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Asia's family-run conglomerates are driving growth in the region

Deep pockets, extensive networks boost companies' clout in Asian markets

Development of Lippo Village began in 1993. It includes a wide variety of facilities in Tangerang, near Jakarta. (Photo by Shinya Sawai)

One of the most striking factors in Asia's growth over the past few decades has been the rise of family-owned conglomerates.

In a region often dominated by state-owned enterprises, these big corporate groups have used wealth, connections and entrepreneurial skills honed for generations to carve out their own empires.

Many of these sprawling groups are connected to companies on our Asia300 list of major players to watch. Investors have good reason to keep an eye on them: In terms of share price, large family-owned businesses tend to outperform the global index of blue chips, according to research by one investment bank.

Of course, there is a downside. Family squabbling over succession and money occasionally gets out of hand, while close ties to the government can invite accusations of collusion. On the whole, however, these companies remain a major engine of growth and a key barometer of the region's economic fortunes.

33 major family-owned conglomerates in Asia

HONG KONG -- About 25km west of bustling and crowded central Jakarta, a modern satellite city rises in the outskirts. It is Lippo Village, developed by Lippo Karawaci, a flagship property developer under the prominent Indonesian family conglomerate Lippo Group.

The place is quite different from the rest of Indonesia. With an overall design by Scottish architect Gordon Benton, it has Western-style homes for single families laid out in orderly rows, and includes a golf course, shopping malls, hospitals, offices and other facilities. An aerial view shows plenty of green space, something in short supply in Jakarta. According to the company, 154,751 trees were planted. The site boasts more than 120km of roads, a drainage system that extends 250km, and a sewage treatment plant.

The village is also home to Universitas Pelita Harapan, or Ray of Hope University. Lippo Group CEO James Riady put his heart into creating the institute, which is now regarded as one of the best in the nation, attracting students and faculty members from abroad as well.

The population has grown to over 70,000 residents since its original inception in 1993, and it is now moving on for expansion. The company has already acquired 1,200 hectares of land, and has rights to develop up to 3,000 hectares.

Two decades ago, the site was barren land. The transformation, which was led by Lippo, is a case of an Asian family conglomerate taking a long-term stance to undertake risks and financial burden.

Lippo Group began as a bicycle parts trader, founded by Mochtar Riady, who was born in Malang in eastern Java of parents from Fujian Province in southern China. Mochtar's core business shifted to banking, the centerpiece being Lippo Bank (now CIMB Niaga), until the Asian financial crisis put his business in financial trouble.

"In an adverse economic climate, Lippo Bank had no choice but to accept three large plots of land, which had been used as collateral on loans that could not be paid," the 87-year-old Mochtar said in his recently published autobiography. One of them turned into Lippo Village. His foresight and long-term planning have made crisis into new opportunities for his empire to shift gear and become an urban planner.

Deep pockets

Family conglomerates in the region also use their deep pockets to create new markets.

In India, Reliance Industries -- an empire encompassing energy, petrochemicals, textiles, natural resources and retail led by Mukesh Ambani -- is flexing its financial muscle to crack the mobile phone data market.

The Mumbai-based conglomerate, originally established by Mukesh's father Dhirubhai Ambani in the mid-1960s, and later split up between brothers Mukesh and Anil, launched its fourth-generation services in September, with the idea that the existing voice call regime had to end and fast data was the future. It started off by offering free data until Dec. 31 and free voice calls after that.

Its entry into the telecom sector, through subsidiary Reliance Jio Infocomm, not only spurred a price war among major incumbents such as Bharti Airtel, Vodafone India and Idea Cellular, it also helped spread the use of smartphones by making them cheaper.

While existing players have slashed rates for both voice calls and data in response to Reliance Jio's services, the company still claims its data rates will be far cheaper even after the offer period expires at the end of the year. Reliance claims its data services will cost around 25-50 rupees per gigabyte, whereas the cheapest package offered by the three leading players averages around 250 rupees for 28 days validity.

On the voice side, Reliance's network will remain free, where its rivals refrain from matching up. Existing players are complaining to regulator as "predatory pricing" and refusing to provide inter-connectivity with Reliance Jio. Even so, Reliance Jio had over 50 million customers as of Nov. 29.

"Calling from Jio to Vodafone or other service providers, it connects late after some pause and beeps and sometimes says 'busy call,'" said Vaid Naran, a resident of Mumbai. "However, as it is giving three months' free service, it is a boon for customers like us."

Experts reckon that Reliance Jio's aggressive stance is made possible by the financial muscle its parent conglomerate wields. Most of the subsidiaries are profitable, and the parent itself is cash-rich. Reliance Industries, which owns 99% of its unlisted unit, has already spent around 2.5 trillion rupees ($36.5 billion) on its 4G initiative.

