The corporate world is similar to that of a food chain, companies looking to expand and gain territory can choose to acquire weaker companies.
In turn the corporation expands, generating fast growth and becoming more powerful.
This process often leads to the creation of conglomerates, as well as the world’s biggest economies.
This food chain has created beasts in Asia. Whereas in the West, it has brought businesses to their knees.
Why does it differ so much?
The rise and fall of Western conglomerates
The rise of the West’s conglomerates began in the 1960s. Anti-trust laws were rife in the U.S at the time and stifling monopolies were widespread.
Ambitious businesses keen to expand were unable to grow in their own sector. Leading to the rise of the conglomerate model.
Firms began acquiring businesses in unfamiliar sectors, diversifying themselves and consequently avoiding prosecution.
Litton, Chapman & Scott, Merritt and Aeronca, all newly established conglomerates born in the U.S. saw their stocks skyrocketing.
American conglomerates were booming.
But what goes up must come down.
Stocks began to tumble with Litton’s stock falling a massive 93 percent!
The great idea of creating huge companies operating in unrelated sectors to loophole anti-trust laws was soon exposed.
The 1980s was the beginning of many Western Conglomerates cutting the amount of businesses under their administration, as the chart illustrates below.
Times have changed. Today, most Western conglomerates concentrate on their central business, leaving any diversification in the shadows.
However, in Asia, huge diversified conglomerates are widespread and contribute significantly to national GDP.
So, how can Asia pull it off?
Asia’s fertile conglomerate environment
Conglomerates in Asia often operate like established mafia members when doing business.
Politicians regularly appear on payroll, banks line their pockets, stock markets are readily available and public loyalty is widespread.
So why are they so favored?
Because the regions conglomerates were the key to leading Asia’s manufacturing reform.
They were the spearheads to unlocking world leading business hubs, taking their countries out of low-skilled, agricultural based economies.
Japan, Korea, Taiwan and China led the way in the movement. Emerging markets in Southeast Asia are now attempting to follow.
There are two main reasons for Asian conglomerates’ success rate
Firstly, renowned Chinese philosopher Confucius supports the hierarchical structure prevalent in Asian culture. Where centralized authority rules in Asia.
For example, at home, the father demands respect. In business the boss demands respect.
This is often described as a family business model.
And this model is the grandfather of many modern Asian conglomerates.
Secondly, conglomerates originating from Asia normally receive far more government support compared to their counterparts in the West.
Another factor is that Western conglomerates are often over-privatized and suffer from high levels of competition. Both of which inhibit conglomerate growth.
From ruins to robotics: how conglomerates built Northeast Asia
The prosperity of conglomerates across Asia is clear to see, however both previous and present operations differ vastly from Northeast Asia to Southeast Asia.
Northeast Asian conglomerate networks in South Korea are known as “chaebols’” and “keiretsu” in Japan.
Both Korea and Japan were ravaged by WWII and the Korean War. This left the countries and its economy in a state of devastation.
The strong governments coupled with the rise of the conglomerates contributed hugely to rescuing the economy and countries.
Hyundai, Samsung and LG are all prime examples of Korean conglomerates driving its economy forward.
A similar story applies to Japan’s notorious companies, including, Sanwa, Mitsubishi, Fuyo, Sumitomo, Mitsui and Mizhuho Financial Group who helped rejuvenate and transform Japan’s innovative economy.
The reward for helping to reshape and rebuild the economy came in the form of substantial government support both financially and legislatively.
Conglomerates’ relationships with governments and politics grew stronger over time.
The companies well connected with the political and banking elites far outperformed those who were not-so-well connected as illustrated below.
The same applies for Korea:
But its Southeast Asian counterparts are considered the Godfather
Following in the footsteps of its Northeast Asian brothers were the conglomerates of Southeast Asia. Somewhat surprisingly, they outperformed their big brothers in the north.
The dominance of conglomerates in Southeast Asia is even more prevalent than those in Northeast Asia.
The benefit of this prevalence can be seen below.
Analysis from both North and Southeast Asia showed that total shareholder returns (TSR) were 10 percent higher than returns seen in Northeast Asia.
And were 18 percent higher than those of other developed economies.
However, it’s often seen that higher stages of development negatively correlate with conglomerate performance, as demonstrated below.
So, why does this occur?
When GDP growth rates are high, pioneering and emerging markets have more space to grow, as can be seen below.
Conglomerates can quickly take hold of an entire sector, especially in emerging markets. Boosted by generous support from the government, both performance and profits come naturally.
When one foot is firmly in the door, they quickly diversify into new sectors and expand business.
Meaning the Southeast Asian conglomerates are broadly considered a great investment.
This explains why conglomerates are thriving in Asia and ignored in the West.
In an upcoming article, we’ll reveal who Asia’s corporate mob families are and where they come from.
