Q: You started a company that has never existed before of its kind… and have built it into a global company. As you think back, even thinking about the culture of Asia, the notion of innovation as a core culture, building something that is a one of a kind and certainly the first of its kind is very counter-cultural. What was your experience in going through that?
A: Well, it was not easy. I agree that the culture in Asia is usually not starting something new. They pride themselves on entrepreneurship but the entrepreneurship in Asia is usually driven not by a new idea but by the desire of being your own boss. I give you a very earthly example. I went to a barber shop in my neighborhood and there are only two barbers in that barber shop and, one day, the junior barber told me that he wasn’t to stand his boss any more. He would go out and open a new shop. So he opened a new shop three doors down on the street. And so he took customers like me away to his new shop. Both of them had to work very, very hard. Both of them had to – they both started discounting. The market is the same size. And it’s not a happy situation anymore. I mean, both of them are very bitter and very resentful to each other and so I have stopped going to either one. It’s not a happy experience any more. I mean, that is entrepreneurship Asian style.
Ah, “entrepreneurship in Asia is usually driven not by a new idea but by the desire of being your own boss”. The Chinese entrepreneur who made this comment has built an Asian-listed global company that has multiplied over 26-fold in 19 years since its Sep 1994 listing to an all-time-high market value of nearly US$100 billion. He started the company at the young age of 55 based on a new idea that he was laughed at and ridiculed everywhere.
As value investors in Asia should know, path dependency has influenced the Southeast Asian (ASEAN) economy, which is the product of a relationship between political patronage and economic elitist power that developed in its initial starting point in the colonial era, and this politics-business nexus was sustained with a different cast of characters. Bet on the wrong jockey (entrepreneur) and the race is over. The Asian horse (business) doesn’t matter much; the ownership of the horse can change, a far more important information to monitor and analyze. Alas to the ones who are not in the insider’s track. These big Asian horses are often grants to quasi-monopoly or regulated/ protected concessions, normally in domestic goods and services industries without a requirement to generate the technological capabilities to compete on the global arena. These asset-based, deal-making trading businesses that form the foundation of many Asian tycoons are akin to elite forms of barber-like “services” in which the fiercely global competition cannot attack with impunity, such as commodities, construction/ infrastructure/ property, financial services. As Joe Studwell pointed out in his insightful book “Asian Godfathers: Money and Power in Hong Kong and Southeast Asia”, Southeast Asia has all the trappings of a modern dazzling economy with its high-tech factories and high-rise buildings but few indigenous, large-scale companies producing world-class products and services.
The scraps that trickle down the big, long tables of the Asian tycoons are left to be competed fiercely in a lose-lose situation at the SME level. Even with the export-driven boom, the SME’s role as middlemen in taking and executing orders efficiently from their MNC customers has limited the scalability of their business model. The typical SME boss believes genuinely that he or she alone took the capital risk, sacrifices and hard work to originate all the middleman connections with the key customers to build the business and hence treat their employees as expenses in merely fulfilling his or her instructions rather than as intangible assets. Given the (limitations of the) business model, it is not hard to produce an efficient but disengaged workforce that hits the natural limits of “productivity”. Hence, the profound comments by the US$100 billion Asian entrepreneur implying that only new ideas and innovations can create sustained win-win value.
May is the “Sell-in-May-and-Go-Away” month – a month to remind all of us to head up for our annual pilgrimage to Omaha to listen to the wisdom of Warren Buffett-Charlie Munger in the AGM of Berkshire Hathaway, to reassess our portfolios on the durable business models that can last the distance and whose stocks we want to buy-and-hold as resilient compounders. May (5th) is also the month of Malaysia’s fiercely-contested political elections to decide whether the ruling coalition party Barisan Nasional (BN) can extend its unbroken hold on power since independence in 1957. During Prime Minister Najib Razak’s four-year leadership since 3 April 2009, which is around the bottom of the 2007/08 Global Financial Crisis (GFC), the Malaysian Bursa index was up around 89%, about three times less than benchmarks in Thailand (+257%), Philippines (+250%), and Indonesia (230%).
