Southeast Asia-based Overseas Chinese Companies Advancing into China October 23, 2012

Transcription

1 Southeast Asia-based Overseas Chinese Companies Advancing into China October 23, 2012 Prepared by: Park Bun-Soon and KIM Kyung-Hoon 1

2 Executive Summary Overseas Chinese capital consists of assets of overseas Chinese companies based in Taiwan, Hong Kong and Southeast Asian nations. Overseas Chinese capital in Southeast Asia is relatively small when compared with its counterpart in Taiwan and Hong Kong. But it has played a critical role in Southeast Asia s economy. Since the Second World War, overseas Chinese have strengthened their status in Southeast Asia by developing a far-reaching network within the region and forging close relations with political powers in each nation. Overseas Chinese companies in Southeast Asia gradually gained supremacy in service industries such as the finance, distribution and real estate development industries. Also, they increased their investment in the manufacturing industry between the late 1980s and the early 1990s when Southeast Asia s economy grew rapidly. But the financial crisis of 1997, resulting from investment spree, sent a shockwave through Southeast Asia s overseas Chinese companies and their growth models. Since then, they have restructured their debt portfolios, sold assets and improved business structure to survive. During the restructuring process, they lost a large amount of assets and some of them even disappeared from the business scene. On the other hand, some Southeast Asia-based overseas Chinese companies have successfully expanded their business into China. Considering their strong presence in Southeast Asia and China, Korean companies need to cooperate with them when making their way into the Chinese markets. 2

3 1. Overseas Chinese Capital in Southeast Asia Southeast Asia s Overseas Chinese Totaling 29 Million Overseas Chinese, who have the homing instinct, have strongly maintained their identity and supported China s distinctive culture, custom and business practices. According to the Taiwanese government, the world s Chinese population who live outside mainland China, Hong Kong and Taiwan reached million, and million (or 75.4%) out of them lived in Asia in Among them, million lived in Southeast Asia, with most of them living in 10 Southeast Asian nations. In particular, they are concentrated in Indonesia, Thailand and Malaysia. 1 In terms of the share of overseas Chinese in total population, Singapore and Malaysia rank first (55%) and second (23%), respectively. Figure 1. Estimated Overseas Chinese Population in Major Southeast Asian Nations Source: Overseas Chinese Affairs Council (2010). "Overseas Compatriot Population Distribution." ; East Asia Analytical Unit (1995). Overseas Chinese Business Networks in Asia, Canberra: Australia Department of Foreign Affairs and Trade. Out of the World s Largest 1,000 Chinese Companies (Overseas Chinese Companies Included), 81 Are Located in Southeast Asia In terms of market capitalization, the world s largest 1,000 Chinese companies included 675 companies located in China, 138 companies in Hong Kong and 106 companies in Taiwan, in According to Taiwan s Overseas Chinese Affairs Council which released the list of the world s largest 1,000 Chinese companies including overseas Chinese companies, 81 Southeast Asia-based overseas Chinese companies also put their names on the list. Among Southeast Asian nations, Singapore took the largest share by successfully putting 31 companies on the list followed by Malaysia with 24 companies. Singapore and Malaysia 1 The population is about 7.9 million, 7.4 million and 6.48 million, respectively. 3

4 could have successfully nurtured large-scale overseas Chinese companies since they are equipped with advanced capital markets. In particular, Singapore has become the center of business activities of Southeast Asia-based overseas Chinese companies, which has, in turn, encouraged overseas Chinese companies based in Indonesia and Malaysia to get their subsidiaries listed on Singapore s stock market. Southeast Asia s representative overseas Chinese companies have been concentrated on the finance, real estate and resources industries while their presence has not been notable in the manufacturing industry. The biggest Southeast Asia-based overseas Chinese company is Singapore s Wilmar International, which ranked 27 th on the list of the world s 1,000 largest Chinese companies. Table 1. No. of Overseas Chinese Companies in Southeast Asia among the World s 1,000 (Unit: US$ million) Largest Chinese Companies (As of 2009) Nation No. of Companies Market Capitalization Sales Revenue Net Profit Total Asset Southeast Asia , ,437 17, ,744 Singapore ,218 59,166 7, ,603 Malaysia 24 86,271 35,444 4, ,995 Thailand 9 34,633 17,288 1, ,881 Indonesia 8 24,977 15,053 1,364 31,109 Philippines 9 30,209 12,486 2,183 44,156 Source: Yazhou Zhoukan, World s 1,000 Largest Chinese Companies Ranking Growth and Structural Changes Growth through Networking In Southeast Asia, overseas Chinese companies have begun growing in earnest since the Second World War. Since all Southeast Asian nations except for Thailand had been colonized by the West until the Second World War, the Western capital had played a critical role in the Southeast Asian economy and overseas Chinese living in the region had collected tax for the colonial governments or run small-scale service companies. As Southeast Asian nations became independent states after the end of the Second World War, Western capital began leaving the region and returning home. Accordingly, Southeast Asian nations governments were in a desperate need of entrepreneurs and capital, and overseas Chinese companies strengthened their presence in the region. Overseas Chinese entrepreneurs, who had long preferred real estate, accumulated capital by purchasing real estate. Also, they rapidly gained control in Southeast Asia s financial industry by running pawnshops and loan-shark businesses. 4

