CHAPTER 14:  SUSTAINABILITY OF ASIA-PACIFIC SUCCESS

 

 

Being intrinsically pragmatic, East Asians have embraced globalization and have generally accepted the discipline imposed by exposure to international capitalism and the need to conform to global best practice. Asians possess a high civilization arriving at modernity, and they do not seem likely to revert to earlier, less advanced customs and conditions.

It must be clearly understood that the primary direction of globalization is toward liberalism. A fundamental premise of liberalism is individualism. Indeed, the increasing wealth of Asians may itself lead to a shift in cultural values away from collectivism and toward individualism.

Globalization progresses so rapidly today because of advancing technology and the liberty to pursue individual goals. Thus, as Asia is becoming liberal, like the West, there is both more choice and more liberty to choose.  However, Asian culture will not abandon absolutely all the social mores that have been, throughout history and still today in modern Asia, the foundation of social, political and economic development. Some traditional behaviors will persist in Asia, for better or for worse. 

Also, liberalism itself does not mean complete laissez faire individualism unrestrained by government. Individual freedom and free markets even in the most liberal capitalist states in the West are controlled by governments to protect social justice and the environment, for example. Effective government provides the institutional underpinnings of modern market economies --including central banks, fiscal and monetary policy, regulatory authorities, and safety-nets at least; plus trade and development boards, public services, moderate redistribution programs, and planning agencies in states where a larger government role has become legitimized. Asian governments are stepping back from their strong roles in earlier development, but they still are not compromising their priorities, which puts nation-building first, so that trends towards liberal values must be seen as serving this ultimate purpose. Since governments in Asia, and Chinese management, and Asian values, etc, have enhanced development and to the extent they can continue to do so, they go hand-in-hand with globalization. 

 

The Bamboo Network in the New Millennium

The bamboo network is coming of age. As the economics of networking becomes more complex with more shareholders, clients, suppliers, creditors, etc, the viability of such a business culture declines. Connections must gradually be replaced by a rules-based system of management. Asian business is in transition from a relations-based system of corporate governance to a professional system of rules. The rules are increasingly the impersonal laws of corporate governance that constitutes shareholder capitalism. Business in Asia will address the demands of investors above any other stakeholder including government. This is the theoretical ideal form of management practice and certainly must be respected more and more as market economies develop and approach theoretical perfection. But the abrupt change is a larger step than any economy achieves in one bound, and the transition may offer some 'market imperfections' that can be exploited. If any manager in the real world has better connections, team effort, works harder, etc, such competitive advantages can still count. But the theoretical principles must be understood and respected by professional managers. 

A recent Survey from The Economist¹ undertakes the task to "explore the prospects for achieving transparency, good corporate governance and sound regulation in developing East Asia." (4) Family businesses in Asia seem to differ from similar closely-held businesses elsewhere primarily in terms of transparency. The Economist asserted that whereas the proportion of listed companies in South-East Asia under "visible" family control is not that different from countries like France or Italy, the stark difference is in the share of companies where ultimate control has been disguised -- this proportion is five times higher in South-East Asia. 

Hiding the family jewels is a major priority of the family owners. This can be accomplished by "pyramid" organizational structures, explained in the Chapter on Overseas Chinese Business Systems. The purpose of these pyramids was to bring outside capital into the family group of companies all the while retaining control within the family over the use of such capital. The company was made deliberately complex and opaque. Perversely, the corporate conglomerates in South-East Asia's emerging economies were able to some extent to 'internalize' capital markets, whereas external capital markets are normally expected to discipline companies in the way money is invested. "The main difference appears to be that in western countries the capital markets have had time to catch up with the tricks of family businesses." (6) Shareholder capitalism needs to develop in Asia, where regulators, creditors, and other institutions of mature capitalist states monitor companies, and outside investors demand representation on the board to influence how their investment is spent. In this way the power of family and other insiders is curtailed in the interests of all shareholders. 

