Book review: Asian Godfathers
A book by Joe Studwell on how to become an Asian tycoon. Estimated reading time: 22 minutes
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Summary
Business in Southeast Asia is often controlled by immigrant entrepreneurs. These entrepreneurs came from China, India and the Middle East. They were unable to serve in government positions and instead became traders. Some of them became wildly successful.
After the end of colonial rule, rent-seeking in Southeast Asia continued in much the same fashion as before. The only difference is that a new group of tycoons teamed up with local politicians to gain control of scarce licenses previously held by European corporations.
Joe Studwell argues that four conditions have been necessary to maintain their business empires: developing relationships with politicians, obtaining scarce licenses from them, securing financing from captive banks and maintaining total control over their organisation.
Rent-seeking in Southeast Asia has retarded growth. Productivity in East Asia has come from innovation and manufactured goods exports. But so far, the economies across the region continue to be dominated by local tycoons.
Joe Studwell’s 2007 book Asian Godfathers continues to be the definitive text on the rise of tycoons dominating Southeast Asia’s economies. These groups of tycoons have built up conglomerates that span industries as diverse as banking, mining operations, airlines, and tobacco.
The tycoons had built up an extraordinary amount of wealth:
“A small region that, concurrently, could not boast a single non-state corporation among the global top 500 none the less accounted for a third of the wealthiest two dozen people on the planet.”
Why? The answer is rent-seeking: tycoons gathered forces with political leaders to extract rents from the economy. In other words, accumulating wealth without adding any value. In the book, Studwell shows how it’s done in practice, from one country to the next. This is his story of how tycoons have come to dominate Southeast Asia.
Table of contents:
1. Immigration from the North
2. The rise of Asia’s tycoons
3. How to become a tycoon: 4 easy steps
3.1. Develop relationships
3.2. Obtain scarce licenses
3.3. Secure financing
3.4. Maintain total control
4. The implications of Asian rent-seeking
5. Conclusions1. Immigration from the North
Over the past centuries, immigrants have come to Southeast Asia: from China, India, Persia and even Arabic countries.
These immigrants often ended up becoming traders or businessmen. And over time, individuals from this group have become wildly successful, beyond anybody’s expectations.
From the 16th century onwards, Southeast Asia became dominated by European colonies. These included the Dutch East Indies, British Malaya and Burma, the Spanish colony of the Philippines and the French Indochina. Siam (= Thailand) had been an independent state all along.
Migration to the region sped up with the invention of the steamship and the opening up of Chinese ports in the mid-19th century. By this time, there were half a million Chinese in Southeast Asia. A huge number compared to the then 5 million people in Thailand and 2.5 million in what we today consider Malaysia.
The 1869 opening of the Suez Canal led to even greater trade. Spices had always been a sought-after commodity, but increasingly we also saw trade in sugar, tin and rubber. Traders flocked to the region. By the early 20th century, there were 3-4 million overseas Chinese in Southeast Asia.
One of the reasons for the success of ethnic Chinese in business in Southeast Asia is that they were unable to serve in the government and were too educated to become farmers. Instead, they’d operate trading monopolies, engage in tax farming, run mining ventures and plantations, gambling venues and even trade in liquor and opium.
Another reason for their success is that they did not threaten indigenous people's political power. The elites felt comfortable teaming up with them since they knew that immigrants would stay on as silent trading partners. Perfect for extracting economic rents.
Such arrangements had existed in the region for at least half a millennium. Colonialism reinforced such tendencies, with European companies teaming up with local elites.
In the late 20th century, large corporations started to outcompete the small-scale immigrant tycoons from China and India. The smaller-scale tycoons found it difficult to access credit from HSBC and Chartered Bank of India.
And the colonies imposed high taxes on the export of manufactured goods so that only resources would be extracted from them. Locals were unable to build export powerhouses. Instead, they turned to the domestic service economies to make a living.
2. The rise of Asia’s tycoons
The end of the Second World War proved to be a blessing for the Chinese and Indian immigrant tycoons in Southeast Asia.