Post-GFC, as Asian economies and her capital markets deepen and mature, a rising tide no longer lifts all the boats like it used to. Post-GFC, once-successful entrepreneurs who have scaled their companies multiple-folds to a billion dollar in market cap have mishandled risks, or preventing them in the first place through business model design, and their companies have hit a stall point in sustainable growth. The investment analysis and valuation impact of the moaty “horse” (business model) matters more than the “jockey” (entrepreneur) in this transition period which Asia is currently in. The winners are companies who have upgraded their business model to compete regionally and globally, such as Thailand’s Charoen Pokphand Foods (CPF TB) (+870% to $8.2 billion) and Philippines’s Universal Robina Corp (URC PM) (+1,680% to $6.1 billion) who compounded far more than the index during the same period. Longtime value investors would notice that the resilient compounders post-GFC in Malaysia are not the domestic entrepreneurial-led companies such as their Thai and Philippines counterparts (e.g. CPF and URC) but rather the MNCs that have been operating for decades in Malaysia: Nestle Malaysia (NESZ MK, +114% to $4.7 billion), Guinness Anchor (GUIN MK, +230% to $1.8 billion), Carlsberg (CAB MK, +328% to $1.5 billion), Dutch Lady Milk (DLM MK, +418% to $984 million), Aeon/Jusco (AEON MK, +280% to $1.6 billion) and Aeon Credit (ACSM MK, +590% to $680 million), Panasonic (PMM MK, +115% to $448 million), Lafarge (LMC MK, +140% to $2.8 billion). The losers are those who continue to hype up their “relationships” and deal-making capabilities to entice the momentum investors dazzled by the headline news of sexy projects. These stocks are the fertile ground for nefarious insiders (“Zhuang Jia” 庄家) who have the incentive and power to manipulate prices and volumes and to inject “action” via announcement of projects, M&As, luring investors in and then offloading in a pump-and-dump Sisyphus cycle.
With great expectations over the ASEAN “Economic Community” (AEC) by 2015 to increase dramatically intra-regional trade, currently accounting 27% of the region’s GDP and expected to double to match the 55-60% figure in EU and NAFTA, and the rising middle-class consumption story, ASEAN stocks have spiked up in valuations ahead of fundamentals. Funds touting ASEAN exposure and expertise sprout up to capitalize on the theme/trend to raise much-needed fund fees. Quietly, the tide appears to have turned. As reported by Reuters and so on, during a recent gathering on April 25 of the leaders of ASEAN nations, officials prefer to call the AEC 2015 a “milestone” rather than a firm goal as was before. In so doing, they are bowing to the reality of slow progress and even some regression on politically sensitive goals, such as eliminating non-tariff barriers, especially government protection for sensitive industries (such as auto trade barriers in Malaysia to fend off car-manufacturing powerhouse Thailand), and lowering obstacles to the free flow of labor in the diverse region of 600 million people. The problems raise doubts over whether the group, whose infamous “consensus” approach is designed to protect national interests but also slows decision-making, can bridge yawning economic gaps between richer nations and newer, poorer members such as Myanmar and Laos. 20 years ago when ASEAN was dominated by a few emperors/strongmen with a tight leash in choosing their preferred economic-elite queen/rook chess pieces, policymakers do not have to worry about domestic politics. Now, the powers of the emperors are weakened by the entrenched interests of the local warlords who have used debt to fund their economic interests, power base and political influence. Policy-making is likely to increasingly turn inward with the emperor seeking to take back and consolidate his powers by culling the powerful warlords and deleveraging the bloated balance sheets at regional/local levels.
Noise traders who “invest” in hot and popular themes always find themselves taken advantage of by clever arbitrageurs. As the influential finance researchers Andrei Shleifer, Bradford De Long, Robert Waldman and Lawrence Summers noted in their 1990 paper “Noise Trader Risk in Financial Markets” published in the Journal of Political Economy (JPE):
“When noise traders are optimistic about particular securities, it pays arbitrageurs to create more of them. These securities might be mutual funds, new share issues, penny oil stocks, or junk bonds: anything that is overpriced at the moment. Just as entrepreneurs spend resources to build casinos to take advantage of gamblers, arbitrageurs build investment banks and brokerage firms to predict and feed noise trader demand.”