Asian firms are moving gradually in that direction, with the transition often directed from the top. Governments have been attempting reforms since the 1997-98 crisis, with mixed success. Fortunately, far-sighted business leaders in Asia seem ready to initiate change somewhat voluntarily. The style of leadership in Asia seems appropriate, where visionary leaders take responsibility and set examples for widespread, even nation-wide reform. The Economist offers some examples that bode well for the willingness of Asians to move forward. (7-9) Stan Shih, CEO of Taiwan's computer giant Acer, banned his children from working in the company; he paid his managers in shares; invited outside directors to join the board; and published audited accounts quarterly even though Taiwan law only required annual statements. These measures were designed for increasing shareholder value by relinquishing family control and making the company responsive to outside investors, improving transparency, and providing management incentive. Another example: Asia's biggest tycoon, Li Ka-Shing, is able to create confidence that attracts international investors despite still maintaining traditional Chinese-style management. "We operate the company western-style, although with an eastern touch," observes his top manager Canning Fok. 

A third example: Thailand's Chinese-owned conglomerate Charoen Pokphand is downsizing and re-focusing on core businesses, and improving transparency by negotiating new investment decisions with minority shareholders. Thus, Asian firms that want to compete in the global market and court global investors must play by global rules of corporate governance. 

But not all Asian companies are changing their old ways so willingly. South Korea's chaebols seem more reluctant to change, despite strong pressures from the government of Kim Dae Jung. Korea's recovery from the 1997-98 crisis was probably the most dramatic turnaround in Asia, which seemed to give the chaebols some room to relax their vigilance. The largest chaebol Hyundai became embroiled in a succession battle between two sons of the founding father. The second largest until it failed in 1999, Daewoo resisted necessary bankruptcy proceedings perhaps too long, engaging in protracted negotiations with Ford and finally General Motors to sell its bankrupt car division. Ford abandoned the talks, presumably either in despair of the outsiders' inability to uncover hidden liabilities, or perhaps finally uncovering too much bad news. Daewoo's chairman is accused of the biggest accounting fraud in history and hiding abroad.

A development that is rapidly increasing the amount of public information on firms in Asia is the Internet. This relatively new resource seems destined to replace the bamboo network of secrecy and special favors for insiders. Foreign investors and other outsiders see a more open playing field. The advanced countries in Asia are becoming well-wired --Japan, South Korea and Singapore are already among the world leaders in computerization. Furthermore, the type of information-age employees that now join Asian firms are "the same sort of pony-tailed, geeky and individualistic people as in California." (8) Such talent may be another force to not only unravel the bamboo network, but also oblige the older generation tycoons to change their style. 

 

The Asian Middle Class Revolution

"It is now likelier than not that the most momentous public event in the lifetime of anybody reading this survey will turn out to have been the modernization of Asia." The Economist² opened its 1993 Survey with this pronouncement, basing its dramatic observation on a projected consumer population in Asia of one billion people by the year 2000. The Economist a decade later reviewed its projection for 2000: there were 1.2 billion Asians aged between 30 and 59, with considerably increased spending power –in China, car sales in the first half of 2003 increased by 82%.³ Today the new consumer class has the spending power not only to buy such normal goods as color televisions, refrigerators and motorbikes, but also cars, luxury goods, tourism and even financial products. The size of this new market is today creating some of the biggest business and financial opportunities in history, despite the unexpected slowdown after the 1997-98 Asian financial crisis.

The 1993 Survey also argued that the Asian consumer movement represents an alternative path to modernization from the Western path: "Asians also now believe passionately in modernization. If they become rich too, they could be in a position to offer the West an example of how to marry economic change to social stability and reconcile freedom with order."

New wealth is thus not the only defining characteristic of the so-called Asian "middle class". This is a term defined generically in Webster’s Dictionary as a "fluid, heterogeneous grouping composed principally of business and professional people, bureaucrats, and some farmers and skilled workers sharing common social characteristics and values." The socioeconomic phenomenon was first identified in Europe as a significant segment of the population became distinguished from both the peasants and the landed aristocracy of old Europe. This new class achieved a certain standard of living, by means of their dominance in commerce and the professions. To be "middle class" presumes a certain educational attainment, conformance to expected standards of morality and decorum, and respect for property and a person’s proper role in society. The concept of a new middle class in Asia draws attention to the relatively sudden modernization (perhaps Westernization), and the dramatic change this implies from the old society of predominantly rice farmers, existing generation after generation at subsistence level.