European businessmen not killed in fighting during the war were either imprisoned or forced into exile. In the words of Japanese historian Suehiro Akira:
“When the Europeans returned to Thailand, they found that major industries, especially in the commercial and financial sectors, that they had previously controlled were now dominated by either the Chinese or Indians.”
This was their time to shine. In Indonesia, President Sukarno launched the Benteng programme, which was meant to support indigenous traders. But in reality, deals were made whereby immigrants teamed up with locals to bribe themselves into lucrative contracts.
The nationalisation of Dutch businesses in 1958 opened up further space for immigrant tycoons to extract rents. After Suharto became President in 1967, he doled out concessions to people familiar to him:
“When Suharto came to power he wanted to be king. So he did exactly what the Dutch did.”
So in the transition from colonialism to self-determination, nothing changed. The countries shifted from colonial rent-seeking to local rent-seeking, often in partnership with immigrant would-be tycoons.
3. How to become a tycoon: 4 easy steps
In the book, Joe Studwell offers four “tricks” needed to become a tycoon.
First, you need to develop relationships with people in power. Second, you must monetise that relationship by obtaining scarce licenses or concessions. Third, secure cheap financing for any capital expenditures or acquisitions needed to use the license. And finally, maintain total control over your operation.
This is a pattern that occurred over and over again across the region.
3.1. Develop relationships
In the decades after the Second World War, a new group of leaders took over the countries across Southeast Asia: Suharto in Indonesia, Ferdinand Marcos in the Philippines and Mohamad Mahathir in Malaysia.
These new leaders promoted their own businessmen partners to extract wealth from their positions. Often, the tycoons would hold shares on behalf of the leaders, obscuring any paper trail that could lead to accusations of corruption. And by promoting their partners, they gained ultra-dependent, ultra-loyal sources of finance.
If you read mainstream media or biographies, you’ll get the impression that many tycoons rose from rags to riches. And while it’s true that some grew up poor, most were privileged through their special connections.
In the Philippines, for example, President Ferdinand Marcos developed an entourage of local tycoons of Spanish and Chinese heritage from the 1960s onwards. One tycoon that was particularly close to Marcos was former janitor Lucio Tan, who, under Marcos, obtained a tobacco monopoly. The capital was reinvested into a bank, real estate, and an airline. Why was Lucio Tan able to amass this type of wealth? Because he and Marcos knew each other from their home region of Ilocos.
Malaysian commodity trader Robert Kuok was masterful in cultivating relationships with the elite. His father played Mah jong with Onn bin Jaafar, a founder of the ruling party UMNO. He also went to school with Onn bin Jaafar’s son and Malaysia’s third prime minister Hussein Onn, contacts that would prove helpful later on.
Relationships also drove the rise of fellow Malaysian Ananda Krishnan. He was close to finance minister Razaleigh and helped him create the national oil company Petronas. He also helped the government nationalise tin mining. When Mahathir became president in 1981, Krishnan cultivated a relationship with him. He went on holidays with him and looked after his children when Mahathir went overseas.
Similarly, gambling mogul Lim Goh Tong received his first casino license by cultivating a relationship with the first post-independence prime minister Tunku Abdul Rahman. He also stacked the boards of his companies with retired offers of Malaysia’s powerful police force.
In Indonesia after 1965, local merchants tried to develop relationships with the new dictator Suharto. Two of the most successful such merchants were Mohamad “Bob” Hasan and Liem Sioe Liong, two people he felt could be trusted. And later on, during his rule, Suharto also relied on ethnic Indian and Sri Lankan businessmen, including Marimutu Sinivasan. A sign of how deeply entrenched Sinivasan was with the elite was that after borrowing heavily before the financial crisis, he received a personal loan of US$900 million from the central bank to save him from bankruptcy.
Typically, leaders would demand about 10% in kickbacks. Bangkok Bank’s Chin Sophonpanich once described the relationship between businessmen and government officials in Southeast Asia as “gentlemanly”, referring to the fact that the kickbacks were no more than 10%. But sometimes as low as 3-5% on very large projects. In Indonesia, Suharto’s wife, Madame Tien, was known in business circles as “Madame Tien Per Cent”. Since 10% was the rate that she required.
