1. Long-Term Entrepreneurs Globalizing Their Australian Businesses and Singapore’s Can Do Spirit
By KEE Koon Boon
Snake venom with a S$550 million market cap then in 1994; a 54-fold multibagger since and a S$30
billion global biotech champion now. Data management software with a S$40 million cap then in
1994; a 150-bagger since and a S$6 billion global share registry solutions provider now.
How did these domestic small-medium enterprises in Australia scale and globalize their operations
successfully right under the noses of powerful incumbent giant rivals?
The trajectory of their success stories is quite similar to Singapore’s Keppel Corp which grew to
become the global leader in offshore oil rig design and building with a market cap of S$18 billion –
albeit a story that has not been reproduced frequently in a similar successful scale amongst
Singapore enterprises.
Commonwealth Serum Laboratories, later renamed CSL, was a sleepy government outfit providing
snakebite antivenin. It was privatized and listed in 1994 for A$500 million. Brian McNamee was
plucked from relative obscurity at the age of 33 to head CSL at the recommendation of then Industry
Minister John Button.
This was much like how the late Hon Sui Sen picked Chua Chor Teck to be Keppel Shipyard’s first
managing director in 1972 and to take over Keppel, formed in 1968 as a wholly-owned company of
the Singapore government, from the hands of British managers of the Swan Hunter Group, then one
of the best known shipbuilding companies in the world that has now disappeared when Bharati
Shipyards bought its assets from a distressed sale in 2007.
Outstanding entrepreneur McNamee was diagnosed to have cancer and kidney problems when he
was planning to buy Swiss plasma fractionation operation ZLB for A$1 billion in 2000. ZLB, a non-
profit foundation affiliated with the Swiss Red Cross, was the only plasma processing plant outside
the U.S. certified by the U.S. FDA. Swiss giant Novartis also offered more money and fanned the
patriotism flame that ZLB should remain in Swiss hands during a period of plasma oversupply.
Due to the persistence of McNamee who flew to Switzerland against medical advice to personally
negotiate the deal, CSL acquired ZLB despite paying 20 percent less than its rival bidder. CSL is
propelled into the world stage and later consolidated its position by acquiring German Aventis
Behring for US$925 million in 2004.
America was then dubbed the OPEC (Organization of Plasma Exporting Companies) of the global
blood industry and CSL broke the dominance of America’s grip in the blood industry. Today,
domestic earnings account for 10 percent of the group earnings at CSL with the bulk provided by its
global businesses.
Keppel got its oil rig design and technology from acquiring rig builder Far East Livingstone
Shipbuilding (FELS), which Keppel took majority control in 1973. Subsequently, the late Sim Kee
Boon, Chairman of Keppel Corp from 1984 to 1999, led the globalization push of Keppel, later
continued by the capable team of long-term outstanding entrepreneurs in the likes of Lim Chee Oon,
Choo Chiau Beng, Tong Chong Heong, Loh Wing Siew etc.
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2. Mr. Sim outlined the basic strategy of avoiding “green-field” or start-from-scratch projects and to
invest in yards that are already there. For instance, Keppel acquired Allison-McDermid in America,
AHI in Middle East, PEM Setal in Brazil, and Verolme Botlek in Europe. Mr. Sim’s dream was to see
Keppel become like a Nestle with a very significant global presence.
The story at CSL and Keppel highlight the benefits of creating national champions and world-class
players. CSL is able to invest more than A$300 million a year in advancing its portfolio of R&D
projects, as compared to the federal government’s budget of A$196 million in the Commercialization
Australia program that is spread over four years. CSL has produced blockbusters such as Gardasil,
the cervical cancer vaccine, and the cash flow avalanche from such hits further cemented its position
as a significant and self-sustaining global research operator. Today, Keppel Corp is one of the largest
private sector employers in Singapore with around 37,000 Keppelites.
A drab industry run as an appendage to accounting firms and backroom ops of financial institutions,
the share registry business has emerged to be a colorful growth business after Christopher Morris
introduced modern technology into the industry and saw early on that he could achieve global
economies of scale.
Computershare, which made more than 100 acquisitions over the last 16 years, is the world’s largest
provider of share-registry services with a staff of 11,000 serving 14,000 corporations and 100 million
shareholder and employee accounts in 20 countries. Morris started Computershare, after working at
EDP, Melbourne’s only computer bureau then, with accountant partner Ken Milner and Mrs.