For several decades following World War II, the poorer Asian countries had a small class of rich business tycoons, politicians and bureaucrats, generals, and the like who generally lacked middle class ideas despite their often ostentatious lifestyle. They might have been big consumers, but of traditional items, or spent their wealth on Mercedes cars or French cognac. The vast majority of the populations consumed very little --soap, rice and simple commodities, and not much more. Asia’s tremendous growth spurt in the 1980s changed this status quo irretrievably. Today, something resembling a Western pattern has emerged. There are still the super-rich, and many more of them. But now there is a high proportion of the population with middle-class tastes and hopes, and many with the money to make a difference. Since The Economist estimated one billion such consumers by the year 2000, this projection has been realized --even exceeded-- despite adverse economicc conditions after the Asian Crisis of 1997. The Economist in October 2003 was now forecasting that “Asia's consumers may soon replace America's as the drivers of global growth.”

The Emerging Business Opportunities

Asia (outside Japan) has just commenced its tremendous boom in consumer spending, which is increasingly becoming a major driving force of the Asian economies (together with a longstanding construction boom). The task for business is to seize the new opportunities.

Newly emerging economies are getting on the bandwagon early. In China, India, and even Vietnam there has been little of the artificial repression of consumer demand that Japan and South Korea resorted to in their early development. Governments in Malaysia and Thailand are openly encouraging consumer demand to foster domestic growth. Even before the widespread urbanization of Asia, consumer demand had been growing in the countryside. To an extent, the rural market spurred the development of the so-called Township and Village Enterprises (TVEs) in China. Much of Java in Indonesia or Fujian province in China may be technically rural, but distribution infrastructures there are as developed as in many cities. The technology of distribution, the density of Asia’s rural populations and increasing rural purchasing power all make rural consumer markets far bigger and more accessible than most marketers would guess. It is possible still in the 21st century to wander into remote regions in the Indonesian archipelago and see stone-age tribesmen wearing nothing but penis sheaths, and stocking up on modern consumer goods from the village shop.

Of course, it is in the cities that the biggest and most advanced Asian consumer markets are found. Urban consumers are adopting western shopping habits, and foreign retailers are expanding market share rapidly. For example, with the boom in private home ownership in China, there is a new market for home improvement. “Government deregulation (Chinese used to rent accommodation from their work units) is boosting home ownership by 30% a year. Along with home ownership comes an interest in decor. China's home-improvement market, estimated to be worth almost 200 billion yuan ($24 billion) two years ago, has since grown much bigger.”⁴

Asian cities and their surroundings ought to be the focus of marketers, not the nation-states. Probably no one business can reasonably attack the "China market", rather the Shanghai, Beijing, or other markets must be selected that are bite-sized enough to be swallowed. Another reason is that, with the networking tendencies of the Overseas Chinese, national boundaries in Asia sometimes are less meaningful in defining a zone for business.

Any marketer concentrating on, say, the 15 biggest cities in Asia might see a tremendous potential market.

Infrastructure

The Economist⁵ claimed in 1996 that more construction cranes were employed in Shanghai than in the whole of North America. The construction boom of the 1990s was visible everywhere, and the needs are still daunting. Jakarta, for example, home to some 10m people in 1997, has no subway, a sewage system consisting mostly of open ditches, and 70% of its people living in substandard housing.

But it is more than the basic necessities that are being contemplated. The national projects of Malaysia are indeed sophisticated --the twin Petrona towers in Kuala Lumpur, at 450m high, are a few meters higher than the world record set by the Sears building in Chicago. This feat was due to be surpassed by the 460 meter Shanghai World Financial Centre. (Malaysia’s grand projects also added to the perceived risk –concerning the economy’s ability to pay for them— that contributed to the loss of investor confidence in 1997.)

