Note: This is Part 7 in a series of articles and cases on Asian Conglomerates. Read Part 6 here. You may read more about the Asian Conglomerate Series here, or view all the published cases here.
Every Asian tycoon becomes a tycoon in the exact same way.
There’s something that I call the ‘core arc’ of a tycoon, that will make things easier to evaluate when you’re reading the story of pretty much any Asian billionaire conglomerator. In fact, the core arc is so obvious and so predictive that you can start going “ok, wait for it …” when you’re reading one of these biographies — the beats of their lives are almost always the same.
This seems bizarre. If I didn’t know any better, I would say that this is overreach. “But how about newly minted billionaires?” I hear you ask. “How about those who start high-tech companies in Asia and then exit at IPO, like so many startup founders in the US?” We’ll get to this objection in due time.
I’m going to describe the core arc to you, discuss some implications of that arc, and then tell you why recognising that this arc exists is helpful even if you don’t live in Asia. I will demonstrate that last bit by walking you through two businesses that exist in the West, that will make more sense once seen through this core pattern.
At this point in the Asian Conglomerate series we’ve looked at only three tycoons, which means that some of the patterns that I’m going to describe to you, you’ll have to take on as a matter of faith — at least for now. But you shouldn’t be too suspicious:
The core arc should be obvious if you’ve been reading the previous instalments, especially if you read the cases that I recommended in How Reliance Won. Let’s see how much you’ve already worked out for yourself.
Every Asian Tycoon becomes a tycoon in the following way:
This core arc seems very neat, so I encourage you to put it to the test: seek out the exceptions. I assure you there are exceptions, though I’ve only found a small handful over the past seven years of looking. The few tycoons that are exceptions are such because they operate in rather unique circumstances — each of which are worth studying on their own.
But I should also note that this analysis is incomplete. I do not claim that you can become a tycoon by following this core arc; the core arc is predictive only in the sense that you can anticipate the broad beats of a tycoon’s life when reading their histories. In other words, every Asian tycoon becomes a tycoon through the same core arc, but perhaps not everyone who follows this path becomes a tycoon.
Whatever qualities that are truly differentiable are left as an exercise for the alert reader. This is, I think, acceptable: by the end of this series, we’ll have done a lot of work for you. Just knowing that the core arc exists if half the battle.
Now that you have this pattern in mind, you may choose to do two things:
But I have a few more observations to make, many of which have to do with implications of this core arc. Let’s walk through some of them right now.
I claimed that every Asian tycoon we have examined (and will examine in this series) got their start in trading. I also claimed that this is not as important as the skills they picked up from their stint in trading: calibrated risk taking, a nose for demand, and an intuitive understanding of power.
The last skill is perhaps the more important one. But the first is how you evaluate tycoon skill in the presence of political capture.
I think it’s fairly obvious the three tycoons we’ve studied so far all have a good dose of these qualities. But the importance of such skills is clearer when we take a look at tycoons who didn’t cut their teeth in trading. Long-term Commoncog readers first encountered second generation tycoon Kwek Leng Beng in The Absurd Deal that Lead to Republic Plaza, a case that was originally published to demonstrate capital expertise, and then used to demonstrate adept use of leverage. Kwek Leng Beng’s father was Kwek Hong Png, erstwhile smuggler between China and Indonesia, based out of Singapore during and after World War II. It was clear that the father got his start in trading; what did the son do?
A good answer lies in Peh Shing Huei’s 2024 biography of Kwek Leng Beng:
One day in 1968, Kwek Leng Beng had enough. Nothing the 27-year-old man did was good enough for his boss and father. He was too slow, he lacked business nous and he was too conservative. Heck, even the way he crossed cheques irritated his old man. “It was very stressful for me as a young man,” he shared, “The pressure from him was too much.” He decided to run away. On a whim, and without much thought, he escaped to Penang in Malaysia in a rare act of rebellion. He did not know how long he wanted to stay away or what he was going to do next. All he wanted was a reprieve from the incessant shelling, or in his own words — “pom, pom, pom, pom, pom.”
Kwek Hong Png would harangue his eldest son for “being too academic” and having all the wrong attributes for the business world — “naive, kiasu, kiasi,” the latter two being Hokkien words which mean “afraid to lose” and “afraid of death” respectively. In his Oral History interview with the National Archives of Singapore, he lamented that his son was “very careful” twice. “My father was so harsh,” said Kwek Leng Beng. “I was a junior fellow. He hammered me by saying that ‘I don’t want you to do this, I want you to do that!’ I replied: ‘But I haven’t learnt how to do it yet.’ He would fire back: ‘that’s always your excuse. You are always saying you haven’t learnt enough.’ I couldn’t win.”
(…) The young and quiet Western-trained law graduate wanted his role to be a backend position. “I thought I’d be able to contribute to my old man’s business as an administrator because while Chinese companies like his were very good at doing business, they could have used better organisation and more efficient systems,” he said in an interview with The Straits Times in 2004. “But my father said: ‘I don’t care how good your administration and systems are, if you don’t have sales, you don’t have income and if you don’t have income, you’re dead’.”
