CHAPTER TWENTY

The New Superpower: The Overseas Chinese

NEWSPAPERS AND MAGAZINES IN the United States, in Europe, and in Japan are full of stories about the new billionaires: the handful of overseas Chinese who have built huge multinationals, headquartered mostly in Hong Kong, Taipei, or Singapore, but also in Thailand, Malaysia, and Indonesia. Actually, these “tycoons,” though highly visible and individually superrich, are only the small tip of an enormous iceberg. Largely invisible—and carefully shunning publicity—are a great many more multinationals owned by overseas Chinese. Most are mid-size; typically their sales worldwide run to several hundred million dollars. Collectively, however, they are far larger than all the tycoons together.

One example is the $400 million group built by an ethnic Chinese whose grandfather had come to the Philippines as a laborer during World War I. The group comprises sixteen small manufacturing plants around the world. Each plant turns out only a few highly engineered products, usually for only one customer or two. Four plants, for instance—two in the United States, one each in Japan and the United Kingdom—make small but critical parts for work stations. Three plants—one each in Indonesia, the United States, and the United Kingdom—manufacture precision parts for the world’s two leading sewing-machine makers, America’s Singer and Germany’s Pfaff, now both owned by another overseas Chinese group. And so on. Every plant is separately incorporated as a legally independent company with its ownership registered in the name of its local manager. Each manager is a citizen of his country, though all are of Chinese descent. But these ostensibly independent managers are kept on a very tight leash. Actual ownership is 100 percent in the hands of the founder in Manila. And each plant reports in great detail and at least twice a week to the group’s chief operating officer, who just moved himself and the group’s top staff from Manila to Honolulu.

How many such groups there are, no one knows. They are privately owned, publish no figures or annual reports, and are secretive to a fault. In Taiwan, where many of them have their lawyers, the best estimate is that there are at least one thousand. How big the overseas Chinese economy is, is not known either. An oftenheard guess—over $2 trillion in investments outside their own home territories—is wildly improbable. It would make the overseas Chinese foreign investments larger than those of the United States! But even $500 billion would mean foreign investments by the overseas Chinese roughly equal to those of the Japanese. The overseas Chinese are certainly the largest investors in mainland China. They have put in more money than either the Americans or the Japanese—more even than the Chinese government has invested this last decade in its own economy. They are thus the driving force behind the explosive economic growth of coastal China. And, with the sole exception of South Korea (which, by and large, is closed to them), they also lead the economies of the other fast-growing countries of Southeast Asia: not only the three islands with a solidly Chinese population—that is, Hong Kong, Taiwan, and Singapore—but also Malaysia (where ethnic Chinese are 30 percent of the population), Thailand (10 percent ethnic Chinese), Indonesia (2 percent ethnic Chinese), and the Philippines (1 percent ethnic Chinese). And they are branching out to wherever there are even small populations of ethnic Chinese, to the United States and Canada, to Australia and to Europe. The overseas Chinese have become the new economic superpower.

Outwardly, the new multinational groups of the overseas Chinese look exactly like other businesses. They are, for instance, incorporated as companies, with a board and with corporate officers. But they function in a drastically different way from anything else in the world economy. The best way to describe them is perhaps as a clan doing business together. Each plant manager in the Manila group is related to the founder—and to each other—by blood or marriage, if only distantly. “We wouldn’t dream of going into a new business,” said the COO to me, “if we did not have a relative available to run it.” This COO is himself not an ethnic Chinese but a Dutchman—he used to run one of Phillips’s big Asian plants. But he is married to the founder’s niece. And, as he told me, when he joined the group, the founder said to him, “I don’t care how many concubines or mistresses you have. But on the day on which my niece and you separate or file for divorce, you can look for another job.” The word of the founder–CEO is law. But his authority far more resembles that of a Confucian head of the house (or that of a Scottish highland chieftain of yore) than that of the head of a business. He is expected to base his decisions on the best interests of the clan and to manage so as to guarantee the clan’s survival and prosperity. What holds together the multinationals of the overseas Chinese is neither ownership nor legal contract. It is mutual trust and the mutual obligations inherent in clan membership.