Between the tycoons, there was a deep distrust. Everyone competed with each other:
“Asian business is a dog-eat-dog world in which aspirant godfathers compete for a finite supply of political patronage.”
The falling out of the cooperation between Robert Kuok and Liem Sioe Liong is a case in point. Another example is the China-focused investment group funded by Li Ka-Shing, Stanley Ho and Indonesia’s Riady family. This investment vehicle achieved exactly nothing since the tycoons were unwilling and unable to work together.
And the tycoons would also try to hedge their bets by cultivating relationships with various politicians to ensure they don’t lose favours. A top executive working for Thai tycoon Dhanin Chearavanont once said:
“We back everyone… And you would always have a portrait of the military leader on the wall. That was the general practice. And of the commander of police, the commissioner for metropolitan Bangkok.”
So the task of cultivating relationships never ends, especially when the political landscape changes fast. As it did after the end of colonialism.
3.2. Obtain scarce licenses
Harvard Business School professor Michael Porter once said about Southeast Asian companies, “They don’t have strategies. They do deals”.
That’s exactly how they operate. Their companies typically don’t expand in the way American or European firms might. Instead, they build conglomerates, maximising the number of scarce licenses they can obtain from their contacts in the government.
For example, many of the richest men in Hong Kong and Malaysia became rich through gaming monopolies. Macau gaming mogul Stanley Ho obtained a monopoly on all forms of gaming in Macau from 1961 onwards. The wealth created was staggering, with a net worth estimated at US$15 billion. His co-investor, Cheng Yu-tung, later formed the property company known as New World Development. But make no mistake - much of the wealth came from his Macau casino monopoly.
In Malaysia, Ananda Krishnan is most famous for building the Petronas Twin Towers. But his core cash flow came from his monopoly on racetrack betting across Malaysia. Krishnan also proposed building the Petronas Towers to showcase Malaysia’s success to the outside world. Krishnan received 48% of the equity without using any of his own money. Ironically, the building was constructed by Japanese and Korean suppliers, showing where the value-add came from.
Krishnan also persuaded Mahathir to provide him with exclusive licenses in the wireless telecom industry and television. Whatever technology was needed was brought in from overseas.
Another Malaysia billionaire called Vincent Tan made most of his money on Malaysia’s Sports Toto lottery, which he purchased from the state in an opaque process.
And then you have Lim Goh Tong, who obtained an exclusive license to operate a casino in Genting Highlands. That casino continues to provide cash flow for the group, which has now gone into plantations, real estate, cruise ships and more. But the core cash flow came from the casino.
Liem Sioe Liong's licenses in Indonesia were mostly related to essential commodities. His close relationship with Suharto led to him obtaining a monopoly on importing cloves in 1965, together with Suharto’s half-brother Probosutedjo. Liem Sioe Liong also obtained a flour manufacturing monopoly, eventually becoming Indonesia's noodle king. Those cash flows formed the basis of the Liem family’s larger empire in real estate, textiles, rubber, logging, steel and cement.
When Malaysian entrepreneur Robert Kuok entered Indonesia, he did so by cultivating a relationship with Liem Sioe Liong. When the latter wanted to import refined sugar and flour, he partnered with Robert Kuok, who then controlled most of Malaysia’s sugar refineries.
Another example of a tycoon obtaining a scarce license is Henry Fok, who obtained a monopoly on importing mainland sand to Hong Kong after the communists took control of mainland China.
Hong Kong has always been seen as a bastion of free-market capitalism based on low tariffs and no exchange control. But domestically, Hong Kong’s economy has been dominated by several property developers working in unison with the government. The fact that Hong Kong doesn’t have a competition law tells you something about the state of affairs.