(…) Kwek Leng Beng often talked about running away from home, said his wife. But the escape to Penang was short-lived. A good friend of his father was a resident in the city, and he slowly persuaded the young man to return home. “He said: ‘He is your father and he meant well. Why do you run away? Running away is not a challenge. Accept it as a challenge. Any problem, call me’,” recalled Kwek. When he got home, his father kept quiet and did not put him through a lecture. The hatchet was buried. Kwek began to understand the sacrifices his father made and embraced the challenges. “I accepted he was harsh. But at the end of a harsh day, you could find a silver lining.” he said, “I was no longer frightened.”
Kwek Leng Beng did, eventually, become very good at calibrated risk taking. He ran Hong Leong Finance as his father’s shadow for the good part of two decades — getting his start with small business loans, and working his way up to larger and larger deals until he took over in 1990. He did not start in trading, but he became savvy. In his older years, Peh reports that Kwek occupied a position of respect amongst Singaporean developers:
When Kwek Leng Beng put on his Hong Leong Finance hat, he was thinking mainly about the company, and it did not bother him one iota to lend money to those in the building materials business or even fellow property developers later, said [Hong Leong Finance former president Ian] MacDonald. “Most of our major clients were developers and they were the rivals of City Developments [CDL was the property development arm of Kwek’s Hong Leong group.],” he recalled. On the flip side, these developers were also quite happy to borrow from Hong Leong Finance. “It was one of the great puzzles I had in my mind for years,” said MacDonald. “I wondered why these developers would come to us because they had to give us all the information which were private and confidential to their businesses.”
Eventually, during a Lunar New Year lunch, he plucked up enough courage to ask a developer who was also a client. The reply has stayed with MacDonald for years: “I would always go to Hong Leong Finance precisely because I knew my loan would have to be personally approved by Kwek Leng Beng. If the person who is the best in the business would approve the loan, that means my project is on solid ground.”
Good Asian tycoons possess these skills. The bad ones do not. These less skilled businessmen are typically entrenched monopolists who have lost the need for calibrated risk taking, so long as their core cash-generating assets remain sufficient to bail them out. And so now we have a hint of how to evaluate tycoon skill: how well do they do when the capital cycle turns? The least skilled tycoons find themselves overstretched when the market goes to shit around them; they find themselves selling off some of their core, moat-protected assets in distress. This is the worst possible outcome.
The point I’m making is that some tycoons are better at calibrated risk taking than others, and you can notice this. Kwek Leng Beng, in particular, has built an entire career taking advantage of the capital cycle:
Ask Kwek Leng Beng about any financial crises, economic recessions and global meltdowns, and his reactions are almost always a dull stare into space at a seemingly boring question, followed by a gentle shrug. “We are conservative, we don’t borrow a lot,” he said. “I would tell my staff, have no fear. It doesn’t bother me.” For a man who has adroitly followed his father’s contrarian business acumen of seizing opportunities in crises, a bearish market is when he transforms into a bull.
But Kwek Leng Beng has never had a government-granted monopoly in his life. (This is different from saying that he doesn’t have a moat protected business). We’ll take a closer look at his career later on in the series.
In The Study of Asian Tycoons I wrote:
Merchants who sought a moat would grow their businesses and become large; merchants who did not seek a moat would struggle forever in vicious competition and fail to grow. Why did some merchants seek out a moat, and others did not? The trite answer is ‘luck’. The more interesting answer is that some merchants were more perceptive than others.
It is indeed true that luck plays a role: initially, Ho was not interested in the gambling monopoly in Macau. He fell into it — he was brought in by his brother-in-law. But once he won, Ho, more than any of his partners, saw the potential in gambling. He knew that with the monopoly in his control he had it made; it was lucrative enough to power the rest of his career. He was right.
Ho had an ability to recognise opportunity when he saw it. Not every merchant was like him. Why?
At this point we can talk a little about this difference. But first, we’ll need to address the role of luck.
One of the more obvious things you may notice about tycoons is their entrepreneurial stance. They are, to a fault, absolutely willing to try anything that might make them money. As a Singaporean businessman once said to me: “Good lah, can make money, why not try? Why not do?”
And so it’s tempting to say that all Asian tycoons are blindly opportunistic. And indeed some are quite blind to the nature of competition, or perhaps to the source of their success. In Asian Godfathers, Joe Studwell describes one situation, not uncommon, that emerged when Hong Kong deregulated its telecommunications industry:
One former cartel and one monopoly that operated in Hong Kong have been dismantled in recent years. An interest rate cartel was employed by the territory’s banks from 1964 for more than three decades, with managers meeting every Friday to set rates (government also employed ad hoc measures to restrain the entry of foreign banks and thereby helped keep HSBC and sister bank Hang Seng’s share of deposits around 50 per cent). But the biggest attack on a Hong Kong monopoly came with the deregulation of the telecommunications industry under the last governor, Chris Patten. Interestingly, it led to a frenzied rush by tycoon-controlled conglomerates to enter the telecommunications business, destroying profit for all comers. The message seemed to be that the tycoons were unused to operating in conditions of genuine competition. (emphasis mine)
This is worth addressing, because there is a germ of truth here: many Asian tycoons are nothing more than high energy entrepreneurs that got lucky. These folks tried many things over many years before hitting it big with a government-protected business. Perhaps they chanced onto it, or perhaps they saw certain peers hitting it big with a license, and chased after one themselves. As a friend (who has long been involved in one of these families) put it to me: “If the government decides to give you a license, out of maybe a hundred businesses who applied, you don’t have to be smart. If you win it, you and your family have it made. You’re going to get rich.” Imitation is always easier than skill. But imitation and blind opportunism means you never develop a theory of competition. You don’t know when competition is ruinous.
