How Do Asian Companies Grow?

Over the last few decades, Asian manufacturing companies have dominated the international playing field. Now, it seems like everything is made in Asia. But it wasn’t the free market that created the region’s global behemoths, it was the governments. And they’re trying to do it again, but this time in the service sector...

The most important thing to know about Asia is that free market rules do not apply. Governments choose which sectors are “strategic,” then create policies and direct funding to help them grow and compete globally.

They do this through window guidance, which is an informal mechanism by which a central bank asks a commercial bank to issue loans to specific industrial sectors or companies, helping them grow.

Right now, it’s common for Asian banks to have lending quotas (from the government) for businesses in priority sectors. This type of window guidance is popular in India, Indonesia, Thailand and the Philippines.

Malaysian and Vietnamese economies are "guided" a little differently. Governments in these countries make banks lend to businesses in priority sectors at discounted interest rates.

Let’s look at how this worked out in South Korea and China – and what the future holds for the region.

Out of the ashes of war rise South Korean giants

Since South Korea’s modern government came to power after the Korean War, certain sectors have received preferential treatment. When a government targets a certain sector, it receives cheap credit, subsidies, and is allowed to access certain benefits that are not available to other sectors.

You can see how the government – in partnership with the Korean Development Bank – targeted certain sectors over different periods in the figure below.


In the 1950s, immediately following the war, reconstruction was the government’s priority. Then, from the 1960s, the government issued cheap credit to the light manufacturing sector.

In the 1970s, heavy and chemical industries became en vogue.

The 1980s saw a wave of government handouts for high-tech industries.

And most recently, the creative sector is where the government is focusing its attention.

Of course, throwing money at a cause doesn’t always create innovation and growth. So what was the key to South Korea’s success?

The merits of controlled competition

South Korea created world-class manufacturing conglomerates – not by controlling entrepreneurs – but by waving very juicy “carrots” (subsidies) in front of their faces, and forcing them to compete domestically and internationally.

First, the government would lure a whole bunch of entrepreneurs to set up businesses in strategic sectors, then let market forces choose the winners.

Winners were “chosen” by their ability to export and to become internationally competitive.

The government offered lower interest rates to companies that figured out how to export. The more they exported, the more handouts they received. Sometimes, interest rates for exporting companies were less than half of other businesses, as shown in the chart below. Cheaper borrowing eventually created competitive advantages for them in the global market.

Chaebols take over

By forcing companies to compete and export, the government created globally competitive conglomerates known as chaebols.

South Korea’s chaebols like Samsung (Korean Stock Exchange; ticker: 005930), LG (Korean Stock Exchange; ticker: 066570) and Hyundai (Korean Stock Exchange; ticker: 005380) were instrumental to expanding the country’s exports.

With government support, they were able to innovate and diversify their product lines, hereby dominating multiple sectors, both domestically and abroad. For example, Samsung started out as a small trading company but later branched out into securities, retail and consumer electronics.

Chaebols were so big, that they single-handedly turned South Korea’s trade deficit in 1985 into a trade surplus in 1986.

A few years later, many chaebols had become so competitive and profitable that they no longer needed special treatment from the government.

By 2015, sales revenue generated by the top five chaebols was equivalent to 58 percent of the country's GDP. The failure of just one chaebol could have a potentially devastating effect on South Korea’s economy.

To that point, currently, a few of these conglomerates are mired in corruption scandals, and there’s talk of restructuring. There is a distinct need to increase transparency and reduce the power and influence they have over the wider economy, but as it stands ‘crony capitalism’ is still as prevalent as ever in South Korea.

With its blazing fast internet access, highly skilled labor and innovative business ecosystem already in place, South Korea is well positioned to dominate the next generation of digital services.

But its corrupt, too-big-to-fail chaebols could undermine the future growth of the high tech sector.

China follows suit… with similar challenges

Like South Korea, China – using window guidance –directs the China Development Bank (CDB) (Hong Kong Exchange; ticker: 1062) to hand out cheap credit to strategic, export-oriented industries.

Strategic development projects change over time, meaning the percentage of total loans given out per year to particular industries changes too. You can see these changes in the graph below.

But just because the government invests in a sector, it does not mean it will automatically improve.

In 2015, for instance, China urged its banks to speed up lending to agriculture. This was supposed to bolster a sector that employs almost one-third of its 1.4 billion people and contributes to 9 percent of the country’s GDP. Yet today, productivity in China’s agricultural sector remains low.

In 2010, for example, CDB supported 438 overseas Chinese company projects worth US$117.6 billion.

The Aluminium Corporation of China, Chinalco (Hong Kong Exchange; ticker: 2600) was a major benefactor – receiving a US$19.5 billion loan to fi­nance the company’s bid to increase its stake in Australian mining company, Rio Tinto. But the investment didn’t quite go as planned. Even though the Australian government rejected the deal, the company still received the loans.

Like South Korea, corruption scandals will continue to plague China’s state-directed progress.

China’s sights are set on services, consumers and infrastructure

China is about a decade behind South Korea, but is catching up quickly.

Its service sector (the tertiary industry) is now bigger than its manufacturing sector (secondary industry) and agriculture sector (primary industry), as you can see in the graph below. That’s a sign of economic development and a pre-cursor to a consumption-driven economy.

As a result of China’s shifting economy, its middle class is starting to spend.

Sportswear, in particular, is performing well – with revenue and profit growth in the double digits. Healthcare, cosmetics, travel and e-commerce companies are also posting rising profits.

And as China continues on its march toward urbanization, cities are in dire need of infrastructure improvements. To give you a little perspective, China’s current infrastructure is only 20 percent as developed the infrastructure in the U.S. and Europe.

In 2015, CDB handed out over US$95 billion in new loans to renovate dilapidated urban housing and support railway and water infrastructure projects.

China is synonymous with rapid urbanization. Shanghai at night. (Shutterstock)

China is synonymous with rapid urbanization. Shanghai at night. (Shutterstock)


So along with consumer goods and services – companies engaged in construction and infrastructure projects will see growth as well.

Asia’s unique brand of Asian Capital Development (ACD) doesn’t always produce the desired results, but in general, if enough money is invested in a certain sector, at least a few companies stand to prosper.