Killing it like a hooker in Hong Kong

On Family

I often harp on how often important or advantageous family connections are in Asia, and wonder why most Western analysts, financial or economic, miss the point. When I really want to understand a local economy in Asia, I try (very tough without a few years of experience in the market) to draw a rough family tree connecting the characters. Unless you understand how players interact, you will often end up puzzled by why certain things are happening. When you do have this understanding, then some of the bewildering news reports that make you scratch your head will then seem like mere levers in game of influencing the public opinion.

An Indian example

When I visited a couple of weeks ago, I heard an interesting story from a friend of mine. It was about an airline called Paramount Airways, a 4-5 year old airline with a premium domestic service. Paramount, unlike Kingfisher or Jet Airways, which had grown from existing businesses, was a startup from a guy who had no prior experience in any business at all, let alone the airline business. So how the hell did, Thiagarajar, the thirty-something entrepreneur who owns Paramount, set it up?

Well, my friend told me, to understand that you have to go back to Thiagarajar College, a small university set up Mr. Paramount’s grandad. India being India, the College had been a source of favors for almost fifty years. If you had a smart kid, but were too poor to afford to send him or her to college elsewhere, you would go plead with the Thiagarajar family, who although they were not wealthy by Western standards, were still the trustees of the College, and they would make arrangements for a scholarship of some sort.

That’s just one example of course. Over time those favors get traded, someone needs some help with government, and the family once helped a government officials’ daughter get into university, so they arrange a favor exchange.

After fifty or so years of that, when young Mr. Thiagarajar goes to the local bank to get a loan for Paramount, the bank officer literally rolls out the red carpet for him. The loan applicant is regaled with tales of how the bank officer used to know Mr. T’s father and even grandad. How he is so thankful that his eldest sister’s son was able to go to College and is doing well now. And how can he help Mr.T now?

That buildup of social capital over decades is what is irreplaceable, and unfakeable. It is what we as Western investors will never have in the local market.  Where a Western investor has to dot the i’s and cross the t’s and even that is no guarantee that you won’t get ass raped when push comes to shove, the local guys often get by with much less. People voluntarily watch out for them, government officials warn them of regulation changes ahead of time, tax officials warn them of audits before they are done. No money changes hands most of the time. It is pure influence.

Even when they make mistakes, they are forgiven. The amount of time before the mistake gets papered over depends on the severity and if it hit the papers in a big way, but in general, few people (who aren’t competing with them) want to see these guys fail, and lots of people are rooting for them.

You see, the guys like the Thiagarajar family, the Bakries in Indonesia, any number of Malaysian political families, Communist party elites etc, Lee Kuan Yew and family, have been building influence for decades.They were providing jobs and livelihoods when there were none, education when schools were few and out of reach of middle class poor. They were rationing these scarce commodities according to their whims before these markets opened up, and the people who received those favors, and their kids, and grandkids remember.These guys were helping people in the dark old days when Asia was a proper third world kind of place. So in the modern era, when they call their favors in, many are glad to do what they can.

This is what confounds most Westerners about Asia. Even when there is no explicit corruption, these guys are like Teflon. They never go bankrupt even if they make the worst business decisions. They never go to jail even when they commit egregious crimes, unless the public opinion demands a sacrificial goat.

I have seen more than one tycoon snatch his wealth back from the jaws of bankruptcy. His Western lenders get screwed, but local lenders are almost always made whole. If his bank goes bust because he’s been embezzling money, the government steps in and saves him. A couple of years in the tank, and he’s out smelling like roses again, running for office even.

November 3, 2009 Posted by | Uncategorized | , , , , | 5 Comments