This is the cynical read of Asian conglomerators, and the conclusion that Studwell is eager to usher you towards. Studwell would have you believe that every tycoon in South East Asia is a low-skilled businessperson who is better at playing the game of political access than the game of competitive business. But it is not universally true. The notable tycoons — the ones with skill — are more thoughtful.
We don’t have to look very far for this. The three cases we’ve published so far have been picked specifically to showcase elements of skill.
After all, isn’t it odd that Stanley Ho was the one who realised the opportunity that STDM represented, despite being the last man (and the most reluctant) to join the bidding consortium?
Over the next few decades, Ho would gradually come to dominate STDM. He (and Fok) brought fellow tycoon Cheng Yu-tung on as a minority partner in 1982, when Ho and Yip Hon had a major falling out. This deal was reportedly worth some HK$400 million (around US$50 million); Yip Hon took the money and left the business.
STDM ultimately became Ho’s vehicle and the source of all his wealth. How did he do this? One explanation was that — right from the beginning, Ho had the most energy, was exceedingly competent, and had the biggest vision. Over time, as Ho’s plans continued to bear fruit, the three other partners must’ve realised that everything Ho was doing was only making them richer. Perhaps it was better to let him run more and more of STDM?
Is it not unusual that Dhirubhai Ambani saw the opportunity that yarn REPs represented, and more importantly the bottleneck he could create if he controlled polyester production, a step up above his supply chain (where there were fewer competitors)?
The more legitimate way to import yarn was through a government-issued licence called a ‘replenishment license,’ often abbreviated to ‘REPs’. REPs were issued to registered exporters of textiles, allowing them to import raw materials (yarn) worth a certain percentage of their export earnings.
REPs were not transferable, but they were traded illegally — and Dhirubhai was quick to see their value. He paid higher margins than everyone else to acquire them, and emerged as a major player in the market for REPs. The actual margins Dhirubhai paid were relatively small, but, as McDonald wrote, “his dominance also put him in the position of being able to turn on and off much of the supply of yarn into the Indian market.”
And is it not odd that B.C Lee chose to go down the path of semiconductors, a daunting, highly technical business — and that, spurred on by his son, fed by cash flows from Samsung’s other domestic monopolies, kept at it until all their Korean competitors died?
In 1974, Korea Semiconductors found itself in troubled financial waters. The company was a joint venture between American and Korean businessmen, and was being monitored by both nations because it had been funded by loans from the US government, earmarked for development of the Korean economy. When the CEO of Samsung at the time, Jin-ku Kang (JK), got a call from the joint venture’s American counterpart, he saw an opportunity. JK wrote, “I had been thinking that an electronics company without semiconductors was like a car without an engine,” and with B.C. Lee’s approval, purchased the American half of Korea Semiconductors.
The founder of Hyundai lobbied for the new government’s support by presenting himself as a beacon of South Korean industry, boasting an honorary doctorate at George Washington University. To compete, B.C. Lee wrangled a doctorate from Boston University. He visited America to receive the degree, touring semiconductor plants at IBM, GE, and Hewlett Packard while he was there. Lee was so impressed by what he saw that it made him nihilistic about Samsung’s semiconductor ambitions. He was convinced they were too late. However, the pressure for Samsung to act mounted when Hyundai started making semiconductors, and Lee Kun-hee convinced B.C. that semiconductors were the company’s future.
These actions are odd when you compare them with the actions of the merchants around them. These men were slightly more observant than their peers.
Perhaps this contrast is never more stark than with the story of Robert Kuok, who we will meet soon in this series. In his autobiography, Kuok describes his father, also a trader:
I must put Father’s behaviour towards his family in the context of his business. By about 1928, when I was only four, he had fallen on hard times. He then suffered through about 10 years of difficult business conditions right through the Great Depression. His profits were poor in most years, and at times cash was extremely tight. He must have been a very frustrated man during the Depression; perhaps this partially explained his ugly behaviour towards Mother.
He had a good run in business from 1917 to 1922 and made close to $500,000 [Straits dollars], which was a sizeable fortune in those days. I would estimate that less than 1,000 Chinese families throughout the length and breadth of the Malay Peninsula and Singapore had that kind of money. So he was a wealthy man by any standard.
One of his best businesses was serving as a government contractor under the English colonial system. One of the contracts that his Tong Seng & Co held was to provide supplies to hospitals and prisons. He also produced charcoal in mangrove areas using slow-burning fires, and he started the first cold-storage business in Johor Bahru. He would start a business, lose money, close it and start another. That would make money for a while, and then the cycle would repeat (emphasis mine).
