Grandfathering in Asian Conglomerates
Why are conglomerates so powerful in Asia?
Darwin’s “survival of the fittest” is not just for animals. In the corporate jungle, companies who want to grow stronger and gain more territory can acquire weaker companies.
This causes the corporation to expand, experience rapid growth and become more powerful.
This is typically how conglomerates, and some of the world’s largest economies, are created.
In Asia, this is how legends are born. But in the West, it's how hard lessons were learned.
But why is there such a difference?
The rise and fall of Western conglomerates
The West’s conglomerate story starts in the early 1960s. Anti-trust laws ran rampant in the U.S.
Monopolies were being curbed left and right.
Businesses were eager to expand but couldn’t do it in their own sector. So, the conglomerate model gained popularity.
Firms started acquiring companies in unrelated industries. They diversified themselves and avoided prosecution.
Newly established American conglomerates, like Litton, Merritt, Chapman & Scott, and Aeronca, watched in awe as their stocks shot up.
These were the glory days of American conglomerates.
But they were short lived…
Soon stocks came crashing down. Litton’s stock fell by 93 percent!
The harsh reality that enormous, diversified companies founded on wacky business combinations are hard to manage effectively, spread like wildfire.
By the 1980s, many Western conglomerates began reducing the number of businesses under their management, as you can see below.
Now most Western conglomerates focus on their core business, hiding any diversification like a skeleton in the closet.
But in Asia, conglomerates are unapologetically large, varied, and contribute large sums to national GDPs.
So, what gives?
Asia’s fertile conglomerate environment
Asian conglomerates run the business scene like well-connected mafia members.
They have politicians on their payroll, banks in their pockets, stock markets at their fingertips, and sometimes even the public’s loyalty.
That’s because many of the region’s most feared conglomerates led Asia’s manufacturing revolution.
They pushed their countries out of low-skilled, agriculture-based economies and into world-class business hubs.
Such was the case for Japan, Korea, Taiwan, China and increasingly emerging markets in Southeast Asia.
There are two main reasons for Asian conglomerates' success rate
Firstly, Confucius' teachings reinforce the hierarchical structure. Centralized authority simply thrives in Asia.
At home, this means honoring the father. In business, it means honoring the boss.
The two are combined in the family business model.
This model is the grandfather of most modern-day Asian conglomerates.
Secondly, home-grown Asian conglomerates receive much more government support than their Western counterparts.
At the same time, Western conglomerates suffer from extreme privatization and high competition. Both prevent conglomerate growth.
From ruins to robotics: how conglomerates built Northeast Asia
Conglomerates may prosper throughout Asia, but their history and current operations differ from Northeast Asia to Southeast Asia.
In Northeast Asia, conglomerate networks are known as “chaebols” in South Korea and “keiretsu” in Japan.
After the Korean War and WWII, both Korea and Japan lay in ruins.
It was strong handed governments and mighty conglomerates that helped pull their economies out of devastation.
Korean conglomerates like Hyundai, Samsung and LG propelled Korea into a modern economy.
Meanwhile, Japan’s infamous “big six”, including Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and Mizuho Financial Group paved the way to rebuilding and reinventing Japan’s innovative economy.
In return for helping rebuild their respective economies, the government gave these companies generous financial and legislative support.
Over time, conglomerates' relationships with politics thickened.
Due to these organization’s tight connections with banking and political elites, their performance was miles ahead of their not-so-well connected peers, as you can see below.
The same goes for Korea:
But its Southeast Asian counterparts are doing even better
Southeast Asian conglomerates naturally followed in their Northern big brothers' footsteps. And interestingly, they had even greater success.
Conglomerates dominate Southeast Asian markets, more so than conglomerates in Northeast Asia.
As you can see below, this greater influence pays off, big time.
In fact, analyzing conglomerates revealed that total shareholder returns (TSR) were 18 percent higher in Southeast Asian than in developed economies.
They were also 10 percent higher than those found in Northeast Asia.
It appears that higher stages of development are negatively tied to conglomerate performance, as you can see below.
So, what’s the cause?
Well, with higher GDP growth rates, emerging and pioneering markets simply have more room to grow, as you can see below.
In emerging Asia, conglomerates can take hold of an entire sector. And with a little boost from the government’s backing, their performance and profits will fly.
After that happens, they naturally take on more sectors and expand their business.
This makes Southeast Asian conglomerates essentially where you want to put your money.
So that’s the story of why conglomerates are revered in Asia and shunned in the West.