Another example of a government-mandated monopoly is Hong Kong’s port. Li Ka-Shing managed to buy up much of Hong Kong’s available berths, and cash flows from these have funded much of his remaining empire, including in real estate, cement, concrete, asphalt and chain retailing. Bankers believe that if not for his control over the oligopoly port business, he would have gone bankrupt in the mid-1990s.
So the key to gaining wealth is to accumulate scarce licenses. And then borrow heavily to build whatever is needed to extract the rents provided to you.
3.3. Secure financing
During colonial rule, the cards were stacked against local borrowers. European and American banks were not keen to lend to local businesses. And when they did so, they often demanded significant kickbacks.
Instead, most local businessmen turned to moneylenders, often with punitive interest rates above 20%. Lending at such high rates did not enable local entrepreneurship.
This situation changed in the post-war era. One enabler of local businesses was Bangkok Bank, led by Chin Sophonpanich. Born to a Thai mother, a Teochew father, and a skilled trader, he was appointed to Bangkok Bank as a general manager.
Chin saw the potential in the up-and-coming tycoons of the post-war era. He travelled between Hong Kong, Singapore, Kuala Lumpur and Jakarta to identify entrepreneurs that could need his capital. He banked godfathers such as Robert Kuok in Malaysia, Liem Sioe Liong in Indonesia, and the Chearavanonts in Thailand. He even funded narcotics kingpin Phao Siriyanon and other politicians running the drugs business.
During Chin’s tenure, Bangkok Bank became the largest bank in Southeast Asia and in the 1970s, with an exceptional return on capital of over 100% per year, according to the IMF. Most of the lending was to Chinese tycoons across the region, helping them to secure financing for their building empires.
A similar story played out in Hong Kong with the Hongkong and Shanghai Banking Corporation (HSBC). After the communists took over mainland China in 1949, the bank helped finance Shanghai manufacturers who wanted to restart their businesses in Hong Kong. HSBC also enjoyed a privileged position as the Hong Kong government’s bank with a monopoly on notes issuance, as a clearing house and more.
But what made HSBC truly special was that it was never controlled by a European or American trading house. The bank's ownership was dispersed, allowing talented bank managers to rise to the top. With broad representation within the company, racial prejudice went out the window. HSBC instead focused on funding the new up-and-coming tycoons, becoming a key source of funding for many of them.
For example, shipping magnate YK Pao was one of the tycoons that were catapulted to the top with the help of HSBC. He had built a successful import-export business in Hong Kong before buying his first cargo ship in 1955. One of his strokes of genius was to obtain ships from Japanese shipbuilders funded 80% by the Japanese government. He then leased out to large Japanese trading companies for ten years, with banks guaranteeing the performance of the charter. Where did he finance the remaining 20%? Via loans from HSBC. Using this strategy, by 1979, he obtained control of 202 ships with more than 20 million deadweight tonnes - the largest fleet in the world at the time.
Another tycoon that benefitted from transactions with HSBC was Li Ka-Shing. In the late 1970s, through a restructuring process, HSBC became the owner of a stake in port operator Hutchison. After Michael Sandberg became HSBC Chairman, he decided to sell the business. But the selling process was anything but transparent. Li Ka-Shing was chosen as the buyer, obtaining ownership of the highly profitable port company at half the net asset value. And most of the financing came from the seller, HSBC itself. This was a win-win situation for Li Ka-Shing.
When Michael Sandberg retired in 1986, Li Ka-Shing gifted him a 1-metre-tall reproduction of the HSBC headquarters in full gold as a token of his gratitude.
Elsewhere in the region, tycoons instead preferred to control their own banks. An early model of the power of controlling your own bank was the setting up of the Philippine National Bank (PNB). It was intended to become a state development bank to support modernisation. Instead, the PNB became the oligarch’s personal treasury, making loans to families in estate agriculture. And when capital ran dry, PNB, with its position as a quasi-central bank, could print money to fund further lending.
Later on, in the 20th century, Philippine tycoons started building up their own banks. From the late 1940s to 1965, the number of commercial banks rose from just one to 33. Typically, these banks would be controlled by individual families. And the loans would go to their own companies and friends - obviously taking a cut from any such favours. In the Philippines, related-party lending has always been accepted as how business is conducted.