(…) As a boy, I witnessed Indian moneylenders who came knocking at Father’s door. From about 1926 to 1941, Father was almost always short of cash. he borrowed money to start new businesses, only to see them fail. The tide of the Depression was against him, but he didn’t realise it. He did not have enough education to sense that the tide was coming to drown him, and that he should take evasive measures and run to high ground like some of the wealthier, better-educated businessmen of Singapore, Penang and Malacca.
By contrast, the young Kuok spent time studying the men and the markets around him.
[In the office of a senior British colonial official]: Now, all my life, I have tried to listen carefully. I was born that way. When I go into a room, I’ve seen everyone before they’ve seen me. I hear every sound, including those that others may have missed. Most of the time, I’m playing a game of poker and pretending I’ve seen nothing. I have always relied on my sense to guide me.
So he [this senior colonial official] underestimated me, because he didn’t ask me to leave before he took the call. He kept on talking and, just listening to his words, I understood that the superior was asking him what he thought of [another British officer that Kuok thought was a good man] Richard Kelly. (…) By the drift of the conversation, I knew that he wanted to get rid of Kelly.
(…) Sure enough, before too long, Kelly’s contract ended and it was not renewed. I had a very clear-cut confirmation of how the colonial administration of the post-war years worked and networked.
(…) From 1953-1958 [ages 30-35] I made numerous trips to Bangkok to meet rice traders and to learn first-hand how the Chinese did their business there. I was broadening my horizon, almost like sharpening my weaponry. I started every morning between seven-thirty and eight, and usually ended at ten or twelve at night. I watched their ways, observing their faults and mistakes, and vowed to myself never to commit the same errors.
And, being observant, being reflective, he realises the nature of the rice trade fairly early in his career:
At my peak, I ranked within the top six or seven rice traders in Malaysia. Because margins on this trade were small, if we made $80,000 to $100,000 in Malayan dollars a year; net of all expenses, we considered ourselves lucky. The largest single market in terms of volume of trading was Singapore. But we traded up and down the Malay Peninsula, from Johor Bahru to Malacca to Kuala Lumpur. We even sent salesmen to Ipoh, Penang, and the smaller East Coast towns.
(…) By the mid-1950s I could see that there really wasn’t much margin or profit to be made in rice. Even a 14- or 15-year-old could set up a shop to buy and sell rice, so the competition was horrendous. It struck me as the least skilled of all trades. As a result, you couldn’t grow very big (emphasis added). Every farmer looks after his own little plot; at best, a number of farmers might form a cooperative if they have enough sense amongst themselves to set up a jointly owned mill. Rice mills require very small capital and don’t lend themselves to economies of scale, so the barriers to entry in the trade are very low (emphasis added).
Rice did not normally experience wild price swings. Imagine: if rice were a volatile commodity, there would often be widespread famine. Did the price of rice double during the year? If the price of rice was £40 a ton (in those days the trade with Thailand was still in sterling, not in US dollars), could it go up to £80? Could it drop from £40 a ton to £20? The chances were not that great.
As I also traded in sugar, I began to see that sugar was a far more volatile commodity than rice. Sugar prices moved up and down like a yo-yo. As a trader, you can only make windfall profits if a commodity is volatile (emphasis mine).
(To spoil the story a bit: Robert Kuok becomes the richest Malaysian on the back of the sugar trade).
There is an echo, here, of Reliance switching very quickly from general trade to synthetic yarns, and of B.C. Lee switching multiple times between numerous businesses, until he discovers and then exploits the foreign exchange license for his wool business.
But I will admit that I’m a little biased: Kuok is particularly dear to me for saying (I’m paraphrasing) “you can distil wisdom from the air”. The full quote goes like so:
I have always felt that wisdom is in the air. Structured learning is fine. But you can pick, you can distil, wisdom by yourself. However, to do that, you have to hone your sense, listen more carefully, smell more deeply, see more sharply, and through that try to distil the wisdom from the air.
This will maybe make more sense when we get to the full Robert Kuok case, but I’ve long thought this was astute. I have, for many years now, attempted to follow this advice. And I happen to believe that the better tycoons are better because they are superior at ‘distilling wisdom from the air’. They are not, alas, reading something like Commoncog. They are busy watching the flows of power and commerce in their business environments. At the end of the day, savvy traders and savvy politicians learn the same things: they want to know what people want, and they want to know how much people are willing to exchange for those things. Once they know this, they seek to gain control of it, which means they can then profit from the exchange.
I make special note of this because this is one of the few things in this essay you can do immediately, regardless of where you are in life. Perhaps the game of political access and the game of trading are more similar than we might think.
The other, exceptionally important idea, embedded in all of these cases, is just how valuable it is to get a durable moat.
This really, really cannot be overstated. Moats that last multiple decades are exceedingly rare. In all of these cases, tycoons have built business empires atop a small handful of protected monopolies. The defensibility of their core cash cows is what guarantees the wealth of their families.
