Asian companies in a new age

Economic thinking after World War II was framed within the context of the Cold War. After the collapse of the Soviet Union in 1991 there was a victor. Leftist ideology had failed and the Washington Consensus on economic thought gained hegemony (in the description of the Italian Marxist ideologue Antonio Gramsci, hegemony was the general acceptance of what suited the hegemon and was also good for the world) though its empirical foundations were at best weak. If one were to view economic success after the collapse of the Soviet Union, say from the mid-1980s, and the stand out countries are South Korea and Taiwan. Thereafter, there was the slow rise of Malaysia and Indonesia followed by the spectacular transformation of China. Since 1998, India has averaged a non-sloppy 6.7% average growth rate (over 17 years). None of these countries have been strict adherents to the Washington Consensus. Their economic policies—be it exchange rates, tariffs, controls and direction of the financial sector and the acceptance of state-owned enterprises—have been adapted to suit the political economy of the specific country and with success.

What is needed now is a post—Cold War narrative to explain the emerging business and firm environment as well. For context, there are roughly 13,000 distinct companies with revenues of over a billion dollar. About 3,700 of these are in the Americas, 5,300 in Europe and another 4,000 in Asia Pacific region. Of these, less than 3,000 have revenues of over $5 billion. In the next five years, just China, India and Indonesia will add about 3,000 companies with over a billion dollars in revenues. This is more than double the number of billion-dollar companies in the US today. These firms are emerging at rapid rates. To illustrate, India had 19 billion-dollar companies in 2000, 145 in 2010 and 186 in 2014 and is likely to add another 500 in the next five years. The impact of these new billion-dollar firms is going to be profound on the business environment.

If we just review the top 200 companies in India, more than 70% are family-owned and another 15% are government-owned enterprises. Many of the large companies are, in fact, conglomerates. They have come up in areas that are not unexpected—infrastructure and infrastructure-related, consumer and consumer-related, financial services and technology. If we explore further we find that there are substantial differences between family businesses in the US and Europe and Asia. Asian family owned companies behave quite differently from those in the West. In India, some of the differences are even starker. Family owned companies are mostly owner-managed; the owner does not behave as an investor. The attitude of these companies in respect to important business decisions is different from family businesses in US and Europe. While family businesses in the West are focused on wealth preservation and are more conservative than diversified private companies, they grow 3% per annum slower and provide a 2% per annum higher return on capital. In India, family businesses have a much greater appetite for growth (19% versus 15.5%), do more mergers and acquisitions and provide a lower return on equity than their private or multinational competitors (14% versus 19.5%). The performance on TSR (total shareholder return) of such companies has been comparable with their competitors. While there is the common wisdom that a family business rarely goes beyond three generations, the fact is that not many companies last 60 years in the world, and the number is decreasing. With family businesses the morbidity rate between every generation is equal—first to second, second to third and third to fourth. However, the greatest risk for family businesses is in managing succession. Those that can do this well significantly improve their chances of inter-generational survival. Given that succession is a big event in a family company’s due to conflict between the successors, conglomerates which allow an easier split of assets improve the ability of these companies to manage succession. More broadly, conglomerates are ever present in Asia not just to foster family succession. The belief that the conglomerate is an inferior model to focused companies is a simplistic notion. It hides the complexity in the environment on account of poor infrastructure and information that makes it easier for these companies to overcome infrastructure shortages and access capital and people.

Further success in India, and Asia more broadly, requires companies (especially infrastructure and financial services) to be good at dealing with the governments in their many manifestations—Union, state, regulators, tax authorities to highlight just the primary ones. Failure to do this can have catastrophic implications. This does not make all recent successes crony capitalists. Far from it, in countries with great poverty the role of the government and all stakeholders becomes even more important. Successful companies need to interpret, inform and influence government policy in good ways, much in the same way as they do with investors. The simple unerring focus on the investor and the belief that businesses must only respect them does not work and arguably should not work in Asia.

It is important for business theorists to come to terms with a post Cold War business environment in its elements. The importance of engaging the government, understanding how to evaluate family companies, the ability to run conglomerates are all requirements to succeed in the emerging Asian business environment. The simplistic assumption that Asia will grow up to become like the US is mistaken. There is an urgent need to go beyond Cold War economics at both the macro and micro level to understand the emerging world order.

Janmejaya Sinha is chairman, Asia Pacific, Boston Consulting Group.

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