5 Overseas Chinese capital have significantly grown due to the strong network among overseas Chinese. Overseas Chinese companies have preferred business partners who come from the same places, have same family names and run same kinds of businesses. Also they have maintained a sense of community and put stress on mutual aid by lending money to and sharing information with newly established overseas Chinese companies. For example, in the 1950s, Thailand s Chin Family provided a large amount of capital for Indonesia s Salim Group and Malaysia s Robert Kuok Group. Also, overseas Chinese capital could have successfully established close relations with political powers who understood the need of economic development and wooed overseas Chinese in exchange for preferential treatment. Southeast Asia-based Overseas Chinese Companies and Asia s Financial Crisis As Korean, Japanese and Taiwanese companies increased their direct investment in Southeast Asian nations since the Plaza Accord in 1985, major Southeast Asian nations changed their growth strategy from the import-substitution industrialization to export-led industrialization and achieved rapid economic growth. In the mid and late 1990s, however, China s breakneck economic growth and uncontrolled financial opening resulted in Southeast Asia s currency crisis. Overseas Chinese companies excessive investment through leverage also contributed to Southeast Asia s currency crisis. Certainly, overseas Chinese companies, which used to play the role of agents for Japanese and Western companies attempting to advance into China, recklessly increased their investment into materials and intermediate goods industries during the era of rapid economic growth. Moreover, they aggressively advanced into the petrochemical and steel industries, in which competitiveness could be acquired through economies of scale and facility expansion, and fell into excessive debts, unlike their advanced multinationals tapping into technology-intensive industries such as electronics and car making. Worse, lots of Southeast Asia-based overseas Chinese companies, which had long been supported by cozy relations with political powers, failed to secure global competitiveness since they had run their businesses in an inefficient manner. After all, the Asian currency crisis dealt a serious blow to overseas Chinese capital in Southeast Asia. It caused the stock market crash in the region and a sharp depreciation in exchange rates, thus significantly reducing the asset value of Southeast Asia-based overseas Chinese companies and putting much heavier burden on them. In the wake of the currency crisis, Southeast Asia-based overseas Chinese companies faced a keen need of corporate restructuring and debt adjustment to survive. Their business scale fell significantly as they sold shares and withdrew businesses to settle excessive debts. Some overseas Chinese companies based in Indonesia and Thailand even disappeared from the business scene. On the other hand, others which successfully survived the crisis struggled to leave declining industries, advance into growth industries and introduce new business structure putting a higher priority on profitability over market control. 5

6 Emergence of Southeast Asia s Resources Companies in the 2000s With the global resources market booming in the 2000s, overseas Chinese companies based in Indonesia and Malaysia have strongly grown by expanding their investment in resources such as palm oil. For example, sales revenue of SMART, the agricultural subsidiary of Indonesia s conglomerate Sinar Mas Group, and Indonesia s palm oil giant GAR more than quadrupled and tripled, respectively, from 2006 to Wilmar International, which emerged after the late 1990s when most overseas Chinese companies were stagnant and struggled to restructure, showed the most notable performance during the 2000s. Despite a mere 21-year-long history, it boasts the largest amount of sales revenue, net profit and market capitalization in Southeast Asia. Its sales revenue and profit quadrupled and sextupled, respectively, from 2006 to Accordingly, Wilmar International, which had ranked 545 th on the Forbes Global 2000 List in 2008, successfully made it to the 230 th place in Wilmar International s success has been supported by overseas Chinese strong network and its rich experience in agricultural processing business. In 1991, Chinese Malaysian tycoon Robert Kuok s nephew Khoon Hong Kuok and Chinese Indonesian businessman Martua Sitorus established agricultural product distributor Wilmar Holdings. 2 In the mid 2000s, Wilmar Holdings pursued M&As with Robert Kuok Group s subsidiaries which had rich experience in the agricultural business, to establish the world s largest cooking oil producer Wilmar International. Currently, Robert Kuok Group is the largest shareholder of Wilmar International, the world s biggest producer of palm oil and lauric oil. 2 The name Wilmar is a compound of Kuok Khoon Hong s English nickname William and his partner Martua. 6