Michele O’Halloran in 1978, later listing the company in 1994. Morris’ younger sister Penelope
Maclagan, who was tired of teaching mathematics, joined Computershare and was responsible for
planning, developing and executing technology across the world in support of Computershare’s
global strategy.
Morris scaled up its proprietary SCRIPTM registry software system, which maintains an up-to-date
record of listed companies share registries, into North America, Europe and Asia-Pacific via
acquisitions, all part of his master plan since inception to give what he calls a “global footprint”. For
instance, in 1997, it bought the share registry businesses of Ernst & Young, KPMG, and RBS in
Australia. In December 1999, Computershare paid A$38 million for half of HK’s largest share registry
from Jardine Matheson, positioning the company for future opportunities in China.
As the only global operator in the share registry business, its research costs are amortized over 100
million shareholders, multiple times more than its established giant competitors in London and New
York such as Lloyd’s, Mellon and Bank of New York, and its local rival, Perpetual/ASX in Australia.
The skills required to run a share registry – management of databases and financial obligations – are
also handy in employee share and option plans, voucher, bankruptcy, and class-action
administration, and Computershare leveraged upon its existing durable economic moat to integrate
acquired companies into its network and expand into these new growth areas.
While CSL and Computershare benefited from growth through M&As, they were circumspect about
such a strategy. McNamee commented that there is a risk when businesses think that they can rely
on acquisitions at the expense of organic growth. “You’ve got to be careful that it does not become
like cocaine for a company – what’s the next deal,” he says.
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3. Growth through acquisitions has proven to be the graveyard for many companies in general. Warren
Buffett, the world’s greatest investor, likened growing via acquisitions to kissing unresponsive
corporate toads who croaked and the tempting but value-destroying toy that executives must have
because their peers have one too.
The globalization experiences forged by the outstanding long-term entrepreneurs at CSL,
Computershare and Keppel illuminated important insights for entrepreneurs.
One, the first strategic overseas acquisition requires subsequent purchases, otherwise the company
risk either being taken over as part of industry rationalization or having a marginal and insignificant
overseas business branch that cannot take root.
Take the case of CSL. For the first two years, ZLB lived up to its promise, resulting in solid earnings
growth for CSL, and CSL market cap more than doubled. But the wheels came off when the industry
went into oversupply and a combination of sharply falling product prices and disadvantageous
currency mismatch nearly crippled CSL. CSL turned risk into opportunity by acquiring German
Aventis Behring to consolidate its position as the industry recovers.
Computershare had 5 percent market share in the U.S. when they acquired Georgeson in 2003.
Many key executives sold their shares and left the firm to start rival outfits to compete against
Computershare. Only when Computershare acquired, a year later in 2004, EquiServe, which conduct
share registries for more than half the Dow Jones index and back-office work for ADRs managed by
JPMorgan and Citibank, did Computershare made its American operations viable with a 25 percent
market share. The acquisition also enabled Computershare to grow in key European markets given
the rise in cross-border corporate acquisitions and cemented its position as a world leader.
Two, McNamee and Morris made mistakes in their global adventures by appointing the wrong
people into key executive positions but were decisive in revamping their management.
Three, all three have risk management systems to cope with industry downturns and currency
mismatch woes.
Back in 1983, Keppel’s cash purchase of Straits Steamship saddled it with a debt of S$845 million.
Furthermore, the shipbuilding industry during that period was pronounced a sunset industry by the
pundits as the industry went into oversupply with more than 80 shipyards capable of building rigs.
Mr. Sim was brought in and he turned Keppel around; in 1986, Keppel was the only surviving rig-
builder in the world.
In addition, shortly after Keppel’s acquisition of Texas-based jackup yard Allison-McDermid in 1990,
an American firm brought a US$565 million litigation case against Keppel for alleged breach of
contract and damages involving the building of jackup offshore drilling rigs. Keppel eventually won
the suit. Keppel saw the need for control and bought out its partner, renaming the entity AmFELS
which became a wholly-owned subsidiary of Keppel. It grew to become one of the best-equipped
offshore yards in the Gulf of Mexico.
“Building a winning company is a team effort”, as articulated by Keppel’s current CEO Choo Chiau
Beng; it takes a team of outstanding long-term entrepreneurs banding together to demonstrate
the Can Do Spirit to weather the storms and emerge stronger, and to scale and globalize successfully.
