CHAPTER 5
Understanding the Power Structure: Who’s Really in Charge?
Power tends to corrupt and absolute power corrupts absolutely.
Sir John Dalberg-Acton
Just like in other countries, in Asia a power structure exists within a country and it is up to you to understand how it functions. For instance, in China, you have state-owned enterprises; in Japan, there are the Keidanren, a Japanese business federation made up of companies, industrial associations, and regional economic organizations; India has the Benami, where old families, such as Tata, rule the roost. Needless to say, in all of these countries, there are dominating forces that have a stranglehold on the overall business community and an ability to keep their power. It’s very important to learn who these groups are, what their interests are, and how to work with them (or, if you cannot work with them, how to stay below their radar). When I think of these groups, I am often reminded of a favorite line from a movie that most people probably never saw.
In the movie The Great White Hype, Samuel L Jackson plays a boxing promoter who has a stranglehold on the boxing world and oversees all the corruption within it. Cheech Marin plays the boxing commissioner. Jackson is trying to get him to rank a particular white boxer in the top 10 despite the fact that he has never fought a professional fight. The conversation goes like this:
Jackson: “What will it take to get him ranked in the top 10...Money?” Marin: “No.” Jackson: “Sex?” Marin: “No.” Jackson: “Drugs?” Marin: “No.” Jackson: Pauses for a moment, and says, “Power?” Marin: “Yeah, power.” Jackson: “You’re fired.” Marin: “Okay, money, sex, and drugs.”
My point is not to cite lines from a movie many people never saw, but, instead, to highlight the analogous role played by these groups in foreign countries. Just as Jackson has the power to fire Marin, they have the power and the relationships, and they have worked through them for years and years, to do as they please.
As a newcomer, you have to navigate this arena and ask yourself what you want. Do you want sales, sales and profits, long-term growth? You will not be able to get them all today. What do you want today and what do you want tomorrow? Working with the large groups that rule the country’s economy, you’ll be able to ask for it piece by piece, and not have it all ripped away from you with just two words, as Cheech Marin’s character did.
All of the power groups, those mentioned above and others, have some common characteristics. They are large in both revenues and power, they are the government or have strong government ties, they easily navigate the currents in their own countries, and they have growing power outside their own countries.
Their composition is always changing and power is constantly shifting. They still have massive power, but, as Bob Dylan wrote, “the times, they are a changin’.” To see where they are now and where they may be going, we’ll examine each of them.
Chinese State-Owned Enterprises (SOEs)
There are roughly 200 SOEs in China. At this point, they represent some of the largest businesses in the country and thus the world. These businesses have traditionally been owned and operated 100 percent by the Chinese government, and reported to it through the Ministry of Commerce (MOFCOM). Many of these companies operate in industries that have traditionally been blocked from outside interest, giving them a near monopoly in their sectors in China. Most of these companies were established within the last 50 years, and their focus was on keeping both jobs and revenues in China. Occasionally they were formed in an effort to create consumer trust. A great example is banking, which both people and businesses have not always trusted. Historically, banking, particularly in rural areas, was done through a “dark” market operated by supposedly trusted individuals in each community. State-owned banks gave people a reason to believe the government would stand behind their deposits.
Recently, the Chinese SOEs are starting to be broken up and turned into private companies.1 The Chinese government is now saying “Enough” to these companies, which have dominated the Chinese landscape for years, operating at times without the requirement to make a profit. Through a variety of means, these companies are transitioning, sometimes as a joint venture with a private equity fund, sometimes filing an initial public offering and garnering public interest. Regardless of method, they are moving away from being wholly owned by the Chinese government. With the advent of new private companies, a major reason for this shift in policy has been the SOEs’ lack of performance. This does not mean that all SOEs are going away; in fact, even those that are becoming privatized will likely (at least initially) still be owned in part by the government.