7 Figure 2. Wilmar International s M&As in Advance into China Business History China lured foreign direct investment (FDI) in the late 1970s when it introduced the opening policy. Unlike Western capital which hesitated to take risk, Southeast Asia-based overseas Chinese companies made a good use of their business experience in Asia to advance into Hong Kong. As Southeast Asian nations and China began strengthening their economic ties in earnest, overseas Chinese companies based in Southeast Asia aggressively made their way into China. Overseas Chinese businessmen donated schools and hospitals to their homeland so as to curry favor with the Chinese authority and invested a large amount of money so as to exploit China s enormous growth potential. Guanxi (referring to networks or connections) gave a significant competitive advantage to overseas Chinese businessmen attempting to advance into China. In the early phase of their investment, Southeast Asia-based overseas Chinese companies concentrated their investment on China s coastal areas such as Guangdong Province and Fujian Province. According to an analysis, they preferred China s coastal areas since the Chinese government established special economic zones there and the the companies were mostly founded in Guangdong Province and Fujian Province. For instance, Thailand s CP 7

8 Group made its first investment in Shenzhen, Guangdong Province, and Bangkok Bank established its first Chinese branch in Shantou, Guangdong Province. For its part, Hong Kong played a role as an investment gateway into China for Southeast Asia-based overseas Chinese companies. Since Hong Kong, as a financial hub, helped overseas Chinese companies to raise funds, a total of 58 Southeast Asia-based overseas Chinese companies were listed on Hong Kong s stock market back in Business Activities in China 1 Singapore-based Overseas Chinese Companies Singapore has been alert to communism since it is a small-scale city state. But it established diplomatic relations with China in 1990 since it could not give up business opportunities in China. Since then, the nation s former Prime Minister Lee Kuan Yew encouraged Singaporean companies to advance into China. But, Singapore s major companies were mostly government-linked logistics companies and China did not open its financial sector in its early phase of market opening. That means Singapore-based overseas Chinese capital rarely had opportunities to advance into China. Accordingly, Singapore-based overseas Chinese companies initially advanced into Hong Kong and later began making their way into mainland China in the 1990s. Currently, Singapore-based overseas Chinese companies have strengthened their presence in China s finance, manufacturing and food industries. Overseas Chinese Banking Corporation (OCBC), one of the leading Singaporean bank established by overseas Chinese capital, has advanced into insurance, real estate and beer brewing businesses in China. In the insurance industry, OCBC cooperated with China s Chongqing Land Property to establish The Great Eastern Life China whose sales revenue grew 60% in Fraser Centerpoint, which is the real estate development subsidiary of OCBC and one of Singapore s three largest construction companies, has aggressively participated in China s real estate development projects since OCBC s beer company Asia Pacific Beer has collaborated with Dutch beer brewing company Heineken to run several breweries in China. Singapore s diversified conglomerate Hong Leong Group has also aggressively advanced into China. Hong Leong Group has run businesses in several industries including the hotel and real estate industries and Hong Leong Asia has pursued manufacturing businesses. In terms of sales revenue, Hong Leong Asia is China s largest producer of diesel engines at 550,000 units and second largest producer of electronics appliances, providing them to all of its overseas branches. It is the largest medium-scale internal combustion engine producer in China and has second largest facilities to manufacture home appliance in China. Recently, Wilmar International s sales revenue has also rapidly grown in China. Certainly, China has already become its primary market which accounts for 52.5% of its sales revenue 8