Let me make this more startling. We have talked, at various points in Commoncog’s history, why you want a moat: you don’t want to suffer competitive arbitrage; compounding capital allocation works best when powered by long duration cash flows; it’s not fun to run a bad business. Here we have an additional point: if you get yourself a source of cash that is moat protected for decades, you are nearly guaranteed a business empire. It almost doesn’t matter what these tycoons do after they pin down a core monopoly — they can burn eye-watering sums on ill-advised ventures, spend lavishly on luxury goods, build a questionably shaped multi-story residential tower for their family in the heart of Mumbai, open restaurants that lose money, start badly-run family offices, anything, really, so long as their core cash-generative businesses are alive and well.
Of course, the best ones go hunting for more good businesses to build or buy.
Earlier in this essay I posed a common objection: “what about newly minted wealth — Asian entrepreneurs who start new companies and get their exit, ala US tech founders?” But there really is no comparison.
The average exited tech founder sells out of their winning startup and places their assets in some wealth management office (in addition to doing angel investing, typically for status reasons). That exit gives them wealth, but not continued cash flow; the startup game is played for equity value, not for dividends. The average Asian tycoon, on the other hand, harvests cash from their protected, cash generative monopolies and reallocates the capital in productive assets again and again over the course of decades. The collection of assets they build continues to throw off cash after they hand it over to the next generation. (And of course they have the option of investing via wealth management services as well; one does not preclude the other). You could say that the biggest difference between the two archetypes is simply that the typical startup founder diversifies through angel investing and traditional wealth management: both ‘non-control investments’. Asian tycoons are more likely (or more able) to diversify through ‘control investments’ — that is, companies that they have a say in running — through a holding structure, and perhaps aided by political access. And so, while most Asian tycoons have nowhere near the levels of skill that Warren Buffett has in capital allocation, they actually have more in common with capital allocator types than they do with the average tech entrepreneur.
This is, incidentally, one reason we published an entire concept sequence on capital allocation before we started on Asian conglomerators. But with two major differences: capital allocators in the West a) are better equipped with theory, and b) have better access to mature capital markets.
The other aspect of this is that tech startups do not typically lend themselves to long duration moats. Technological obsolescence is a thing. Consider: how many technology companies do you know whose franchises are guaranteed for more than a decade? Two decades?
A government protected business can easily last for three. Or four.
Of course, not every business that a tycoon gets involved with needs to be a control investment. Perhaps the most startling example is that of Cheng Yu-tung, who we last met as a 10% shareholder in Stanley Ho’s STDM, the sole gambling operator in Macau for 40 years. Cheng was also the force behind conglomerate New World Development and Chow Tai Fook, the jewellery chain. Joe Studwell has a carefully worded paragraph in Asian Godfathers, on the utility of that stake in STDM:
While Fok has been popularly viewed as a major real estate developer in Hong Kong and mainland China, and Cheng developed a stable of listed companies under the New World name, it was casino earnings that underwrote their expansion. (...) The exact shareholdings in STDM have never been confirmed, but company directors over the years have suggested that Ho and Fok held 25–30 per cent each and Cheng around 10 per cent. Despite Cheng Yu-tung’s limited stake, it is speculated in Hong Kong financial circles that his STDM shares generated more cash than his controlling position in publicly traded flagship New World Development.
I am somewhat sceptical, because Cheng’s publicly listed holdings are notoriously lousier than his other private businesses. It is not entirely surprising that publicly listed conglomerate New World Development has generated less cash than his holdings elsewhere (including privately-held Chow Tai Fook, a company that Cheng turned into a conglomerate over the course of his life). But if we accept Studwell’s speculation at face value, then we should admit that this is quite startling: it implies that a huge chunk of the capital Cheng could redeploy came from the dividends of one deal, done to help Stanley Ho buy out problematic partner Yip Hon in 1982. Again: this is more capital than Cheng’s control of a publicly listed company. It should make you recalibrate the power of a lucrative monopoly, especially one that has lasted as long as Stanley Ho’s STDM.
At this point, we know enough to be able to evaluate tycoon skill. Not every tycoon is skilled, and skill does not necessarily map to the amount of wealth that a tycoon has. One measure of skill is something that we have already discussed: how well do they do when the capital cycle turns? Because so much of a tycoon’s success depends on their core cash cows, anything that threatens those assets is particularly notable.
But there are a few other ways to evaluate tycoon skill. For instance:
Consequently, this quirk of Asian conglomerates explains why so many of them are so badly run. You don’t need to be operationally excellent if you have no competition. Hell, this explains why so many leaders of Asian conglomerates have non-operational roles — their primary job is capital allocation … and maintaining political access.
This is one of the core lessons of business, which we’ve examined before: in many situations, operational excellence simply isn’t the highest order bit for success.
One question that arises from this essay is: why is there a core arc? Why do the lives of tycoons in such different countries such as India, and South Korea, Hong Kong, and Malaysia, share so many similar beats?
