai mogul Charoen Sirivadhanabhakdi, the owner of Chang beer, does anyway. In 2012 Sirivadhanabhakdi - whose five children all work in the family firm - bought Fraser & Neave, a conglomerate which has a strong presence in both alcoholic and non-alcoholic drinks markets across Asia.
He is now on the acquisition trail, and recently made bids for numerous other businesses, including Siam Makro PCL, which operates discount stores, Singaporean engineering groups UE and WBL, and Australand, an Australian property group. Admittedly it hasn’t all been plain-sailing. A joint-venture with a military-owned company in Myanmar hit the buffers recently, and some worry that he has borrowed too much to finance his expansion. Whatever the hiccups his intention is clear, though.
And why not? Family-controlled conglomerates now account for 27% of the stock markets across Asia. In Hong Kong the figure is about 45%, while in South Korea it is around 70%, according to The Economist. They make up half of the biggest 10 companies on the Singapore stock exchange. Firms like Jardine Matheson and Hutchison Whampoa from Hong Kong, the Lopez Group from the Philippines, Hyundai and LG from South Korea, Japan’s Mitsubishi and so on dominate the region’s economies.
This defies all logic, according to economists, who have been saying for years that family-owned conglomerates are doomed. They argue that as emerging markets become more competitive and the corrupt institutions that allow them to thrive become stronger, conglomerates will wither away and be replaced by more rational, modern shareholder-owned corporations. And yet as Asian markets have become more like Western ones, in many respects, they are still flourishing. How?
A recent paper published in the Harvard Business Review by three academics from the Indian Institute of Management gave some answers. They argued that while it might be true that American-style conglomerates are in general no longer successful, Asian ones are different in important respects.
Rather than having divisions, which tends to multiply the numbers of managers, they are more like a “federation” of companies, to use a description from Anand Mahindra, the chairperson of India’s Mahindra Group: some of the conglomerate’s companies are controlled by the centre, others are entirely independent, and everything in between.
Unlike American divisional companies, the top management in conglomerates’ businesses report to their own boards, because they are independent entities, and so have are more able to make decisions than American-style divisional heads did. “The legal separation of each business also ensures that it’s affected less by the parent’s dominant logic than the divisions in a company would be,” wrote the academics. Their independence allows individual firms to allocate resources and determine remuneration structures more efficiently than a distant manager in head office can.
Their diverse business activities might seem like an undisciplined scattergun approach - India’s Birla, for example, has 56 companies involving cement, retailing and financial services, and Tata has over 100 entities, some of which control several sub-companies. But what holds them together is a hands-off central group of family owners surrounded by non-family professional managers that takes a strategic, long-term view of the businesses.
This means they can spot and act on opportunities. “The unique value creation potential of business groups lies in coordinating the activities of affiliates,” said the academics.
It also means that they can bring their experience and deep knowledge of the group to bear when needed, unlike professional American CEOs who now last on average six years. Family owners are there for the long-run, and impose their values and identity on the businesses, without feeling the need to make their mark and change things for the sake of it.
It doesn’t always work, of course, and some family conglomerates have imploded. But many are flourishing. Charoen Sirivadhanabhakdi - who left school at the age of nine - understands something that many academics find hard to fathom.