9 and 37.2% of assets. As of 2011, it had a total of 123 factories in China including 52 palm oil refineries and 40 oil seed refineries. Also, Wilmar International is one of China s largest companies milling rice and flour and its sales volume more than doubled in the milling business in It has accelerated its effort to advance into China via FDI. As a result, the number of its subsidiaries and affiliated companies in China (except for Hong Kong) grew from 90 in 2007 to 114 in It also plans to go public in China. <Sales Revenue > (US$ billion) 35 Rest 30 China Figure 3. Wilmar International s Sales Revenue and Assets <Assets> (US$ billion) Rest China Source: Wilmar International (Each Year). Annual Report. 2 Malaysia-based Overseas Chinese Companies The Malaysian government introduced the Bumiputera policy so as to narrow the economic gap among tribes in Before the policy was adopted, non-malays had strong economic power with foreign capital and overseas Chinese capital accounting for 60.7% and 22.5%, respectively in Accordingly, Malaysia s political leaders strived to take over foreign capital and prevent overseas Chinese capital from growing so as to strengthen economic power of Malays. Malaysia-based overseas Chinese companies, hit hardest by the policy, began expanding their business overseas. Among Malaysia-based overseas Chinese companies, Robert Kuok Group has made the biggest investment into China. Malaysia s holding company Kuok Brothers, Singapore s Kuok Singapore and Hong Kong s holding company Kerry Holdings have played a pivotal role in propping up the intricate corporate governance of Robert Kuok Group. The group began running its major business in Hong Kong in the 1970s and expanded its Chinese business in the wake of China s market opening. In the 1980s, it began advancing into China s hotel industry and established China s landmark buildings. It ran 26 Shangri-La hotels in China as of November 2011 and currently plans to additionally open 23 hotels by It has also strengthened its efforts to advance into China s agricultural processing industry by investing into its Chinese subsidiaries. 9

10 Malaysia s Hong Leong Group has also aggressively expanded its business in China. It made its first foray in China in 1994 so as to manufacture air-conditioning and refrigerating machinery. Its subsidiary OYL Industries was the world s largest air conditioner manufacturer and had established three factories in Wuhan, Shenzhen and Suzhou by But Hong Leong Group sold OYL Industries to Japan s Daikan and has turned its attention to real estate development in China since then. Its subsidiary GuocoLand Limited, a latecomer in China s real estate market, has mainly pursued M&As to acquire properties and advanced into the nation s distribution industry by building distribution facilities on its land. For example, GuocoLand Limited opened a shopping mall of 600,000 square meters at the Guoson Center in Beijing in May Indonesia-based Overseas Chinese Companies Indonesia-based overseas Chinese companies strengthened their presence under the leadership of Indonesia s former President Suharto ( ). They were provided with diverse business opportunities by Suharto who granted preferential treatment to overseas Chinese companies running business in government-controlled monopolistic and oligopolistic sectors for Indonesia s economic growth. But Indonesia-based overseas Chinese companies began establishing business bases and got some of their subsidiaries listed in Hong Kong and Singapore in the 1970s in an effort to prepare for the post-suharto era. Since then, Indonesiabased overseas Chinese companies, which initially advanced into Hong Kong, began investing in China, especially in Fujian Province from which founders of the companies came. Sinar Mas is the most representative Indonesia-based overseas Chinese company running business in China. Sinar Mas founder Oei Ek Tjhong, who came from China s Fujian Province, has aggressively advanced into China, along with his son Oei Hong Leong. For his part, Oei Hong Leong established China Strategic Holdings in Hong Kong in the 1990s and took over stakes of around 200 state-owned companies in China when China s local governments privatized companies. He could expand businesses since he had successfully established Guanxi with China s communist leaders while studying in China in the early 1960s. Keenly aware of China s growth potential early on, Sinar Mas has aggressively invested in China s paper, pulp and agricultural processing industries. Accordingly, its paper and pulp subsidiary APP and agricultural processing subsidiary GAR have achieved robust growth in China. 4 Thailand-based Overseas Chinese Companies Among Thailand-based overseas Chinese companies, CP Group was one of the most aggressive companies in making effort to advance into China. CP Group, one of Thailand s largest private companies, began as an agricultural processing company and has diversified its businesses. It was the first foreign company which advanced into China and emerged as the largest foreign investor in China in the mid 1990s. It began making investment into the 10