The answer lies in a simple fact about markets that we tend to forget. In the post-Cold War era, just about every country runs a mixed economy — a balance between market forces and government planning. The only difference is in degree. Some countries, such as South Korea, under two decades of dictatorship, or India, under four decades of socialism, run economies that are more controlled than most. And of course there are Leninist states like China that run a market economy on a tight leash. But even Western economies — all of Europe and the US, for instance — have some amount of planning. In those countries, planning is called ‘regulation’.
It is therefore trivial to explain the core arc if we use the language of economics:
To put this differently: regulation is a wonderful way to build a business … assuming the regulation doesn’t go away.
It is very common to talk about this phenomenon from the perspective of economics, or government policy: these distortions result in higher prices for the consumer, so we mostly think of it as a Bad Thing resulting from Bad Governance. (“And therefore we should deregulate!” — is the usual follow-up, or “We need more anti-competitive policy!”) It is comparatively rarer to hear about this phenomenon from the perspective of a businessperson.
So let me make that case for you, in the language of my inner Singaporean tycoon:
You … crazy ah? Of course you want to take advantage of government. Why you don’t want? I ask you: what is your goal in business? Your goal should be to make money right? If you got opportunity to make money doing simple thing, what for you make money doing difficult thing? You see our friends Ah Seng and Ah Heng all become billionaire because they friendly with government. Why you want to do hard thing? You geh kiang [pretend to be clever] or what? Just do what works lah!
(Translate this to Hindi or to Korean as you wish).
This is not a very kosher thing to say. But this is how savvy tycoons think in just about every developing country, for as long as the incentives exist. A more politically correct version is Warren Buffett’s “I don’t look to jump over seven-foot bars: I look around for one-foot bars that I can step over.” If you want to become a tycoon, your job is to make money in your specific ecosystem. If the simplest way to achieve your goal is market distortion through political access … why wouldn’t you exploit this? But this is more acceptable when reframed using the language of shareholder returns, or ‘capital allocation’.
In truth, similar approaches exist everywhere there is regulation. We have already examined two remarkable American firms that are only possible thanks to the distortions caused by regulation of the airline industry: Transdigm, and HEICO. Both companies are praised as ‘singular’ and ‘high quality’. Both have been double digit compounders over a multi-decade period. Both have moat characteristics that are enabled only by government regulation. Both are worshipped because they generate excellent shareholder returns at the expense of their customers.
Unlike these companies, Asian conglomerates do not typically generate excellent returns for their minority investors. Corporate governance in Asia is bad. The main beneficiaries of public listings are mostly the owner-managers and their families. Which is probably why publicly listed tycoon vehicles are roundly criticised for the same business practices that are praised when practiced by similar firms in the West.
Don’t let this distract you: the core business pattern is actually the same.
“Ok,” I hear you say “Why is this core arc useful to me?” Perhaps you don’t live in Asia, or perhaps you do not intend to become an Asian tycoon. What can you use from this essay?
My answer is simple: the core arc allows you to spot similar business opportunities, wherever you are. Think about two of the tenets we’ve just examined: first, that governments meddle in markets everywhere in the world. Second, that market distortions are opportunities. If you are mostly exposed to tech company lore, you will think that the only way to win is to wade into deeply competitive, highly innovative markets. You will, in Buffett’s terminology, forever run after seven-foot poles, ignoring the one-foot and two-foot opportunities that shrewder businesspeople might spot.
If you know how to look, pieces of the core arc are actually universal. Here are two examples that demonstrate this in action.
The year is 1971 and Bernard Arnault is the 22 year old grandson of a French entrepreneur. The business that he grows up in is a civil engineering and public works construction company based in the north of France. The company was started by his grandfather, to rebuild infrastructure after World War II. The company is run by Arnault’s father. In 1976, five years after he starts in the business, Arnault convinces his dad that industrial construction is not a good business to be in. He believes that real estate development is more lucrative. So they sell the industrial construction business and pivot to building vacation homes — first at Nice, then along the French Riviera, and then throughout Europe, wherever the demand exists. His father retires and Arnault takes over as they make this change. Arnault is 27 years old.
The business does well at first, because Arnault is a savvy businessperson. At the high point, the company makes $15 million in annual revenue, at a better margin than the industrial construction business. But then in 1981 François Mitterrand is elected President of France and the country becomes strongly socialist, and business becomes very difficult.
Arnault moves to America to build Palm Beach condos. After all: go where the demand is, correct? Whilst in the US, Arnault learns of the leveraged buyout (or LBO). Today we call this playbook ‘private equity’: you raise money using junk-rated bonds to purchase companies that cost many times the equity capital that you have. Arnault is still rich from the family business, and doing ok from developing vacation condos in the US, but the capital he has is comparatively tiny. It is especially tiny when pit against his first target: the French conglomerate Boussac.
At the time, Boussac is a group of companies formerly owned by textile industrialist Marcel Boussac. Boussac, the man, dies in 1980. Boussac, the conglomerate, is a complete mess. It goes bankrupt in 1978, is taken over and then run terribly by the government, is then bought by the Willot brothers, who proceed to run the company into the ground again in 1981. The French government promptly takes it over again. This may sound dumb to you today — what is a government doing running a failing textile company?! — but this is what socialism in 80s-era France looks like.