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4. The Bitzu’istic Education Ecosystem To Scale Up
By KEE Koon Boon
“Can my kid watch how you milk cows?”
“Can my kid see how you print the newspaper?”
As a young boy, Gil Shwed was taken on learning adventure trips by his loving mother – to dairy farm,
to printing house, including to his father’s office in 1972 where he saw a computer for the first time
when he was five years old. Enlivened, and grounded in the values of sacrificial love since young, Gil
pursued excellence in an “education” in computer skills by signing himself up for an afternoon
computer class in a religious community center at nine, embarking on a summer job coding for a
language-translation software company at twelve, and taking computer science classes at the
Hebrew University while in high school.
While his high-profiled peers boisterously chased fashionable dollar-seeking career strategies with
their well-endowed grades and holistic CV, Gil diligently and silently persisted in building a computer
security software, an idea that he had cooked up during his four-year mandatory military conscript
in which he strung together military computer networks in a way that would allow some users
access to confidential materials while denying access to others. After leaving the army service, Gil,
together with his two friends, Shlomo Kramer and Marius Nacht, would work together on borrowed
computers in the cramped and hot apartment that belongs to Kramer’s grandmother without much
extrinsic reward, and without the psychological security of a “proper” real job, until 1 a.m., then
comforted themselves with companionship and Japanese food or went for a drink on the beach.
Gil’s “education” was brought closer to fruition when he arrived in 1993 at the Jerusalem office of
BRM, a software and technology investment firm founded by the entrepreneurial Barkat brothers.
Through BRM, Gil’s “education” and sacrifices were made market-relevant when plugged into the
unique self-organized ecosystem that constantly searches for innovative ideas and new products.
BRM shared in Gil’s vision and gave him technical and business assistance and about $500,000 for
half of his company, a risky proposition then given that the internet boom had not happened yet and
cyber attacks were not a worry. The trio unveiled their product at a computer show in Las Vegas in
1994 and won the best software award. That product was called FireWall and their flagship product
has never been breached. Their company, Check Point Software Technologies, went on to list in
NASDAQ in 1996 and its market capitalization had since multiplied more than 20-folds to around
US$9 billion presently.
“Education” with that bitzu’ism quality was at the heart of the pioneering ethos that connected not
only the trio together but also into the global marketplace, adding on to the social capital that higher
“education” brings to society when multibagger companies are created. A bitzu’ist is a Hebrew word
that loosely translates to “pragmatist”, but with a much more activist quality. The bitzu’ist is “the
builder, the irrigator, the pilot, the gunrunner, the settler” – all rolled together into one; “crusty,
resourceful, diligent, impatient, sardonic, effective, and not much in need of sleep”. And bitzu’ism is
the thread that runs from those who braved marauders and drained the swamps to the
entrepreneurs who believe they can defy the odds and barrel through to make their dreams beyond
themselves happen.
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5. Gil thinks of his home country Israel as a “startup nation”: “We managed to create a country from
zero. We’ve had an entrepreneurial spirit for over 100 years. Brought in immigrants. Fed them.
Created a legal system. Built cities. Set up farms in the desert. Invented techniques like drip
irrigation. One thing that really helps us here is that we don’t have a local market. We are thinking of
customers who are 6,000+ miles away from home.” Adversity, like necessity, breeds inventiveness.
Surrounded by hostile neighbors that makes regional trade impossible and endowed with little
natural resources, Israel has the highest density of start-ups in the world with one for every 1,800
Israelis from its population base of 7.4 million with seventy different nationalities as Israelis think
globally to create international products. These physical constraints ironically positioned Israel for
the global turn toward knowledge- and innovation-based economies and companies. After the US,
Israel has more companies listed on the NASDAQ than any other country in the world, including the
entire European continent, as well as India, China, Korea, Singapore combined. These agile startups
darting between the legs of multinational monsters are hungry global champions, with some long-
term entrepreneurs who looked not for the tempting quick flips but stayed the painful course to
build and last for the long-term, such as Gil’s Check Point, scaling up to become world leaders, brick
by brick.
Warren Buffett, the world’s greatest investor and the apostle of risk aversion, broke his decades-
long record of not buying any foreign company with the purchase of an 80 percent stake in Iscar
Metalworking, the world’s second largest maker of cutting tools which is founded in 1952 in a
wooden garage, for US$4 billion in May 2006 – seemingly vulnerable assets in war-torn Israel.