This structure has deep roots in Chinese culture and history, reaching back two millennia. It was the only way merchants could survive in a country that knew no civil law (it still doesn’t) and in which there was (and still is) no appeal against a local mandarin, who could be arbitrary, was often corrupt, and was usually contemptuous of “trade.” Survival thus depended on the ability to shift one’s money and one’s business overnight to a distant cousin, without contract or anything in writing. The one sanction in this system—and an effective one—is then disgrace and ostracism by the entire business community for anyone who betrays this trust.

There is tremendous strength to this tradition. It explains in large measure why the groups of the overseas Chinese could grow so fast. If there is a qualified clan member available in a certain country or a certain industry, the group can often get him to join by appealing to his clan spirit. Thus, unlike the Japanese company, the group does not have to wait until it has grown its own managers from scratch in order to expand. And unlike the typical Western company, there is little internal resistance against bringing into a senior position someone from the outside; he is, after all, “family.” “Ten of our sixteen plant managers,” the COO of the Manila group told me, “worked for Western companies but were willing to join the clan business.” And since it is accepted that the group has to be run to perpetuate the clan and its prosperity, the lazy or incompetent family member can usually be kept out of a top job and even out of the business altogether. The founder and CEO of the Manila-based group wanted his two sons to succeed him. But the clan members running the plants made it clear that they would not accept the sons. They persuaded the founder instead to make their choice, the Dutch COO, the heir-designate. “My money,” I was told in Malaysia by the head of another overseas Chinese group, “I can leave to whomever I pick; my power has to be left to whomever my associates trust.” The Japanese, it has often been said, owe their success to their ability to run the modern corporation as a family. The overseas Chinese owe their success to their ability to run their family as a modern corporation.

But with all its strengths, the overseas-Chinese multinational will have to change quite a bit in the next decade; indeed, wherever I went on a recent Southeast Asian trip, the discussion centered on the need for drastic changes. For one, the founders who still run the groups are, in the majority of cases, getting old. The head of the Manila-based group, for instance, is seventy-three. The successors to the founders have grown up in a very different world; many are Western-educated, for example. “Our next CEO,” the number two man in a Taiwan-based (and fast-growing) multinational told me, “cannot be a Confucian ‘head of house’ or ‘elder brother’; he’ll have to be a team builder and a team leader—that’s what we learned as graduate students in the U.S.” But also for the overseas-Chinese multinational to grow, and especially for it to grow in mainland China, it will have to go into joint ventures of all kinds with foreigners—Westerners and Japanese—to whom the Chinese tradition is totally alien. Only foreigners—Americans, Japanese, Europeans—have the technology to build, for instance, the locomotives that China desperately needs. But Chinese-speaking businesses, that is, overseas Chinese, will be needed to maintain and service those locomotives. And joint ventures, as the younger overseas Chinese fully realize, mean written business plans and clear contractual arrangements—things the Chinese tradition abhors. It also means something even more abhorrent: sharing information. But above all, the overseas-Chinese multinational cannot grow unless it learns to bring in “strangers,” that is, Chinese from outside the clan. If you need a metallurgist or a computer specialist, what matters is the person’s competence, not his membership in the clan. And that person will expect to be treated as an equal; if he’s not treated so, he will leave. Wherever I went in Southeast Asia, how to treat the stranger was the first topic raised and the one that provoked the most-heated controversy. “To maintain clan cohesion we cannot possibly treat as an equal a Chinese who is not a clan member,” everybody said. “Yet to grow the business, we have to.”

And then there is, of course, the grave uncertainty of mainland China’s future. Only a few, largely Hong Kong–based groups have all their eggs in the Chinese basket. There are even a few groups—in Singapore mostly, but also in Malaysia and Indonesia—that have kept out of mainland China altogether. But all overseas Chinese know that their future heavily depends on how China does; and in countries in which they are a (greatly envied) minority, namely, in Thailand, Malaysia, Indonesia, and the Philippines, the Chinese also know that even their economic survival may depend on China’s health and strength. And I did not meet a single overseas Chinese who expected anything but a decade of surprises and turbulence for mainland China.

Yet every single one of the younger overseas Chinese—the people who are now taking over the day-to-day management of their multinationals—was confident that his group could successfully solve its problems and yet maintain its basic Chinese character. “They will change details, but they won’t change the fundamentals any more than the Japanese changed theirs when they modernized,” said a Taipei lawyer who is the confidant of a large number of overseas-Chinese business leaders. “And it will work!”

Will The Secrets of Chinese Management be the title of the management best-seller of the year 2005?

1995