According to Fitch Ratings, earnings from the group's refining and petrochemical businesses will provide a cushion for the growth of the telecom operations for some time. The credit agency expects the group to "take advantage of the strong growth potential in the India telecoms market ... We expect the robust infrastructure, along with its affordable 4G data offerings to support Jio's growth," said Director Muralidharan R in a note on Nov. 3. GSMA, an organization representing the interests of mobile operators worldwide, forecasts that the 4G connection base in the country will grow from 3 million at the end of 2015 to 280 million by 2020.

Family power

The strength of Asian family conglomerates was demonstrated in lifting China out of the backwater. At the end of 1978, Deng Xiaoping, the paramount leader of the country then, called for foreign direct investment in a 180-degree shift to reform and opening up, after decades of self-inflicted chaos due to a series of dogmatic political and social campaigns.

During the early days, the global business community largely remained on the sidelines. But overseas Chinese either directly invested or led the investment of some $417 billion from 1978 to 2005. This was about 67% of total foreign direct investment into China during that period, according to a paper published in 2011 by Ren Guixiang, a researcher at the Chinese Communist Party's history research institute. Bangkok-based family conglomerate Charoen Pokphand Group was also one of the early birds.

Dhanin Chearavanont, a second-generation leader of the Thai conglomerate, was literally the first person to register a joint venture in 1981 in Shenzhen, one of the four special economic zones newly opened to foreign investment. The corporate registration number for its animal feed venture is "0001." CP was also the first to open a carpet factory in another special economic zone of Swatou, Fujian Province, where his father Chia Ek Chor was born and Dhanin himself spent his elementary school days.

Dhanin wrote in his recent memoir, published in the Nikkei Asian Review, that the Cultural Revolution turned China into a different place, where the "situation was bleak" and "there was nothing." However, he saw opportunities, where "you could develop something from the ground up. I immediately made the decision to invest." This was in late 1979, when he visited Guangzhou, where he had spent a year as a teenager, and found it to be "unrecognizable."

His bold first step has paid off. Chia Tai Group, as CP is known in China, has become a conglomerate in itself, investing a total of 110 billion yuan ($15.9 billion) and earning annual revenue of close to 100 billion yuan in 2015.

Robert Kuok Hock Nien, an ethnic Chinese Malaysian tycoon, was another early mover. Shangri-La Hotel, one of the main businesses of his Kuok/Kerry Group, opened its first property in Hangzhou in 1984. Including other brands such as Traders, Kerry and Jen, it now runs 60 hotels in mainland China, more than half of its worldwide operations.

Kuok, who made his fortune in the sugar business in Malaysia, expanded his foothold in Chinese real estate in 1985, kicking off with a joint venture to build the China World Trade Center, still a landmark in the heart of Beijing. During the first six months of 2016, his Hong Kong-listed flagship realtor Kerry Properties reported over 4 billion Hong Kong dollars ($520 million) in revenue from property sales and rents in China, 73% of the total.

As Hong Kong manufacturers shifted their production sites to the mainland, especially into adjacent Guangdong Province, CLP Holdings, a power comapany controlled by the Kadoorie family, was quick to grasp the resulting opportunity. Even before the official decision was made to open up, Lawrence Kadoorie, the late second generation chief of the Jewish conglomerate based in Hong Kong, visited Beijing in May 1978, which led to a contract to supply electricity to Guangdong through interconnecting the grid in 1979.

In 1985, partnering with Guangdong Nuclear Investment, CLP started construction of a pressurized water reactor type nuclear power plant in Daya Bay. The facility is now producing electricity for both sides.

The Kadoorie family's other main business is Hong Kong and Shanghai Hotels, which runs the Peninsula Hotel and the Peak Tram in Hong Kong. On Nov. 25, the hotel company celebrated its 150th anniversary.

As its name suggests, the company used to own luxury hotels in China, including The Astor House Hotel in Shanghai, until they were all confiscated by Mao Zedong after 1949. Along with their electricity business, the Kadoories also made a comeback in China in 1982 to run the Jianguo Hotel in central Beijing as a joint venture. However, it was only in 2009 that the Peninsula Hotel opened its doors in Shanghai, after taking 60 years to regain the other half of its name.

Better business

Along with the dynamic way they conduct their businesses, big family enterprises tend to make better investments. Credit Suisse has tracked the share price movements of over 900 listed family-owned companies with market capitalization of over $1 billion, and found that they have outperformed the MSCI All Country World Index since 2006.