Buffett’s view is that if Iscar’s facilities are bombed, it can go build another plant. The plant does not
represent the value of the company. It is the talent of the management, the international base of
loyal customers, and the brand that constitute Iscar’s value. As Iscar’s founder Stef Wertheimer puts
it firmly, “We do not miss a single shipment. For our customers around the world, there was no
war.” By responding to threats this way, Wertheimer and his team have transformed the very
dangers that may make Israel seem risky into evidence of Israel’s inviolable assets. Israelis, by
making their economy and their business reputation both a matter of national pride and a measure
of national steadfastness, have created for foreign investors a confidence in Israel’s ability to honor,
or even surpass, its commitments.
What is striking about Israel is that the development of human capital is the key to growing the
economy. According to OECD, 45% of Israelis are university-educated, which is among the highest
percentages in the world. While Israel was ranked second among 60 developed nations on the
criterion of whether “university education meets the needs of a competitive economy” according to
the IMD World Competitiveness Yearbook, its “education” was made relevant because it was
plugged into the unique ecosystem such that the combination of sacrifices and competence has a
performance-based outlet to be converted into longer-term relevance for the global marketplace
and translated into meaningful payoffs for the society.
Intrigued by Israel’s human capital development efforts, Singapore’s deputy prime minister and
finance minister Tharman Shanmugaratnam had skipped the last day of the G-20 summit several
years ago to drop in on Hebrew University’s Yissum. When measured by the commercialization of
academic research, Yissum is among the top ten academic programs in the world and the archetypal
technology transfer company. Mr. Tharman wanted to know how they did it, as recounted by Dan
Senor and Saul Singer in their book “Start-Up Nation: the Story of Israel’s Economic Miracle”. Like
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6. Israel, Singapore was a small, threatened, and rugged country, and Singapore had a well-educated
workforce where students often top standardized tests in math and science. Yet its people are not as
entrepreneurial and innovative in building a critical mass of world-class companies, commercial
assets of a “special quality” that scale sustainably to $20 to $100 billion in value and with a social
mission to achieve.
In “Stage 1” of Singapore’s growth since its self-governance, the system in education is rightly about
forging a meritocratic and highly-competitive “standardized” education system to lift the technical
competence and social mobility of the masses to the plateau where they will be able to get the rays
of the sun emitted by the multinational companies in its export-oriented economic strategies. This is
augmented by higher valued-added services from logistics, shipping and maritime support to legal,
finance and accounting, generating high-wages to beat inflationary pressures. This was masterful
strategic grand-positioning amidst the geopolitical forces of power in the “hard times” era to meet
the exigencies of the global forces in order for the population to stay employed and survive.
In other words, the education system in Stage 1 is about plugging in to the needs of capable MNCs,
who, in turn, connect the small, open economy of Singapore to the real marketplace. Along the way,
short-term transactional-based tangible wealth was collected amongst the individuals through
industriousness in work, and passed on when invested in private assets that have the potential for
long-term capital appreciation, such as property, to foster a sense of ownership and stability. As the
late Dr Goh Keng Swee, the indefatigable economic architect of Singapore, elucidated: “The way to
better life was through hard work, first in schools… and then on the job in the work place. Diligence,
education and skills will create wealth.”
Yet, the highly-skilled workforce is not able to house whatever of their intangibles into building and
owning long-term institutions and enterprises, imprinting their own personal values in them so as to
contribute to the society in a lasting way, in which the supreme purpose in life was winning through
industriousness, virtue, and an honorable way of living. The capitalization of “profits” that accrue
from these building-and-accumulating longer-term activities are housed in and owned by the MNCs
vehicles. As a result, it is inevitable that people, without anchored by a core sense of purpose
beyond oneself and without compatible ethos, become increasingly individualistic, mercenary, and
short-term in their mindset and psyche with the march of Stage 1-based economic “progress” over
time. In addition, there are growing concerns expressed by the MNCs that the Singapore workforce
lacks the initiative and innovativeness that the knowledge-based industries desire, imposing a
barrier to a breakthrough in wages.
Making further economic and social advancements from this blockage by putting guile ahead of
industriousness, their “retained earnings” are deployed into scalping, speculative and hedonic
activities which can be socially destabilizing. Their accumulated wealth and assets for its own sake
evolve to a sense of entitlement, festering into a dangerous liability that erodes character, moral
values, and social cohesion. And healing attempts or reform through efforts in “character education”
and “creative thinking” alone is not only difficult but also decidedly off-track. As economist David
Landes puts it aptly, nothing is more dilutive to drive and ambition than a sense of entitlement,
ingraining in the minds of the elites and the population that they are superior, which reduces their
“need to learn and do”. This kind of distortion makes an economy inherently uncompetitive.