Japan’s Keidanren
“Keidanren” roughly translated means “Japan Business Federation,” and has been in existence since 1946. Relatively speaking, this is the oldest organization of the three we are reviewing, but considering the long history of these countries, it is still relatively new. The Keidanren is made up of 1,329 representative companies, 109 nationwide industrial associations, and 47 regional economic organizations.2 The purpose of the Keidanren is to organize the country’s business, maximize the growth of industries, and make sure that Japan competes on a global scale. The leaders of this organization come from some of the most well-known Japanese companies in the world. The Keidanren also makes sure that there is a consensus in the business community on certain domestic and international issues. It’s with all of this in mind that one finds the true power of the Keidanren, as it functions as guardian of the Japanese economy.
I recently met with the Japanese Keidanren and some of its most important directors, and found, as one might expect, they are a very formal organization—everything comes from a script and rules are followed, but they are very focused on driving growth and open to improving the Japanese economy, and for this reason they will listen when the right people speak and work to advance the Japanese economy.
India’s Benami3
We have seen significant changes in the power structure in India over the last 25 years and it’s important to understand this history when trying to understand its economy. Prior to 1991, everything was licensed; the system was 100 percent patronage based, and only a few families made it big, similar to the Russian oligarchs and the Soviet system. At that time, state enterprises were in every business sector and they thrived, not by making profits, but with sales.
After 1991, there was a systemic change and the government not only removed most of the license system, but they also attempted to get out of most businesses. Families still held their power; but politicians effectively took large parts of the economy for themselves and put someone in charge of a business so they could siphon the profits off for themselves (this was called Benami). Benami is defined as someone, or some entity, that acts on behalf of a powerful patron, the ultimate beneficiary of the relationship being the patron. Every politician’s family members owned factories, businesses, and corporations that secured government contracts and projects, and were given advance knowledge of impending policy changes.
Today things have changed somewhat, but not as much as in Japan or China. Families still make up the elite and old families such as Tata, Birla, Ambani, Bajaj, and Godrej are still quite powerful. Many of these still have family members who are politicians, that is, at least one member is a politician, even if the rest are businesspeople.
But now new families are rising up to the elite, families such as Adani, Maran, Reddy, Mittal, and Jindal, most of which are not Benami but rather beneficiaries of the pre-1991 license raj (or governmental rules). Even without the Benami in your family, you still need the government to get things done and these families also have ties to every political party. Thus, as one political party rises to power, their families rise to power in business, and the other families go into hibernation, waiting until their politicians return to power. Corruption in India still runs rampant and ill-gotten wealth is taken out of India by overinvoicing imports. It’s then routed back into India by foreign direct investment taking advantage of tax havens.
SOEs, Keidanren, and Benami are three examples of how some of the largest economies in Asia operate; similar systems exist in almost every country, if not every country, in Asia. Looking at them, you can see that there’s great benefit to working with, instead of against, these organizations, especially as you try to grow your business in one of these countries.
At the same time, it’s also helpful to understand that there have been changes over the years and, as you view each of these societies, it’s important to recognize the direction in which they are moving. If the direction of the organization is plotted, hopefully your company can profit from it. When talking about direction, you might examine why the Chinese SOEs are being turned into privately owned businesses. On the surface, there are obvious reasons like lack of profitability and a shift of governmental priorities, but dig deeper and you find there are also issues with corruption that is being rooted out of the government. If the Chinese government wanted to eliminate rampant corruption within an organization that they owned, they could either arrest everyone or simply divest the government of the business and make it someone else’s problem. They seem to have chosen the latter road.
So while it’s extremely important to recognize the powers that be, their direction, and their interests, it’s also important to know how to work around them. This is not to say that you should completely ignore them; however, if you’re operating in a country where the institutions of power are corrupt, keeping up ties and perhaps sales while operating without them becoming a large part of your business is of utmost importance.
Five Common Mistakes Businesses Make When Confronted with the Power Structure of a Southeast Asian Country
Whether you are working with the SOEs of China, the Keidanren of Japan, the Benami of India, or the “power” in any other Asian country, it’s important to understand the power structure of that country to avoid mistakes that can lead to failure.
