To build a business, basic is best


If you want to build a solid firm that has as much chance as possible of surviving into the next generation, are some sectors better than others? The answer is yes, but they’re not necessarily what you think.

We live in a world obsessed with technology, and specifically the internet and its spin-offs. Apps, clouds, and especially anything smartphone-related seem like a big deal. But technology analysts will tell you that the smart money is not in businesses like game-making or messaging, but in the hardware. Servers, to be precise, or phone networks.

India’s Bharti Airtel, which is owned by a branch of the Mittal family, said this week that its net profits were up 170% year-on-year as cheap smartphones flood the country and people use more data.

That’s a good business to be in. But there are better ones. A good rule is this: the more basic the better. Some of the biggest and oldest family firms are in stuff that is fundamental to the modern world. Koch is in oil and agriculture, and has been going since 1918.

The Weyerhaeusers have run their vast timber business since 1900. Cargill, which is in commodities such as beef, soya and paper, has been going since just after the American Civil War. An employee once told me that everything in a Big Mac, including the box it comes in, could have been made by Cargill. That’s a good business to be in. So is beer – most of the world’s top brewers, including Heineken and Molson Coors, are family-controlled. Staples are stable.

But you can get even more basic. Almost all the world’s biggest dredging firms are Dutch and/or family-owned. That’s not a sexy business, but it is necessary. Without them, the world’s ports, and world trade, would grind to a halt.

Even better, perhaps, is concrete. In his book Making the Modern World: Materials and Dematerialization Vaclav Smil – who Bill Gates calls his favourite writer – writes about the importance of materials in the modern world. Just one fact shows how important brute stuff is in the 21st century: between 2011 and 2013 China used 6.6 gigatonnes of concrete, more than the 4.4 gigatonnes that the US used in the entire 20th century.

Both of the world’s biggest concrete makers, Lafarge and Holcim, are family-owned.

Smil also points out that when we work out how to make something –  a smartphone, say – with less materials, that doesn’t mean that we start using less of those materials. It means that the cost of a unit goes down, and so demand for them goes up and we use more.

To be in the phone-selling industries is a mug’s game, because you will get undercut by new entrants. You wouldn’t need to tell this to Samsung, which saw third quarter profits in its handset business drop 60% year-on-year as Chinese upstarts like Xiaomi took market share.

But if you are in aluminium, rare earths or plastics, then you are in business. You aren’t in the expensive and thankless game of persuading teenagers in Shanghai that your phone is cooler than someone else’s. Whether Samsung or Xiaomi buy your product, doesn’t matter to you, because somebody will.

Everyone has heard of Apple and Samsung, or Coca-Cola, because their business relies on advertising of one sort of another. Nobody has heard of the Mongolian cobalt miners or Congolese Aluminium smelters they rely on. But these are the businesses that have a good chance of really lasting.

The golden rule is this: get as low down the food chain as possible, and you increase your chances of longevity.