Filling the Moguls' Shoes

Asia's family dynasties are handing the reins to a new generation—but can the kids ever live up to dad?
By George Wehrfritz
Newsweek International

July 23, 2007 issue - They are the chieftains of Asia's economic boom, a cohort of multibillionaires that led the region's transformation from an impoverished backwater at the end of World War II to the main growth driver in today's global economy. And although these tycoons most often grab headlines for their latest deals or soaring personal wealth, the most salient detail about them could be this: they're not getting any younger.

Even the most vital of the bunch—like Hong Kong's rival property moguls Li Ka-shing and Lee Shau Kee, worth $23 billion and $17 billion, respectively—are nearly octogenarians. Malaysia's richest man, Robert Kuok, is now 83. Macau gambling kingpin Stanley Ho is two years his senior. And Taiwan plastics magnate Wang Yung-ching, the eldest Asian billionaire on the latest Forbes list, will turn 91 in January. "Entrepreneurs who were teenagers at the end of the war are now 75 to 80 years old," says Randel Carlock, director of the Wendel International Center for Family Enterprises at INSEAD, "and they're going to make the transition."

So, too, will the trade, real-estate and manufacturing empires that survive them. More than any other region, in fact, Asia is the place where the family-business model reigns supreme. In 2004, the magazine FinanceAsia calculated that families controlled 40 of the region's 100 largest listed companies, while states controlled 38, and just 22 were widely held corporations per the norm in New York or London. Yet while this preference has underpinnings both cultural (Confucianism) and historic (colonization), Asia isn't that different from the rest of the world—just later in its economic takeoff. The 19th-century empires built by U.S. industrialists like Andrew Carnegie and John D. Rockefeller were largely dissolved in the 20th, and the same fate appears to await many of Asia's postwar tycoons in the 21st.

As a Chinese axiom holds, "Wealth does not span three generations." Will that pattern hold? John Ward, a family enterprise specialist at the Kellogg School of Management in Chicago, says there is a "very high probability" that it will, because of all the pressure on family rule. Internal risks include succession discord, nepotism, sibling rivalries and dilution of ownership among the patriarch's many heirs. Externally, home markets are swinging open, exposure to global financial markets is increasing and in many countries publicly traded companies face louder calls from minority shareholders demanding better governance and more transparency.

Such challenges have increased substantially since the 1997-98 Asian financial crisis, and are harder to resist after the founding patriarch exits the picture. The process is already well underway in South Korea, where tougher antitrust legislation, greater foreign participation in the local economy, high inheritance tax and disharmony within the family have rocked the nation's biggest chaebol—including Samsung, Hyundai, LG and SK Group—since the death of their founders, putting into question the ability of third-generation successors to stay in control once their turn comes. "In all societies," says Ward, "the most vulnerable time in a family business's history is what we refer to as the sibling partnership generation, in which brothers and sisters co-own, and sometimes co-manage the company."

That's already proving true in Asia. Although successful transitions to the sibling generation have occurred, the list of cautionary tales is long. At Hyundai, for example, three feuding brothers engineered the group's 2002 breakup. Two years later, the sons of Reliance Group founder Dhirubhai Ambani split India's largest industrial conglomerate in two because they couldn't agree how to manage it; analysts say the division served no commercial purpose. And in Hong Kong, the April death of Nina Wang, whose $4.2 billion net worth made her Asia's richest woman, saw her fortune pass to her longtime feng shui master, though that will has been contested and experts anticipate that the fate of her unlisted Chinachem will languish in the court for many years.

Nor has global competition been kind to many in Asia's sibling generation. Hong Kong's Richard Li, second son of Li Ka-shing, was hailed as a telecom wunderkind in 2000 when his New Economy vehicle, PCCW, acquired Cable & Wireless HK from its British parent company for a cool $28.5 billion. Within three years the dotcom bubble had burst, and PCCW has lost 96 percent of its market value—exposing Li to ridicule as Asia's biggest wealth destroyer. In Malaysia, Lim Kok Thay, heir apparent to 89-year-old billionaire and Genting Group founder Lim Goh Tong, is still struggling to make headway with Star Cruises, established in 1993. Star is the third largest cruise line in the world, but it lost $156 million last year despite Asia's booming tourism market. While rival cruise line Carnival has seen its share price double since 2002, Star's has been stagnant.

Invariably, family conglomerates find themselves straddling two models of capitalism. Dad carved out his niche in what for the most part were closed, insular economies. And because he called all the shots, he could ignore market trends, make extremely long-term bets and be bold when the moment required it—which is to say, function much like the growing list of companies that are taking themselves private in the West to avoid the constraints of public ownership. But these same men sent their sons to get M.B.A.s at some of the world's most prestigious universities, where their lessons in the best managerial practices, shareholder wealth maximization and the laws of the New York Stock Exchange gave them a very different approach.