Most of us in the West can easily cite differences in how business is done between the United States and England, but the differences among the countries of Asia are significant. There have been books written about the power elites of Asian countries, just as there have been books about the historically powerful families in the United States and England. If working with the government or these families is imperative to your business success, as it is to any business that wants to grow, it’s essential that you make sure you understand how the power is distributed and who you need to work with in that country or countries to gain power and have your voice heard.
The other important thing to remember if you want to be successful is to pay attention to how the power changes and what creates these changes. Is it only during changes of leadership in the country that power changes? Perhaps even this does not change the real “powers” that you are beholden to. The change doesn’t have to be extremely drastic for there to be opportunities in Asian markets. Changes in the power structure occur throughout Asian countries; for example, when looking at India, voting changes opportunities; when looking at China, opportunities become abundant every time there is a new five-year plan installed. Look for key determinants that trigger change and use them to anticipate and exploit market change. Sometimes country operations will adapt to these power changes, such as the five-year plans in China, and sometimes you might find exploitable factors that are not being focused on in the country. Both can be very profitable, but the latter may offer the most opportunity with the least competition.
1. Believing They Do Not Need Help Setting Up a Business in the Country
Building a relationship in Southeast Asia and penetrating into a country’s elite requires an introduction. Using your state and federal government relationships is the best way to make your way into these foreign federations. Find ways to attend trade delegations with state and federal organizations that often include meetings with SOEs in China and the Keidanren of Japan; make sure you maximize your opportunities during these times. It’s not easy, especially in Japan where you will be in very formal meetings.
For the most part, the majority of Southeast Asian countries maintain very formal meeting practices. Find ways to make those meetings stick; for example, be the only American at the table who shares a business card with the Chinese (Japanese, etc.) translation on the back—make sure the translation is correct; take the time to learn their traditions, to learn a few simple phrases like “hello” or “thank you,” or a traditional toast. These small gestures show that you care, that you want to do business with them, and that you are coming for the long term. Instead of trying to avoid the powers of the country, make a point of getting to know them. As you get to know them, good employees may come to work with you who have useful contacts, and there may be opportunities for you to team up as businesses. Contrariwise, you never know if they will remain the powers they are (see the discussion above about the privatization of China’s SOEs).
Perhaps a good way to think about this is to ask yourself, would you avoid the Fortune 100 in the United States? More than likely, your answer is, “No, I would seek them out.” Why would this change in a foreign market just because of their governmental relationships? Their relationships with other local businesses? The operations may be different, motives may be changing, but your goal is to make sure that you are seeking opportunities for growth.
2. Believing the Country Is Big Enough to Ignore the Nation’s Power Structure
Make no mistake about it: No matter how big the country is, you want to pursue all of it. Maybe not on day one, maybe not on day two, but you need to find your opportunities throughout the whole country and that undoubtedly means doing business with whoever holds the power in that country. Too often, companies think the market is big enough for everyone; however, when it comes to Southeast Asia, it’s critical that you understand that only the strong survive. To make it in the market, you need to be able to maximize your business.
The Chinese Railroad System is a great example of the importance of maintaining relationships and the ability to grow one’s business. For years, this system was extremely corrupt. Then, in 2015, one of the biggest corruption cases in China’s history was exposed, and Liu Zhijun, the former minister of the railways, was sentenced to death for bribery and abuse of power.4 As a business leader in China who worked with the railroads and transportation industries, I saw a new lifeline for business open up, and being a first mover was imperative.
Businesses that were previously nearly banished from these sectors were now able to take on new business opportunities. Prior to the shift in China, we had continued to pursue opportunities, albeit in smaller areas or smaller projects. This gave our clients needed exposure, relationships with influential people, and early growth. When the power shifted, it opened up floodgates of opportunities that were not there before.
3. Not Having the Right “Power” Relationships
This one is harder to gauge because you could be working with someone at an SOE or in the Keidanren, and it might not be the right relationship. You have to figure out how much true power the person has in the organization because if that person does not have power, they aren’t going to admit it. They will try to use their relationship with you to gain more power inside their own organization; you may just be along for the ride.