11 agricultural processing business in Shenzhen in 1979 and expanded its business into animal feed, motorcycle and construction industries in the mid 1990s. CP Group, running its Chinese business under the name of Chia Tai Group, had successfully established its branches in 28 provinces out of China s 30 provinces around that time. In the late 1990s, however, CP Group began selling its subsidiaries since its business in China was hit by the currency crisis. For instance, it sold Shanghai-based motorcycle company Shanghai Ek Chor Motorcycles, which was listed on the New York Stock Exchange, to its joint venture partner SAIC Motor Corporation. Since its restructuring, CP Group has expanded its investment into China s distribution industry so as to target the nation s domestic market. Its subsidiary Louts, which opened its first store in 1997, has seen the number of stores soar to 46 in Recently, Louts sales revenue has also rapidly grown. Despite difficulties in the late 1990s, CP Group still remains as one of the most significant investors in China. As of 2010, the amount of its accumulated investment into China reached US$ 6 billion and it ran businesses in all of China s autonomous regions and provinces excluding Qinghai Province. Currently, it has 213 subsidiaries and 80,000 employees and its sales revenue reaches 50 billion yuan in China. 4. Suggestions and Countermeasures Assessments Southeast Asia-based overseas Chinese companies have mainly advanced into China s resource-based manufacturing and service industries. In particular, they have rapidly grown in processed agricultural goods related with palm oil due to successful investment and booming resources market. Southeast Asia-based overseas Chinese companies could have successfully strengthened their presence in the sector because the demand for resources has soared due to China s rapid growth and they have already established their own systems to secure resources and process agricultural goods by advancing into China ahead of their competitors. Also, they have taken advantage of their experience and business know-how accumulated in Southeast Asia to strengthen their presence in China s distribution, hotel and real estate development industries. On the other hand, they are not competitive in the electronics and machinery manufacturing industries due to a lack of independent technologies and brands. During the early phase of their investment in China, Southeast Asia-based overseas Chinese companies belonging to the general manufacturing sector advanced into China under the brands of Japanese companies. But, China s opening policy has deprived them of the role of brokers. In the past, Guanxi obviously gave Southeast Asia-based overseas Chinese companies a critical competitive advantage. At the first glance, it seems that the influence of Guanxi has 11

12 currently weakened. Nevertheless, it still plays a pivotal role in running businesses in China. Certainly, China s market opening policy has attracted lots of multinational companies, whose strong presence has discouraged China s local governments from giving business favors to inefficient overseas Chinese companies. But Guanxi still provides Southeast Asiabased overseas Chinese companies, which share language, ancestors and customs with their counterparts in China, with intangible competitive advantage. Moreover, China is highly likely to strengthen its friendly relations with Southeast Asian nations and give special treatment to overseas Chinese in competition against the US. Table 2. Overseas Chinese Companies Presence in China by Industry Sector Type of Business Leading Companies Note Resource-based manufacturing General manufacturing Distribution Hotel Construction Processed agricultural goods (animal feed, cooking oil), paper CP Group, APB, Sinar Successful investment Mas, Wilmar International Electronics, machinery Uncertain investment Singapore s Hong Leong, performance from a Lion, Malaysia s Hong Leong long-term perspective Department stores, CP Group, Lion, Malaysia s shopping centers Hong Leong Currently successful Hotels Robert Kuok, Singapore s Hong Leong Successful Apartment construction, F&D, Singapore s Currently successful but regional development, Yanlord, Singapore s Hong uncertain from long-term business area development Leong perspective Currently successful but Energy Power plants Banpu, Genting, Saha Union uncertain from a longterm perspective Implications for Korean Companies Southeast Asia-based overseas Chinese companies running business in China s finance and capital-intensive manufacturing industries have been hit hard by the Asian currency crisis. On the other hand, agricultural processing companies have grown rapidly as the global resources market has boomed due to continuous growth of emerging nations including China. Also, Southeast Asia-based overseas Chinese companies have recently faced limits to growth in traditional business sectors and accelerated their efforts to advance into new growth sectors such as media and IT service. Against this background, Korean companies need to cooperate with overseas Chinese companies in the distribution and finance sectors when they either secure raw materials or expand into Southeast Asia. Moreover, they may need to consider overseas Chinese 12

13 companies as their significant business partners when making their way into the Chinese market. Considering that Southeast Asia-based overseas Chinese companies have strong competitiveness in the distribution, tourism and hotel industries in China, Korean companies need to strengthen their cooperation with them over the long term. 13