The son's education thus undermines the raison d'être of the family model, which is its freedom to act contrary to short-term profit maximization. "If everybody just follows the laws of the Harvard Business School and [global consulting giant] McKinsey, then nobody's really got a relative competitive advantage," says Ward. For all their global training, the second generation never fully masters the father's political deftness or his back-channel ties to officialdom. "The game really isn't about producing a globally competitive business [but] about amassing concessions in local economies and stitching up cartels," argues Joe Studwell, author of a provocative new book arguing that Southeast Asian tycoons may be guiding their region into relative stagnation, like Latin America. "Dad lived with politicians, went to school with them. You can't get that by going to Harvard."

Many in the sibling generation face a stark choice: play caretaker to a predominantly domestic business empire, or grow it by going global, which is much more risky. Malaysian developer YTL is one family-controlled business that sees its future beyond the national boundaries. Patriarch and namesake Yeoh Tiong Lay, 78, established his construction company in 1955, leveraging contacts with the British colonial government to win his first job—building two ammunition depots. "I made 5,000 Malayan dollars profit," says Yeoh, still jazzed by the deal. "I told myself, 'Waaah, it's good to be a contractor'."

Yeoh moved his business to Kuala Lumpur and began bidding against foreign developers for major projects in the capital. Today the Yeohs' net worth is estimated at $1.7 billion (which makes them Malaysia's sixth richest clan, with interests in hotels, IT, cement and utilities) and the firm is listed at home and in Japan. Yeoh's eldest son, Francis, 52, now runs the business. "From day one you are right into the deep end and learning everything very fast, how to make money from a contract," says the younger Yeoh, who is internationalizing the company by acquiring utilities in Britain, Australia and Indonesia. "I never thought I would do anything else.

Many tycoons see retaining family control as job one, but there are many different strategies for getting it done. One particularly elaborate succession will unfold following the passing of Taiwanese plastics pioneer Wang Yung-ching, founder of the Formosa Group, Taiwan's largest diversified industrial conglomerate. Wang's empire accounts for 10 percent of the island's main stock exchange by value; together the four largest group companies—there are some 50 total—were worth $38 billion at the end of 2006. Legendary as a decisive taskmaster, Wang seemed ready to pass the top job to his son Winston, until he was banished from the group in 1995 after having an affair with a Taipei coed. Lately, Wang (who officially retired last year, but is still active in the business) has buttressed family control through cross-ownership deals, in which affiliates have raised their stakes in listed group companies, in a manner that magnifies the founding clan's overall say. "They want to maintain family control, and the best way is to use money that is not their own," says Ishtiaq P. Mahmood, a family-enterprise specialist at the National University of Singapore. "That way they can control the whole thing when they probably don't own more than 5 to 10 percent."

This is, however, a step backward in terms of modernizing the company. Cross-shareholding in South Korea spelled doom for that country's heavily indebted conglomerates in the 1990s, and in Japan tight keiretsu supplier networks contributed to the nation's loss of competitiveness and the downfall of firms like automaker Nissan, which nearly went belly up before Renault staged a rescue in 1999. Yet because the Formosa Group is neither deep in debt nor bound by strong buyer-supplier ties, the biggest succession risk most analysts cite is a loss of focus. "At present, you still see the big man in the background," says Chu Wan-wen, an economist at Academia Sinica. When the patriarch goes, "each individual company should be OK, but the direction of the group as a whole will be less certain."

South Korea shows how quickly ownership structures can change once founding patriarchs exit. Over the past decade its major chaebol have slipped steadily from their clans' grasp. At the largest, Samsung, foreign investors now own a significant percentage of the company's stock andsecond-generation helmsman Lee Kun Hee, mastermind of the firm's emergence as Asia's most valuable listed electronics company, has landed in hot water for alleged inheritance tax violations. Even if judges rule in Samsung's favor, the Lees' hold on their empire may weaken when its financial flagship, Samsung Life, eventually goes public, because new regulations bar a single entity from controlling listed financial and nonfinancial companies. A similar tale is playing out at rival Hyundai, Korea's largest conglomerate until the 1997-98 Asian financial crisis. It was divvied up among three feuding sons after patriarch Chung Ju-yung died in 2001. Although both the Lees and the Chungs are positioning the third generation to someday take over, stronger antitrust regimes, greater transparency and South Korea's democratization have ended the era of crony capitalism, so the sons' positions are far from secure. "These third-generation tycoons might be accepted culturally in Korea," says Jang Ha Sung, a prominent business professor at Korea University. "But they will have to prove their professional skills, and if they fail they won't be given a second chance."

This is very similar to the established pattern in Europe and the United States, in which most families eventually cede management power and outright control of the empires their forebears built. That is the process by which former family brands like Ford and General Electric rose in the 20th century to be ranked among the largest multinational corporations. American billionaire Warren Buffett once likened familial succession to "choosing the son of the 2000 Olympics swimming champion to win the 2020 Olympics"—a long shot. And there's no reason to suspect that the outcome will be different in Asia.

With Jonathan Kent in Kuala Lumpur, Jonathan Adams and Jackie Lin in Taipei, B. J. Lee in Seoul and Sonia Kolesnikov-Jessop in Singapore
© 2007 Newsweek, Inc.

Source: Newsweek