In Bangkok, traffic is so congested it is rumored that people carry portable lavatories in their cars. The annual cost to the city’s economy of inefficiencies due to infrastructure problems is billions of dollars. These deficiencies can erode Asia’s cost advantage. It can cost more to get a container from China's interior to Hong Kong than to move it from Hong Kong to Europe or America. It is not just distribution networks, but utilities for production itself. In Bangalore’s "Silicon Plateau" and Taiwan’s Hsinchu science park, electricity is so undependable that occupants of the parks build their own power plants.

The World Bank estimated a total potential bill for infrastructure needs in the 1990s at around $1 trillion, including $400 billion on power alone. Much of this must be financed by the private sector. The model for getting the private sector involved is the "build-operate-transfer" approach, where the private builder of say, a road, is allowed to obtain payment through collecting revenues from a toll for a given period. Gordon Wu’s Hong Kong based Hopewell Holdings, one of the original infrastructure builders in Asia, built roads in China with this formula. However, government authorities sometimes tend to be too careful about the level of returns awarded to private builders. For example, in January 1996 a new Hindu nationalist government in the Indian state of Maharashtra forced Enron, the Texas power company, to renegotiate a $2.8 billion deal which the Indians considered too favorable to Enron. The only clear conclusion from that debacle is that India’s power needs were considerably delayed.

To spur the self-reliance that such internal rebuilding requires, a growing proportion of Asia’s business is being done within the region. Intra-Asian trade continues to grow rapidly, and intra-regional investment (mostly by the overseas Chinese) accounted for around 40% of Asia’s total foreign direct investment before the crisis. The Association of South-East Asian Nations has pledged to reduce tariffs on most goods to 5% by 2004, allowing outsiders to treat Southeast Asia as one market. And now Asia has its own, home-grown consumers: a gigantic middle class is emerging.

 

International Competitiveness of State Enterprise

The case analysis of Keppel Corporation in Chapter 6 illustrates an important aspect of the astounding success of Asia-Pacific business: The role of the government in Singapore has been productive in not only industrial policy but also state enterprise. A central aspect is national and international networking at government levels. 

Keppel is an exceptional enterprise. Well-led, adaptable and profitable, it is a rarity among government-owned shipyards worldwide. Keppel's success was an outcome of an effective state role, rather than being hampered by bureaucracy and politics as is more commonly expected. 

During the latter decades of the 20th century, researchers investigated state-owned, or “government-linked companies (GLCs) with renewed intensity, with particular interest in management limitations and adverse implications for the 'free trade movement'. However, scholars have failed to produce a unified, cohesive concept of GLCs. Certainly many suppositions have been advanced, but theoretical developments about the behavior and performance of GLCs remain scattered and inconclusive. If there is any unequivocal conclusion in the literature, it is that a GLC is an unwanted, improper sort of enterprise, prone to confusion by politicians and bureaucrats. Notwithstanding, the Singapore GLC system seems to be an exception to the general rule --Singapore GLCs have performed very well, which is contrary to the experience virtually everywhere else in the world. Singapore would seem to represent a rare type of business and governmental culture where GLCs are efficient and even fair competitors (and effective vehicles for national competition as well).

A private sector management culture has been developed in Singapore GLCs, acquired largely as a result of exposure to international competition and MNC management and technology. Business acumen can often be developed to a higher level in GLCs than in domestic private enterprise in less-developed countries. The general expectation in advanced societies is that the private sector is more developed and government relatively less competent in business, so a government role becomes counterproductive. On the other hand, in some emerging economies a 'technocratic' bureaucracy is relatively more efficient, and a government role can even be essential. Entrepreneurs, expertise, institutions and organization are lacking in the private sector. The best people gravitate to government because that is where they find authority, responsibility and money. In fact, this may contribute to a 'crowding out' effect of indigenous private enterprise because management resources are scarce in emerging societies. The government can become legitimized in a big role. Government initiative is well supported and succeeds while private enterprise is left behind. The State becomes the responsive, proactive initiator for new direction, ideas, risks. Success breeds success. In Singapore, as a follower society, new initiatives often have come from the government, which itself is a model of effectiveness among world governments.