The majority of this group are from Asia, including Lee Kun-hee's Samsung Electronics and Li Ka-shing's Cheung Kong Property Holdings. Market capitalization of major listed companies under Lee's Samsung group adds up to $278 billion and Li's Cheung Kong group to $142 billion as of Nov. 25, respectively.

Joseph P.H. Fan, a professor at Chinese University of Hong Kong who studies family-run businesses, also observes that family businesses "usually do better than state-owned enterprises or diffusely-held corporations in terms of sustainability and profitability." He attributes the strength to originate from "intangible capabilities," such as relationships, trust, networks and values that are "very difficult to be bought and sold in the marketplace."

However, there is some downside, the major one being succession. The recent strife at Indian giant Tata is a good example.

The recent move by the board of Tata Steel to remove Cyrus Mistry as chairman with immediate effect on Nov. 25 highlights the widening rift with his predecessor, Ratan Tata. Group holding company Tata Sons on Oct. 24 announced that it would remove Mistry from his chairmanship, which he had assumed in December 2012, and temporarily return it to Ratan Tata. The move touched off an all-out feud within the country's largest business group, which boasted total revenue of 6.77 trillion rupees ($103.5 billion) last year.

Mistry is hitting back, citing the "total lack of corporate governance" of the board of Tata Sons for his sudden dismissal, as well as constant interference from his predecessor during his reign. For its part, Tata Sons has released its own version, pointing to Mistry's unsatisfactory performance. In a statement issued on Oct. 27 the company said that "... the tenure of the former Chairman was marked by repeated departures from the culture and ethos of the group."

The bickering is taking a toll on their reputations and on share prices as well. The market capitalization of 29 group companies that the holding company acknowledges was 7.41 trillion rupees, 4% lower than at the end of March, whereas the overall Mumbai market has gained 8%. Now all eyes are on group companies' shareholders meeting starting from mid-December.

In South Korea, the so-called "Choigate" scandal has brought to light collusion between the political elite and family-run conglomerates. Politicians have been pressing family conglomerates, known as chaebols, to set up funds for their own interests, while in return the companies get favors in business.

The latest case involves allegations that Samsung Group bribed Choi Soon-sil, a longtime confidante of President Park Geun-hye, to win support from the state pension fund, which voted for the merger of the group's two key affiliates last year. Prosecutors are investigating, and raided the offices of both Samsung and the National Pension Service.

"Park Geun-hye/Choi Soon-sil gate is a typical case of collusion between political and economic powers, considering the Republic of Korea's most powerful person was involved in collecting money from corporations," said Sohn Chang-wan, a law professor at Yonsei University, in a forum on Nov. 22. "Such collusion was repeated in the previous governments, but this case is a big setback in the nation's democracy, considering it is a corruption scandal by the president herself."

A banker in her 40s in Seoul, who had previously worked for an affiliate of SK Group, said she was disappointed to see such collusion repeating over and over again. "Influential figures in the political and economic sectors still collude for their own interests, and have not changed from their old habits," she said.

Chaebols were aggressively supported and nurtured during the administration of President Park Chung-hee and became the main driver of South Korea's economic growth starting in the late 1960s, dubbed the "Miracle of the Han River." Ironically, his daughter, the current president, had to offer her conditional resignation on Nov. 29 due to her alleged involvement in the country's one of the worst scandals, which centers on collusion with the chaebols.

Hong Kong is another place where relationships between political power and family conglomerates are constantly questioned.

In electing the territory's next chief executive, or top leader, in March, representatives of family conglomerates led by Li Ka-shing and others will each cast several votes. Voting rights for the 1,200-seat election committee that selects the territory's leader are allocated to various business and social sectors and people holding largely ceremonial posts in China's rubber-stamp legislature and top political advisory body.

There was a symbolic scene on Sept. 22, 2014, where virtually all of the leadership of Hong Kong Inc. was summoned to Beijing by Chinese President Xi Jinping. Along with Li Ka-shing and Robert Kuok, a delegation of more than 70 business leaders headed by Tung Chee-hwa, a shipping mogul who served as the city's first chief executive, were lectured by Xi on Hong Kong policy and how "Hong Kong and the motherland are in the same storm-tossed boat, their fates mutually dependent on each other."

This was immediately after the start of the Occupy Central movement, in which students and citizens demanded genuine universal suffrage to elect the chief executive. The movement was thwarted, but frustration, especially among the youth, remains against Beijing and to a certain extent against the local family conglomerates that support Beijing.

For either good or bad, family conglomerates are taking the center stage in Asian business.

Nikkei staff writers Jun Suzuki in Jakarta, Rosemary Marandi in Mumbai and Kim Jaewon in Seoul contributed to this story.

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