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7. Thus, even though America consistently ranked far below Singapore and the East Asian nations in
educational metrics such as standardized test scores or prizes won in math and science competitions,
the U.S. “education ecosystem” with that bitzu’ism quality continuously enabled the emergence of
long-term entrepreneurs with a sense of mission, such as Sam Walton (Wal-Mart), Warren Buffett
and Charlie Munger (Berkshire Hathaway), Bill Gates (Microsoft), Steve Jobs (Apple), Ray Kroc
(McDonald’s), Jim Sinegal (Costco), Howard Schultz (Starbucks), Henry Taub (ADP), Jeff Bezos
(Amazon), Pierre Omidyar (eBay), De Hock (Visa), Les Wexner (Limited Brands), Warren Eisenberg
and Leonard Feinstein (Bed Bath & Beyond), Phil Knight and Bill Bowerman (Nike), Peter Rose
(Expeditors), Herbert Irving and John Baugh (Sysco), the “Google guys”, Mark Zuckerberg (Facebook),
Walt Disney, Oprah Winfrey, and so on.
Instead of getting diminishing marginal returns from repeating the educational strategy of Stage 1
that treats educational achievements as instrumental, the education system in this “complex
uncertain times” era that characterized Stage 2 requires enabling the population to grope and reach
directly into the global marketplace, to be sensitive and alert to existing anomalies and paradigms of
how things ought to function and behave in the marketplace. It is this sensitiveness and alertness
that lead to their discovery through their strong conviction and belief that they can do it significantly
better. A nation of long-term entrepreneurs who are able to burst asunder the limits of existing
knowledge to find and exploit the niches of relative advantage when they introduced their new
innovations to positively create value for the customers and society.
At the heart of the educational curricula in any discipline and subject is for the educators and
teachers to connect and sensitive the students to the chaotic global marketplace, something that is
woefully inadequate or missing. The proud and disengaged students, upon seeing the reflection of
their foggy and incompatible images in this grand mirror, start to humble up and see inside
themselves, embarking on a self-discovery and self-learning journey or Work to equip themselves
with both the knowledge and character to once again see themselves more clearly in this mirror.
They will experience the uncanny: the raw sensual data reaching their eyes before and after are the
same, but with the pertinent framework of meaning, the chaotic features and anomalies in the
marketplace are visible. Visible for them to experience the burning sense of mission to sacrifice in
undertaking the lifelong Work of building durable enterprises with compulsion, persistence and a
sense of urgency. The sacrifices and, at times, pain, can break the heart, but doing anything else
would be unimaginable. There will be no idle time to waste for every moment has a strategic
importance. Sensitized students will be constantly attentive to the possibility that they may be
mistaken, and they will be enlivened by a sense of responsibility towards the Work, internalizing the
well-working of the Work as an object of passionate concern and personal committment. This is an
ethical virtue.
And being rich or poor is irrelevant in the bitzu’istic education ecosystem without that delusive and
destructive chase towards instrumental educational achievements, for it is now plugged into the
marketplace and this experience of the uncanny does not reveal itself to idle spectators. The poor
can beat the rich because they can be more virtuous. Both the poor and the rich can rise through the
marketplace by staying relevant as diligent builders of enduring enterprises, sharply on the lookout
for the hazards and the opportunities that changes in the marketplace bring. The ultimate
meritocratic-based education. The people would embrace a compatible set of values through a
system to mold ethos into their character so that their behavior and action would align to the
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8. imperatives set by the integrity of the outstanding enterprises. Character is tested on the anvils of
the marketplace and forged over the fire.
In a rendition of Dr Goh’s view on the spirit of education as both “a search for truth” and “the way to
better life”, the mother of purpose and progress in education in Stage 2 is to accumulate “wealth” by
industriousness and virtues through the market-tested applications of knowledge and skills in daring
to build lasting enterprises with a social mission. After all, as former Israeli President Shimon Peres
puts it, “the most careful thing is to dare”, which also articulates the pioneering definition of the
Singaporean trait of kiasuism to scale new heights. Gil Shwed sums it up: “People work [at Check
Point] and don’t feel as if they’re being left behind. They feel like they’re part of a group, a
community, that they’re building something.”