In Singapore the top achievers, even from the private sector, are tapped for service in the state's enterprises. Businessmen from the Civil Service do not seem risk averse. Recruitment of an enterprise's top personnel from the Civil Service does not necessarily inhibit independence and entrepreneurship largely because these individuals were outstanding professionals of respected competence and key members of the national leadership team. Michael Porter contended that "national importance" attracts the nation's top talents (1990:114), contributing to competitive advantage in an industry. In addition to the prestige of joining an elite team, lavish government pecuniary incentives enhance the staffing function.

One clear advantage of GLCs lay in the power of management. Power in this case was partly a result of the GLC being a large company, dominant on the local scene, but also top managers were top national leaders as well. Keppel's appointment in 1994 by the Economic Development Board to lead the Republic of Singapore's flagship overseas operation in Suzhou, China, is an example of management clout (and connections).

Nor was entrepreneurialism lacking. There is arguably a kind of "corporate entrepreneurialism", which may be superior in concept to the traditionally revered virtue of individual entrepreneurialism. Large organizations (or a network of firms) have certain advantages in terms of resources available. Leverage is more obtainable externally since financiers are more ready to back larger businesses (especially state-owned), and there is a 'critical mass' of cash, R&D and other assets, and a pool of talent. An entrepreneur heading a strategic business unit within a larger organization, given autonomy to do business, can be innovative and is often more able than small-scale entrepreneurs to exploit a good idea.

The success of GLCs like Keppel speaks well for the state's role as initiator and owner of national business enterprise. Keppel's innovation in finance and its excellent non-financial performance in such areas as product quality, marketing effort, and labor relations were indicative of its position of national leadership in business management. These are examples of the many fields where major GLCs played a role in the 'state entrepreneurialism' that characterizes the Singapore GLC system. Of course, since at least the 1980s the government has been cognizant of the need for privatization of existing state-owned enterprises and depending more on private ventures for the enterprises of the future. The lesson might be that state enterprise can be an effective development mechanism in emerging economies, and it of course presumes good government. 

 

The Asian Political Model

The old adage --that Asians are not so concerned about democracy, and that business, not politics, is the real concern --should not be overblown. If politics did not really matter, why would China find it necessary to repress dissidents? Harry Wu, a prisoner in China’s gulags,  reportedly had his back broken, his arm smashed by a spade and his nose punctured by force-feeding. In January 1996, a former electrician named Wei Jingsheng, who had spent most of the past 15 years in prisons or camps, was sent down for another 14 years on questionable charges. He was not released until September 2001. These events are a concern, within Asia as well as to the whole world.

Hong Kong’s handover from British colonial rule to revert to China’s sovereignty on 30 June1997 was a cloud of uncertainty for business in the territory, and the perceived political risk still gets considerable attention in Asian Intelligence country reports. There seems little doubt that business in Hong Kong is now more political, and probably more corrupt. 

Other uncertainties include China’s saber-rattling over Taiwan, hostilities on the Korean peninsula, and internal conflicts pervading most countries in Asia.

Alexander de Tocqueville famously pointed out that revolutions happen when rising expectations are dashed. Many western news analysts were quick to point out that social unrest was one of the most likely outcomes of the 1997 economic crisis in Southeast Asia. Where living standards double within a decade, then collapse to a low level again, certainly some tempers may flair. Even in still-prosperous China, there are 100 million migrants who are a burden to city infrastructures, especially in the coastal areas. And worries of wealth distribution and even food shortages persist. The benefits of liberalization often seem to be hogged by corrupt officials and cronies of the political establishment. Reform of the political institutions, less restrictive participation in political processes, and general maturity of the polity seems inevitable, with untold consequences for business and society in Asia.