Situations like this have been seen time and again in China: A U.S. businessman wanders into the airport in full-on celebratory mode. He has just secured a major contract and wants to make sure everyone knows. After working for six months with the vice president, the contract is signed and the businessman will return to the United States to make sure everyone knows it was their hard work and persistence that got this done. What the person does not realize is that, typically, in China, only one person can sign and chop. It’s required for a contract to be legally binding contract, and 99.9% of the time, the person is not a vice president. At best, in China, contracts are merely guidelines, but if the right person has not signed and chopped them, they’re worth less than the paper they are printed on. It is essential when doing business in China that you make sure you are working with the right person. Having the right relationships will allow you to ask around to ensure you are in talks with the right person.
In addition, the right relationships give you access to the right people. Having strong relationships to build information around is a key piece to success in Asian markets.
4. Believing the Power Structure Doesn’t Play in Their Market
It’s foolish to think that you’re in a highly profitable arena and that the country’s elite businesses haven’t taken notice. It’s possible that your technology is so new and great that they’re not in your business right now, but how long do you think that will last? Companies with money and power tend not to cede ground forever. In sports, we often say a great defense is a good offense. In simple terms, if you are out pushing forward at all times, do you think they can catch up with you? Can you get out in front of the elite organizations and build your relationship with them so that they decide not to invade your space and, perhaps, instead become dependent upon you? This happens more often than people realize.
If it’s easier and cheaper for these elite-owned large companies to purchase from you than to develop the technology themselves, they may continue to purchase it from you. Usually, this will not last forever, but options like an Original Equipment Manufacturer (OEM)5 or a joint venture may be an alternative for the future. Your initial strategy does not have to be your strategy forever; you should be constantly reviewing and updating it, looking for ways to better develop the market, keeping all your options in mind when you are doing these reviews.
Their dependence on you can also become a great exit strategy. Businesses that bring a new technology to the market and build their relationships with the local elite, often find them making large offers for their businesses. On the other hand, if this does become an exit strategy, one thing to keep in mind is that if you have too many deep relationships with partners, especially joint ventures, each of them may attempt to block to your exit.
5. Believing One Country’s Government Works the Same as the Other
Even in Asia, each country works very differently. Many countries in Asia cannot even claim that their government functions in the same basic ways it did 10 or 20 years ago. Look at how Hong Kong has evolved since they moved from British to Chinese rule. Consider the changes we discussed in India’s power structure and how they have changed. When looking at Southeast Asian governments and how they work with businesses, you’ll find literally hundreds of major changes throughout Asia made during the last 20 years.
On the other hand, it’s important not to group Asia into one large cluster, just as you wouldn’t group North America into one large group. For example, business with the government is done very differently in Canada, the United States, and Mexico, let alone smaller countries in North America.
What then can you do to understand the differences between countries, especially subtle differences, like the difference in laws and government intervention between Hong Kong and Taiwan, both semi-Chinese territories? Expatriate support and your own research cannot speak accurately about how the government works in your sector. Don’t despair. You can get a better understanding from your in-country support, who will have been working in your sector for years.
Keep an eye on how to work within the framework of these countries. At first glance, one might assume that a U.S. business cannot work in India because corruption is so rampant. But we are all aware of numerous U.S. firms actively working, and apparently succeeding, in India. There are methods, tried and true, to success in these countries; modeling after someone who did it before you is a good way to get your foot in the market. Finding out how to do it better than the people who went before you is the key to being great in the market. This can be done in a few ways, the easiest of which is modeling several successful businesses and taking from them their most successful practices. Another way to protect and grow your business is to take advantage of the actions of these large governments or powerful groups, either trying to move quickly where they are slow, or better yet, having them push you into markets they cannot or will not advance into.
Notes
- 1 http://www.forbes.com/sites/kenrapoza/2015/12/30/china-starts-breaking-upits-state-owned-enterprises/#61a2d23d56e5
- 2 http://www.keidanren.or.jp/en/profile/pro001.html
- 3 All information directly from Dr. Ashley Miholi
- 4 http://www.theguardian.com/world/2013/jul/08/liu-zhijun-sentenced-death-corruption
- 5 An OEM is a company that has a special relationship with computer and IT producers to resell the producers’ product under their own name and branding.