Business models that continually create new ideas, new inventions and innovations rise above the noise and stay resilient and evergreen like the bamboo. Yes, of course, most inventions don’t scale up. Singapore’s Trek (TREK SP) invented the ThumbDrive USB flash drive in 2000 and has a market cap of $60 million, flat since its May 2000 listing, and faces challenges in scaling up. That’s why there are many experts in Singapore who scoffed in the local press, “If inventors were entrepreneurs, Thomas Edison would not have died a poor man.” These experts were defending against well-intentioned observers who pointed out that the winners of the “Entrepreneur of the Year Award” in Singapore do not have the “X-factor” such as new ideas, inventions and innovations; the winners have “profits” and “can make money”. Yet, Taiwan/Malaysia’s Phison Electronics (8299 TT), who “invented” a somewhat similar “PenDrive” in May 2001, has a market value of $1.3 billion, up over 8-fold since its October 2004 listing and is over 22 times bigger than Trek. And these experts and even the “entrepreneurs of the year” are also the very ones who laughed at the “new idea” of the Chinese entrepreneur who built a global business with a market value of US$100 billion when he founded the company at the young age of 55 in 1987 and now he’s 81. Not only that, he is able to create a $300 billion industry built on top of his company, somewhat akin to how Edison who “shaped not only industrial America, but also mass entertainment and contemporary culture with his breakthroughs in sound recordings and motion pictures” as commented by Rutgers University’s “The Thomas Alva Edison Papers Project”:
“There is still more to learn from one of the most brilliant inventors and entrepreneurs of modern times, a man who shaped not only industrial America, but also mass entertainment and contemporary culture with his breakthroughs in sound recordings and motion pictures. By the time of his death in 1931, Edison had received 1,093 U.S. patents, a total still untouched by any other inventor. Even more important, he created a model for modern industrial research.”
Charlie Munger, the influential partner to Buffett’s success, has a hero who is an inventor-entrepreneur too, creating devices such as the lightning rod, the first bifocal glasses, odometer, urinary catheter, the Franklin stove and yet never filed for patent for all his inventions. Munger would sometimes makes decisions based on what his hero would do given the situation. He is none other than Benjamin Franklin.
So we have Ben Franklin and Thomas Edison from America. How about Europe? In my presentation at Emerging Value Summit 2013 on April 10, I asked the question: If the tangible assets of a company were destroyed, how much is such a company worth in the eyes of a value investor? Probably not much or even zero. Worse, the entrepreneur will be sniggered at, particularly in Asia where visible tangible assets and accomplishments are the hallmarks of success. Yet, when Germany’s Robert Bosch has all his factories and equipment burnt and destroyed during the World War, he is able to bounce back to build an industrial superpower worth over $150 billion, like the bamboo who bend, not break when a wild storm would have snapped the mighty resisting tangible oak tree. The source of Bosch’s resilience is “emptiness”, just as how the vitality and resilience in the growth of the bamboo revolves around its hollow empty center – his “indestructible intangibles” in the form of inventions such as the magneto ignition device and his unique business model to realize their value.
How about Asia? Until Asia appreciates the importance of “emptiness” and “indestructible intangibles” in sustained value creation, the “economic civil war” amongst the various leaders, officials, elites and special interests in the political-economic nexus fight in getting their hands on the tangible assets to “be their own boss” as growth slows and stalls will be like the ultra-blown-up, scary version of the barber story recounted at the beginning of the article by the $100 billion entrepreneur: “The market is the same size. And it’s not a happy situation anymore.” Everyone will be bitter and resentful towards one another in this “Kto, Kogo?” (Who, Whom) Asian entrepreneurship-style, that is, who plans whom, who directs and dominates whom, who assigns to other people their station in life, and who is to have his due allotted by others. Note how nobody will be “fighting” over “emptiness”, over the invisible “intangible assets”, as they require iterative experimenting and sustained building to realize and multiply the intrinsic value. Without “emptiness”, Asian businesses cannot scale up to become resilient compounders to overcome market crisis. Without “emptiness”, the Asian capital markets will be the playground for powerful insiders and manipulators who prey on investors.
So who is this Chinese entrepreneur who builds the $100 billion company on a “new idea”? Can it double to a market value of $200 billion, like Samsung and IBM? Are there any Benjamin Franklins in Asia? Is there a systematic process or mental framework to continually find and invest in them? Their identities will be revealed in upcoming articles. Fortunately, in the miasmic Asian capital jungle, value investors can rest calmly in the tranquillity of the bamboo grove with its resident of quietly resilient compounders – the Bamboo Innovators.