 

The quest for the Asian miracle

One reason why business in the Asia-Pacific is of interest to business people everywhere is that "Asia is now witnessing a Darwinian struggle between a clutch of different forms of capitalism." (The Economist 1996:1) The most noteworthy struggle so far was between Western and Japanese manufacturers --consumer vs producer economics. Another, the "bamboo network" of family businesses created by overseas Chinese, has also caused both fascination and trepidation. Other Asian models of business have had an important impact, including the Korean chaebol, and even the Singapore government-linked enterprise. The last mentioned paragon of business success is linked also to a wider debate on politics. Is the "paternalistic authoritarianism" of Singapore and other Asian countries a model to be emulated elsewhere, and will it lose its essential qualities that have contributed to economic success in particular countries?

The Japanese model finally began to falter in the 1990s. Doubts were also broached about the wider East Asian model by Paul Krugman (1994), whose famous "total factor productivity" argument refuted the notion that there ever was an Asian miracle in the first place. Krugman (and Alwyn Young) contended that virtually all of Asia’s growth was a result of simply allocating massive capital and labor resources to manufacturing, rather than any actual efficiency in utilizing these inputs. 

Yet through early summer 1997 the optimism in the region was euphoric and Asians could not countenance any mood for caution. When Macau was returned to China in 1999, all of Asia came under Asian control for the first time in 400 years. This event, coupled with the region’s spectacular economic growth, left a whiff of Asian supremacy in the air.

But the assumption that growth would continue was dealt a rude shock in the summer of 1997. Faced with rising inflation, trade deficits, and external debts, most governments in the region remained optimistic, until market speculators took them to task. By July 1997 current-account deficits in Thailand and Malaysia had reached 8% of GDP. Much of the capital inflows that balanced these deficits, especially in Thailand, were short-term. The miracle turned into a debacle, revealing serious faults in the foundations of both business and government throughout the region. 

Thus, the economic crisis in Asia of 1997-98 put a damper on the swelling pride. A brief economic recovery after 1998 in most of East Asia suggested that the pre-1997 pattern of growth might re-emerge, but worldwide recession in 2001 further discouraged the party mood. The decline in confidence seemed to hit bottom in late 2002. Since then, the perception seems to be that East Asian countries are more stable both economically and politically than they were. In the 12 months before the Russian political crisis in late October 2003, emerging countries’ stockmarkets rose 60%. Global investors seemed to look very favorably on future prospects in emerging markets once again, especially prospects in East Asia. Not only did share prices increase, but loans from foreign banks and bond investors and foreign direct investment all surged.⁶

For sustained economic success in the future, the Asia-Pacific needs business managers more than anything else. This explains the thirst for Western business degrees, paradoxically. To be the best, managers must first be familiar with western ideas to muster more complicated skills in technology, marketing and branding, and other essential management areas of the future. Eastern ways are not taught in business schools; they are inbred, but they represent the kinds of values that fostered the Asian "miracle" and still have considerable merit.  

 

Conclusion

This book has discussed socio-political and economic legacies in the Asia Pacific. With their strong social foundation, Asian polities greet the new millennium with optimism --but also with trepidation. They are aware of the dangers of globalization, and that the rapid pace of change in the modern era will only quicken in the future.

The greatest strength of the Asian legacy may be that it is simultaneously retrospective and forward-looking, providing solidarity, legitimacy, continuity, and pride, yet compelling the societies to be flexible and adaptable as well as stalwart in the face of adversity, to meet the challenges of globalization.

 

endnotes:

 

¹ Discussion draws on "Survey of Asian Business," The Economist, 7 April 2001.

² Discussion draws on "Survey of Asia," The Economist  30 October 1993.

³  “A billion boomers,” The Economist, 9 October 2003

⁴  “Doing up the Middle Kingdom,” The Economist, 9 October 2003

⁵ Discussion draws on "Survey of Business in Asia," The Economist, 9 March 1996.

  ⁶ “Investors return to the frontiers,” The Economist 1 November 2003