In 1984, Arnault bids $60 million for the company. He puts up $15 million. The investment bank Lazard Frères puts up $45 million. Arnault is — at 35 years of age — an outsider; he may be from a wealthy family but the French business elite consists of much older men. Bernard is young. Nobody knows him.
There’s some speculation that Arnault convinces the French government to sell Boussac to him because his then-wife comes from a more successful multi-generational industrialist family. They get in with Lazard and someone convinces the government to sell this dying conglomerate — with over a billion in annual revenues — to this 35 year old. The company is bleeding so the government is somewhat desperate. It is not entirely crazy to pay $60 million for such wreckage.
But the price turns out to be ridiculously cheap.
Arnault runs the typical LBO strategy and treats Boussac like a carcass: he carves the group up for parts. He liquidates the textile companies, sells the disposable diaper division for $400 million, sells the factories, lays off the workers, gets rid of everything except the gem at the heart of Boussac: Dior, the fashion house. And more importantly what Arnault wants is the Dior brand — not the emaciated house that currently runs it. Through a series of manoeuvres he concentrates his stake in Dior, so that he maintains control of the one piece that matters to him.
In truth, Arnault had seen something interesting in the company. Brands — especially brands in luxury goods — are by definition long duration moats. If you have a powerful brand, if you can resurrect it and nurture it, you have a stream of high margin cash flows that are protected for a very, very long time.
Arnault repeats the playbook over the next four decades, buying control of Moët & Chandon and Hennessy and Louis Vuitton and eventually, Givenchy and Kenzo and Loewe and Bulgari and Hublot and TAG Heuer and Marc Jacobs and Rimowa and Sephora and Dom Pérignon and Veuve Clicquot and Glemorangie and Ardbeg and, most recently Tiffany & Co, the prized jewellery brand most known for their pretty blue boxes.
Arnault becomes the richest man in the world for a brief period, most recently in 2023 and 2024. He owns 48% of his conglomerate.
What is the point I’m making here?
I am not saying that Arnault follows the core arc — far from it. But so many parts of his story rhyme with the core arc that it’s difficult not to notice. You have him chasing demand, taking advantage of market distortions because of government policy, noticing and then going after businesses with long duration moats. Those moat-protected, cash generative assets form the backbone of his group. When Arnault begins, it isn’t clear that this is possible. Nobody looks at Boussac and thinks “ahh, there lies Dior, a gem you can build an empire around.” Of course, Arnault doesn’t just use retained earnings to grow — he has Lazard and the mature capital markets of Western civilisation on his side. But he also doesn’t have fierce competition for the luxury brands he wants to buy — at least not in the beginning. He starts out with a secret.
Our second story isn’t as well documented, so I am going to limit myself to a demonstration. This is what pattern matching with the core arc can look like.
In 1976 a university programmer and PhD graduate by the name of Jim Goodnight starts a company called the SAS Institute with a bunch of colleagues. They all come from the University of North Carolina, and had spent the prior 10 years building statistical analysis software for folks working in agriculture Experiment Stations throughout the country. The first package they released was named the SAS system, and it was originally used by university statisticians in the Southern Experiment Stations up at Mountain Lake, Virginia.
In 1972 their university loses its National Institute of Health grant. At that point, all the university computing centres are funded by the NIH, and losing the grant means losing the funding for the development of their SAS package. Goodnight and his colleagues start asking the Experiment Stations to pay them $5000 a year out of their budgets. They all agree.
Word begins to spread about the software. SAS Institute hires salespeople to sell to other statistical departments in other universities, and then eventually to other academic departments as well. They also begin to sell to corporations, and then government departments, and begin to expand out from statistical analysis to broader business intelligence and decision support.
Now, I happen to know a little bit about the ‘business intelligence and decision support’ market. In the 80s, and 90s, SAS had competition from systems like Cognos and Business Objects and Hyperion Solutions. Then, as now, the BI market was incredibly fragmented. Cognos was eventually bought by IBM, Business Objects by SAP, and Hyperion by Oracle, marking in some ways the closure of that generation of competitors. Today’s BI market is dominated by Tableau (owned by Salesforce), PowerBI (bundled for effectively free in many of Microsoft’s enterprise offerings), and then a long tail of smaller business intelligence offerings like Looker and Sisense and so on.
But SAS has grown every year since 1976. It now makes billions of dollars annually, and owns 200 acres of its own campus in Cary, North Carolina. The company is famous for their corporate culture — so famous, in fact, that Google studied SAS Institute perks in the early days, when Google themselves were considering installing minibars and snack pantries throughout their offices. SAS built most of the buildings in their campus, and as a result laid plastic pipe throughout each building, so that they are able to pump syrup from their basements into soda dispensers throughout the offices. It has remained a private company the entirety time. It never raised money from investors.
