The overseas phenomenon of Chinese management

Some of the world's wealthiest individuals are ethnic Chinese, but so few have become truly world class industrialists. Anthony Ko investigates the issue.

It is widely acknowledged that East Asia is an economic power house. It is equally acknowledged that the Chinese, wherever they are in the region, have played an important role in that reality. That there are, and will be, many successful Chinese businessmen in this world, is something worth betting on.

The Chinese edition of the May 1995 issue of Forbes magazine listed the 47 largest overseas Chinese business groups, in terms of market capitalization, in South-East Asia. Among these 47 groups, only three are engaged predominantly in manufacturing, while seven others have some significant manufacturing operations. Most of the other groups concentrate on property development and banking and finance. Even allowing for problems with data and definitions, these findings seem to support earlier findings by scholars that overseas Chinese businesses tend to focus on property and hotel development, ship-owning, trading, banking and low-intensive manufacturing.

An important question is raised by these findings. Is it true that overseas Chinese communities have been better at producing tycoons in property development, shipping, hotel and banking than in producing world class industrialists? The answer to this question has implications as to whether South-East Asia, as a region, will become the world's next industrial power.

Major industrial companies do not develop out of a vacuum. As Michael Porter noted in his book, Competitive Advantage of Nations, leading companies of a particular industry tend to cluster in one or a few countries because the country or countries provide the right support as well as challenges for firms in that industry.

He argued that whether firms of a particular industry in a country are more likely to be successful (that is, competitive internationally) is a function of six factors: (1) firm strategy, structure and rivalry, (2) factor conditions, (3) demand conditions, (4) related supporting industries, (5) chance and (6) government policy.

Given the relatively low level of the industrial base of the Southeast Asian countries, firms will be handicapped by the lack of sophisticated supporting industry and the supply of well experienced technical and managerial personnel to propel local companies to become leaders in their field in most manufacturing industries.

As suggested in the literature on overseas Chinese management, success in manufacturing is still based mainly on exploitation of comparative advantages such as low labor cost or resource endowments rather than on managerial or technological excellence. Southeast Asian countries also lag in terms of sophisticated domestic demand for most manufacturing industries, except perhaps those with deep traditional routes.

Sophisticated and demanding customers, coupled with a competitive industry structure, provide useful challenges for an industry which encourages them to seek continuous improvements in features, quality and cost. Given such conditions, the odds against the emergence of world class industrial companies in such a short time is high. The circumstances may be changing with economic development, and one is beginning to see some companies--such as Johnson Electric, a Hong Kong based manufacturer of micro motors--establishing themselves as leaders in niche areas.

If a late start is the main reason as to why there have not been many major overseas Chinese industrial companies, then the prognosis is quite optimistic. The situation is less optimistic, however, if the next possible factor is valid. This relates to the managerial style of overseas Chinese entrepreneurs. In essence, it is argued that family ownership, low inter-personal trust and concern with face, combine to create an autocratic and personalistic management style that stifles individual initiative and makes the retention and motivation of staff difficult. This hampers the ability to manage large, decentralized but highly coordinated organizations.

The efficiency and effectiveness of such organizations depend on good communication and the ability, motivation and freedom of a large number of operating and managerial personnel to make numerous operational decisions daily as well as to effect continuous improvements in operations. This contrasts with the success factors of property development, ship-owning and so forth, which are more about personal foresight, business acumen and cultivation of networks which bring access to opportunities, capital, information or political favors than on organization size, efficiency and effectiveness.

It is important to understand the main factors that lead to such a management style to deduce whether it is likely to change. Low inter-personal trust is a cultural factor that depends substantially on the socialization experience of entrepreneur- managers. So is the priority given to family control and the expansion of family fortune. Given the big differences in the socio-economic situation and the educational backgrounds between the founders of the leading business groups and succeeding generations, it is possible that some changes in management style may result.

So much for factors that might hamper the performance of overseas Chinese companies in the more sophisticated manufacturing industries. But what of the factors affecting the choice of businesses? If we assume that the entrepreneurs' primary goal is to accumulate personal or family wealth, a point which has been suggested by some scholars, then it seems reasonable to assume that the entrepreneurs' choices of business will be dominated by risk-return expectations rather than by the desire to become leaders in particular industries.

Scholars have described the growth patterns of many major overseas Chinese firms as "opportunistic". Money flows to whatever seems lucrative as opportunities arise. This investment pattern results in conglomerates in which the different businesses are managed relatively independently from each other. This implies that the various businesses are considered as individual investments rather than as related parts which enhance the competitiveness of the whole group in related industries. Without a strong attachment to a particular industry, it is difficult to conquer the many obstacles on the road to becoming an industry leader.

If the environment is such that focusing on certain industries "looks like the best bet" for wealth accumulation, then one would find more entrepreneurs focused in their efforts. In the case of many Southeast Asian countries, property development may appear to be a "good bet". On the one hand, property development is generally a good investment if the economy is growing. On the other hand, as argued above, success in property development depends more on personal foresight than efficient management.

Historically, many of the founders of the major overseas Chinese firms had little formal education and exposure to large- scale organizations in their formative years. It is not difficult to imagine that they would have been more comfortable in engaging in businesses which required less sophisticated operations than those that do. The tendency to avoid the unfamiliar is shown by strategies adopted by many manufacturers of the region when faced with rising costs as the economy develops. Relocating manufacturing businesses to a lower cost country, or diversification into other businesses which do not require sophisticated management are by far the more common responses.

Like management style, however, the preferences of the second generation may be changing. Only time will tell whether that is indeed the case.

Dr. Anthony Ko is with the Department of Business and Management, City University, Hong Kong.