In the Ferdinand Marcos era, the banking system increasingly ended up in his own control and those of his cronies. Lucio Tan, for example, gained control of Allied Bank, allegedly paying only 1% of the estimated value of the bank. Marcos's classmate from law school, Roberto Benedicto, was handed the chairmanship of the PNB, which was then allowed to take over Republic Planters Bank, which funded half its lending through the central bank. Herminio Disini, who married Imelda Marcos’ cousin, was also given control of the two banks. Many of the loans of these institutions went bad, and they had to be recapitalised after the departure of Marcos in 1986. But by that time, the tycoons had already become rich.
In Indonesia, Suharto helped liberalise the banking system. In the prior era, most banks were state-owned and corrupt, and reforms were badly needed. On the other hand, after the liberalisation, banks instead became controlled by individual families. By the Asian Financial Crisis, the country had 240 institutions, typically belonging to local tycoons or the children of Suharto.
One of the premier banks of Indonesia today is Bank Central Asia, which was built by tycoon Liem Sioe Liong. After the Asian Financial Crisis, investigators found that 60% of its loans were to related parties, and the bank was sold to the Djarum Group. At Sjamsul Nursalim’s Bank Dagang Negara, related party lending accounted for 90% of loans. Another famous example is when tycoon William Soeryadjaya allowed his son to set up his own bank. He lent most of the money to himself and blew it on projects across Southeast Asia. The US$700 million bank blew up in a matter of days.
Later on, during the Asian Financial Crisis, tycoons found themselves strapped for cash. The central bank went in and saved the tycoons from bankruptcy. But over two-thirds of the loans went to four tycoons: Liem Sioe Liong, Sjamsul Nursalim, Mohamad Bob Hasan and Usman Atmadjaya. Investigators later found out that the number of loans was actually 3x the value of withdrawals, suggesting that some of the loans went into tycoons’ pockets. Many of them fled the country during the height of the crisis and continue to control significant amounts of wealth.
Controlling your own bank can be profitable.
3.4. Maintain total control
Finally, godfathers need to maintain strong control over their empires. They typically demand total obedience from relatives. Most play along in the hope of obtaining vast inheritances. Meanwhile, relatives are kept cash-poor to keep them from up-ending the status quo.
An example is property developer Ng Teng Fong’s son Robert, who ran the multi-billion Hong Kong subsidiary Sino Land. Yet Robert still lived in an apartment rented for the company and only owned about US$1 million worth of Sino Land equity.
The same has been true of the Chearavanont family. Journalist Michael Vatikiotis remembers dinner with Dhanin Chearavanont and his two middle-aged sons. During the dinner, they were not allowed to speak. The sons had to literally beg the patriarch if they wanted to buy a new car.
This control is also maintained by the fact that it’s always the older son that takes over the company. Instead, sons have to seek the goodwill of the godfather until the day that he passes away. This keeps the family on their toes.
Sometimes, such control backfires. Li Ka-Shing’s son Richard Li has been a rare case of rebellion. For example, Richard Li acquired Hong Kong Telecom without his father’s permission. And Richard has described Lee Kuan Yew － not his father － as his hero in an act of open defiance against his father.
Their wives are typically also subordinate to the patriarchs. The tycoons would carry mistresses. Billionaires who own entire apartment blocks, hotel chains and yachts have plenty of private space away from home. As Indonesian tycoon Oei Tiong Ham’s daughter said of her father:
“All his life he had great interest in women and sex. He had eighteen acknowledged concubines and a total of forty-two children by them.”
Another way to maintain control has been to avoid the public spotlight. The old private banks that dominated London and New York didn’t put their nameplates outside their headquarters. Same in Southeast Asia. The tycoons often operate outside the public’s attention as well. They typically prefer their deals not to become the focus of the public’s attention.
Others have even tried to maintain a positive public persona, sometimes at odds with reality. Li Ka-Shing famously reads the newspaper each morning to understand what has been said about him. He would then make notes of anyone who criticises him and then curtail advertising expenditure to those publications, including Next magazine and Apple Daily.