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9. Surpassing Stall Points in Scaling New Heights
BY KEE Koon Boon
2011 marks the 50th “anniversary” since Ray Kroc, 59 years old then, bought out McDonald’s for
US$2.7 million from the McDonald brothers who were the original pioneers of the fast food
restaurant “system”– an expensive valuation then and with no secret recipe for hamburgers, no
patents, and no technological breakthroughs. Since fully taking charge of McDonald’s destiny, Kroc,
the visionary leader, enlisted the help of a team with Fred Turner as the execution extraordinaire,
June Martino as the human resource specialist, and Harry Sonnenborne as the numbers guy who
advised him that real estate was the key to a franchise’s financial success.
By 1965, the year when McDonald’s was listed – interestingly, at the same time as Singapore’s
independence – the team had scaled the business nationwide with tenacity to more than 700
restaurants amidst the thicket of resource-rich incumbents, aggressive competitors under the wings
of corporate giants, and copycats. McDonald’s now has more than 32,000 restaurants worldwide in
117 countries and two-thirds of its sales are now contributed from outside of America. More than 75
percent of McDonald’s restaurants worldwide are owned and operated by independent local men
and women. McDonald’s is also one of the largest property companies with US$17.6 billion in self-
owned “McProperty” real estate retail assets. The company’s market capitalization has since
multiplied 140 times in 45 years to US$88 billion currently.
Why McDonald’s, easily one of the most recognizable brand name in the world, is not a core buy-
and-hold stock in the portfolio of Warren Buffett, the world’s greatest value investor, is probably
one of the greatest underexplored enigmas in value investing. The non-investment by Buffett’s
Berkshire Hathaway is all the more ironic given that McDonald’s is the biggest buyer of Coke – and
the Golden Arches was also listed in the same year as Berkshire. Having multiplied his returns by 10-
folds after investing in Coca-Cola in a big way in 1988, the ubiquitous beverage brand is arguably the
business model that most define Buffett’s philosophy in value investing.
When asked whether he would buy McDonald’s and go away for twenty years, Buffett gave an
intriguing reply in a lecture at the Florida School of Business back in October 1998. “It is a tougher
business over time“, Buffett said, “People don’t want to be eating – exception to the kids when they
are giving away Beanie Babies or something – at McDonald’s every day. If people drink five Cokes a
day, they probably will drink five of them tomorrow… I like the products that stand alone absent
price promotions or appeals although you can build a very good business based on that.”
Buffett’s Berkshire Hathaway did purchase McDonald’s in 1995/6 when it was probably around
US$17 to 20 billion, but he exited in 1997/8 at around US$26 to 30 billion. Although McDonald’s
grew to US$50 billion around a year later, it started its precipitous trend to fall to US$13 billion by
February 2002 as it posts its first ever quarterly loss. Singapore’s dynamic entrepreneur Robert Kwan,
who had a small wholesale toy store, was earlier than Buffett, opening with sharp foresight the first
McDonald’s in Singapore in 1979 at Liat Towers, although he sold off his share in the business in
2003. Mr. Kwan carried his experience and insights to rejuvenate the Singapore Zoo, Bird Park and
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10. Night Safari, bringing them back into the black in his role as the executive chairman of Wildlife
Reserves Singapore in 2003, later stepping down in 2007.
“A tougher business over time”, an all-important axiom for entrepreneurs and value investors.
Coca-Cola itself hit its peak at around US$200 billion in market cap in Jul 1998 before dwindling to
US$90 billion by 2005 and recovering to US$165 billion presently. Starbucks, in its 40 th “anniversary”
this year, poured its heart to scale one cup at a time after Howard Schultz bought over the six
Starbucks shops for US$4 million in 1987 to reach US$28 billion in 2006 before hitting the roadblock
to tumble to US$7 billion by end 2008 and is now back up again to US$38 billion.
Most businesses are not so fortunate to be able to recover. In 1962, the year IBM turned 50, Tom
Watson Jr. – IBM’s chairman and the son of its founder – commented that of the top 25 industrial
corporations in the United States in 1900, only two remained on that list by 1961. This year in 2011,
as IBM celebrated its centennial, its current CEO Sam Palmisano carried on Watson’s insight and said
that of the top 25 companies on the Fortune 500 at the time of Watson’s lecture, only four remained
in 2010.