How are they able to do this? One explanation comes from a 1999 oral history interview with SAS Institute CEO Jim Goodnight. He says (emphasis added):
I want revenues to grow faster this year than expenses, so we can get back into kilter because they used to be pretty much the same. I have always tried to keep income, growth and expense growth, at about the same level. This year revenue growth is going to be more than expense growth. That's one of my measurements that I use to determine how we're doing. SAS is fortunate in the fact that we've got this annual renewal stream of income that we can count on ninety-nine percent of coming. There's no doubt how much revenue we're going to get from renewals. That represents about eighty percent of our income that is pretty much guaranteed as long as we continue to meet the expectations for the customer. The only real variable is how many new customers we can bring in, and how much new software we can sell to existing customers. That typically is right around twenty percent.
So, by all measures this seems to be a healthy Software as a Service business. At 20% compound annual growth, and a 99% annual retention rate, it isn’t very hard to see how SAS can become so valuable, without external investors, given that they’ve grown for such a long, long time.
But here’s something that doesn’t make sense: in the broader BI market, a 99% retention rate is insane. A more common figure is 80% — meaning a 2% monthly churn rate. To put that differently: the majority of BI companies expect to lose 20% of their customer base each year. That means a company with a 20% annual growth rate will just … plateau.
So how the hell is SAS able to achieve such growth rates? How is it able to retain so well? Well, you have the core arc in mind now. More importantly, you know that market distortions are sometimes opportunities — and it pays to do the easy thing instead of the hard thing in business. Let’s just skim the SAS Institute’s Wikipedia page and see if anything leaps out at you:
In the 1980s and 1990s, SAS released a number of components to complement Base SAS. SAS/GRAPH, which produces graphics, was released in 1980, as well as the SAS/ETS component, which supports econometric and time series analysis. A component intended for pharmaceutical users, SAS/PH-Clinical, was released in the 1990s. The Food and Drug Administration standardized on using SAS/PH-Clinical for new drug applications in 2002.
(…) ] A study published in 2011 in BMC Health Services Research found that SAS was used in 42.6 percent of data analyses in health service research in the US, based on a sample of 1,139 articles drawn from three journals.
(…) The company's fraud detection and prevention software is used by the tax agencies of various countries, including the United States, United Kingdom, Ireland, New Zealand, the Netherlands, and Canada. In 2023, the Finance Minister of Malta announced that Malta would begin using SAS' software to detect tax evasion.
(…) SAS has been a partner of the Cleveland Clinic since 1982. During the COVID-19 pandemic, the clinic used predictive models developed by SAS to forecast factors such as patient volume, availability of medical equipment and bed capacity in various scenarios.
On the one hand, most of these initiatives sound like a bog-standard Switching Cost moat — which is par the course when you’re an enterprise software company. On the other hand, it sure is nice when all new US drug applications have to use a standard analysis package produced by your company. And since you need SAS Institute’s software for your drug applications, wouldn’t it be nice if you expanded your use of SAS for other business applications? We’ll give you a nice bundle discount …
To be clear: I’m not saying that SAS’s growth is attributable only to the lock-in they’ve managed to build into their pharmaceutical research use cases. Certainly much of their expansion in recent years have come from other use cases — such as customer intelligence, risk analysis and fraud detection. I should also note that their use cases are always focused on specific, advanced analytics use cases, not the generic dashboarding that is so common in the BI world. But the point I’m making is this: just as in the core arc of an Asian tycoon, it is always much easier to expand one’s business when you have an impregnable monopoly in one corner of your business empire, throwing off cash year after year, for decades. (Or, as mentioned earlier: if you have a long duration cash-generative moat, you’re almost guaranteed a business empire). And how could you not build an empire? The chips are stacked in your favour.
After all: if you plan to sell a drug in the US — any drug — you have to go through the FDA. And going through the FDA means buying SAS.
Here is a follow-up question: would you have noticed this pattern without the core arc? Maybe so, and maybe not. But then if you had recognised these business patterns, you wouldn’t need this essay to make sense of the tycoons we’ve studied together. The shape is the same.
What have I shown you? I’ve shown you a core business pattern that applies to all the Asian tycoons. This ‘core arc’ contains so many fundamental business patterns that it is more widely applicable than just with Asian conglomerates alone.
We have touched on many topics in this essay: competitive moats, and hunting for demand; market distortions, and government corruption, plus the importance of distilling wisdom from the air. More importantly, we have talked about how the core arc enables you to evaluate tycoon skill, a theme that is going to come up repeatedly in the rest of this series.
Learning to see all of this is half the battle. There are two mistakes when it comes to evaluating Asian tycoons. The first is to read Joe Studwell and believe the argument he so smugly implies in Asian Godfathers: that Asian tycoons are only worth studying as the side effect of governance failures but not for business skill — they are uncompetitive, and therefore lacklustre businesspeople. The second mistake is the opposite: to believe that all Asian tycoons are good at business, and that the richer they are, the more skilled they are. The truth, as we have seen, is more nuanced than that. There are gradations of tycoon skill; there are multiple axes that you should use to evaluate them, and you can learn to see all of this. You can learn to copy the best bits for yourself.
If I’ve done my job correctly, the core arc should be super obvious to you from here on out. Let’s test this. In the next instalment, I’m going to toss you another tycoon profile, and we shall see what leaps out at you.
Let’s go.
This is Part 7 of The Asian Conglomerate Series.