With great wealth inequalities, secrecy can also help to avoid kidnappings. For example, in 1981, Philippine tycoon John Gokongwei’s daughter Robina was kidnapped. And his son-in-law was killed after a similar kidnapping. Li Ka-Shing’s son Victor Li was kidnapped in 1997, demanding HK$1 billion for his return. The perpetrator was later executed in mainland China. But Li Ka-Shing tried to keep the whole episode outside the public’s eye to avoid similar copycat kidnappings in the future.
While control is helpful in a region where trust is scarce, such control also begs what happens after the patriarch dies. The party can only go on for so long.
4. The implications of Asian rent-seeking
In 1994, Paul Krugman claimed Southeast Asia’s growth miracle was overhyped. According to his article The Myth of Asia’s Miracle, economic growth in Southeast Asia was built on increased inputs of capital and labour. In contrast, productivity growth lagged behind that of the United States. He believed that the success of East Asia would not be replicated in the predominantly rent-seeking economies of Southeast Asia.
At the end of the day, productivity is what drives economic growth. And productivity is a function of exports and innovation. Rent-seeking contributes to neither.
Indeed, the region's savings rates have always been high. But much of those savings were funnelled into wasteful government projects and the pockets of the tycoons controlling the banks.
And tycoons are rarely involved in the highly competitive － but productive － export industry. They prefer cosy arrangements where competition is limited.
Japan, Korea and Taiwan are rare success cases where the countries have gone from poverty to developed nation status. What set them apart is that they all implemented land reform and encouraged entrepreneurship. When their governments did back companies － such as with TSMC in Taiwan － they typically backed technology-intensive export businesses rather than domestic service companies. They also adopted free trade policies that gave them access to American and European end markets.
In Southeast Asia, on the other hand, governments ended up in bed with their favoured tycoons. Without an independent judiciary, police force, bureaucracy and central banks, elites have been able to influence voting processes and curry favours from legislators to achieve their goals.
According to Studwell, Southeast Asia supplies cheap labour to multinational companies that keep R&D in their home countries. Great for those who are employed by those multinationals. But policies have not been able to nurture globally competitive export businesses. Some exceptions include tourism in Thailand and electronics exports in Malaysia and Vietnam. But such exceptions are rare.
Asia is a region with exceptionally hard-working individuals who tend to follow the rules. But the Confucian work ethic can also be used by political powers to justify social control and repression. Populations often end up being taken advantage of by their leaders and tycoon collaborators.
5. Conclusions
Investing in Southeast Asia is tricky since the economies are controlled by tycoons. Joe Studwell shows that such corporations tend to underperform their competitors. Pull up stock price charts for Riady companies, for example, and you’ll find that most of them have performed poorly since their IPOs.
There are several problems with these companies. One is that they often do not care about minority shareholders. They’re in full control over each listed company and have little incentive to share their wealth. Another problem is the prevalence of related party transactions, including with their banks.
But there are exceptions. On Michael McGaughy’s blog, he contrasts the share price performance of two Indonesian companies: Soeryadjaya’s Astra and Widjajas’s Sinar Mas. The former has performed beautifully. The latter was a huge disappointment. So some tycoons are clearly better than others when it comes to rewarding minority shareholders. Look at their track records.
And on the positive side, owning a scarce license, such as a monopoly casino or race track, can provide cash flows for decades to come. If you can find companies that not are not only able to extract economic rents but also reinvest them wisely, you’ll probably end up with a winner.
"Asia is a region with exceptionally hard-working individuals who tend to follow the rules. But the Confucian work ethic can also be used by political powers to justify social control and repression. Populations often end up being taken advantage of by their leaders and tycoon collaborators."
Brilliant conclusion and 100% true. Convergence with Western levels of economic success also typically requires convergence in certain institutional and cultural aspects like economic freedom, anti-monopoly regulation, independent courts, etc -- as the Asian Tigers have generally shown.