Is there a “natural limit” or “stall point” in the size of the business by industry and country as the
entrepreneur attempts to scale up before he or she faces the challenge of their corporate lives to
overcome the start of a secular reversal in fortune? After all, if an elephant were larger by a mere 15
percent, its body weight would require such bone and muscle strength in its legs that its weight
would make it simply too heavy for the muscles to lift, and the beast, unable to move, would starve.
Yet, elephants can dance, as what Lou Gertsner said in describing how he led IBM to overcome a
near-death experience in the early 1990s when he took over as CEO in April 1993. IBM then was at
US$10 billion after falling from its 1987 peak at US$50 billion. By reducing the Big Blue’s dependency
in mainframe manufacturing, which was supplanted by personal computers and servers, and
building the global platform for services to provide higher value to customers, a core business which
today accounts for over 40 percent of its overall profits, Lou had multiplied the market cap 10-folds
to US$100 billion by the time he passed over the leadership baton in 2002 to Sam Palmisano.
Palmisano quadrupled earnings and created another US$120 billion in shareholders’ value in 10
years as he positioned IBM in software and analytics, an area which now contribute more profits
than services do.
Understanding the dynamics of this stall point can illuminate important lessons for both the Asian
entrepreneur trying to scale his or her enterprise to a greater height and the diligent value investor
wanting to generate sustainable multibagger returns. In other words, value investing is about
investing in the outstanding entrepreneur building the durable economic moat which means the
business gets easier, not harder, as it gets bigger.
One key to McDonald’s success is what Mr. Kwan described: “McDonald’s sells a system, not
products.” The System of People, Products, Place, Price and Promotion. The stability of the “three-
legged stool” System of Franchisees, Suppliers and Employees. The System that accumulates
knowledge to synthesize the factors of production in land, labor, capital, and technology to scale the
business sustainably. Yet, this is perhaps still only less than half the reason. A System requires too
many moving parts to work – too much risk involved for a cautious value investor to bet big. There
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11. has to be “something”, that intangible key switch, to connect the different tangible moving parts
such that they reinforce the outperformance of one another in a clockwork fashion, which, if it does
succeed, can result in the lollapalooza effect that superdominates the competitors.
The key switch to its enduring success is arguably the culture that Kroc infused right from the start
into McDonald’s. Kroc believed wholeheartedly in his franchisees and partners to become successful
before he does, which has an appealing sense of human justice to it. Kroc was embarrassingly open
about his personal finances – what he earned, what he paid for his house, what he owed. That
candour carried over into his business. He would fully disclose the costs and prices of McDonald’s
suppliers so that the franchisees would know that his company was not benefiting from any
kickbacks or commissions that were the common practice. Any price breaks from the suppliers were
passed directly to the franchisees to improve their competitive advantage. By not indulging in
kickbacks, McDonald’s showed suppliers and franchisees alike that “it was in the business for the
long haul, not the short haul”. Kroc once told a supplier: “I want nothing from you but a good
product. Don’t wine me, don’t dine me, don’t buy me any Christmas presents. If there are any cost
breaks, pass them on to the operators of McDonald’s stores.”
As copycats sprouted, Kroc was also willing to sacrifice the quick franchising profits others were
making in up-front fees collected from selling territorial rights and equipment to franchisees. After
making most of his or her money before the store opens, these owners did not care much about the
subsequent performance of their franchisee clients. Kroc was also never tempted to make side
income, unlike many other operators who have no qualms to jump at any such chances. Kroc
steadfastly enforced that there would be no pay telephones, no juke boxes, no vending machines of
any kind in McDonald’s restaurants. The side income these machines offer would create
unproductive traffic in a store and downgrade the family image that he wanted to create for
McDonald’s.
“This is going to be probably one of the most competitive businesses in the U.S. and we have the
only real solid approach to this business,” Kroc said with conviction, “The other ones are going to die
like flies. They are rackets. They are fast-buck deals. Those fellows [the franchisees] are going to do
any doggone thing they want to do, and the owners of the name are just going to let them do
anything they want as long as they are getting money out of it. It will be a survival of the fittest, and
we are going to be on the top of the list of the fittest. I know we have the only clean, honest
franchise.”
As a result, McDonald’s is able to cultivate a massive base of entrepreneurial long-term dedicated
operators and suppliers in a way that rivals cannot because of its long-term culture. A long-term
culture that triggers the intense instinct, emotional focus and commitment with regard to actively
planning for the enterprise’s future as one cohesive singular enterprise and not as separate fiefdoms.
A long-term culture which fosters a one-for-all team environment and provide the overarching
raison d’être in that everyone feel the pressure from the marketplace to deploy assets and forge
strategies that create multibagger entrepreneurs, a common scorecard of sustainable performance.
Aggressive competitors who sold out to major food processing giants to finance their growth find
themselves eliminated out of the race. The packaged foods giants belatedly discovered that there
was an enormous difference between the management of manufactured food sold to supermarkets
and food prepared and sold directly to customers at a fast-food outlet. In the former, manufacturing
11

12. is centralized and more easily controlled, and the sale to the consumer is indirect and depends
highly on branded advertising. In the latter, production is decentralized and difficult to control, since
each store is a self-sustaining production unit. Furthermore, the sale to the consumer is direct and
depends highly on local service. This is also a lesson for most Asian entrepreneurs who grew their
businesses as a manufacturer because it allows them centralization and control – it takes a vastly
different mindset to scale services and knowledge-based business models successfully.
Success for the Kroc becomes synonymous with value to society. Success becomes building a durable
economic moat and a culture in which everyone knows that they cannot accumulate greater
responsibilities and wealth unless they help in cultivating multibagger entrepreneurs. Yet, everyone
stayed hungry with a “McHeart” in cultivating more entrepreneurs no matter how much credit they
had accumulated because they were in a position to help something truly important live and thrive.
Kroc passed away early in McDonald’s corporate lifecycle at the age of 81 in 1984 – and had worked
at McDonald’s nearly every day even when he was confined in his wheelchair until the day he died.
He left behind the culture of integrity, candour, teamwork, commitment, and performance-based
fairness. Without this, most entrepreneurs will inevitably find themselves operating a tougher
business over time as the “system” to scale “the product that may not stand alone on its own” will
disintegrate. This is also the reason why most other restaurant retailers, be they from the west or
Asia, are not close to one-tenth of McDonald’s size.
The late American writer Carl Sandburg once said, “When an institution goes down or a society
perishes, one condition may always be found. It forgot where it came from. They lost sight of what
had brought them along”. Whenever McDonald’s was embroiled in controversies that were the
result of its neglect of the core values, such as the usage of low-quality or unhealthy ingredients, it
flounders. When the Golden Arches went back to rediscover the core values, it rises back up, like it
did when it created a healthier and higher-quality image since 2003. Without the workable
intangible culture and core values, the tangible assets, such as its vast retail property assets, would
amount to a dark-cloud-like ominous liability, particularly when leverage is involved.
McDonald’s is a story about pragmatic romantics, a story about entrepreneurs trying to create a new
and better world for people with enduring values. What was motivating Kroc, who was chronically ill
before he ever stepped in McDonald’s, was the belief that he had at last found the idea that could
be the foundation of the major enduring enterprise he had been hoping to build since leaving the
security of his previous company. Kroc developed a sense of mission that pulled his team together
because Kroc convinced them that they were involved in a noble undertaking – building a national
chain of 15-cent hamburger stands. They shared a common desire to prove to family, friends, and
more established businessmen that they were pioneering a new industry that would someday have
a far-reaching impact on American life and business – and now the world.
The performance-based economic built by Kroc and his team at McDonald’s gave the ordinary
worker the chance to be successful in their own right if they work hard and honestly. It would be
interesting if clients and the investing public in the asset management industry are able to get the
performance-based treatment enjoyed by McDonald’s franchising partners – no kickbacks, no up-
front fees, and the operator genuinely cares about the subsequent performance of the franchisee
clients since their success and destiny are inextricably intertwined.
12

13. Above all, what should the genuine entrepreneurs and the diligent value investors take to heart? For
the elephant to continue dancing, to surpass stall points in scaling new heights, it must have the
right McHeart.
13

14. Services Sustainability in Building Asia’s Prosperity 500 Companies
By KEE Koon Boon
“Singapore is too small and its talent pool is too small to produce a world-class manufacturing giant
of the Fortune 500 class”, Minister Mentor Lee Kuan Yew said. A cryptic remark indeed because it
does not imply that the venerable founder of modern Singapore thinks Singapore cannot produce
world-class services and knowledge-based giants which cannot be acquired easily because the
acquirer would lose the specialized and intangible assets that characterized these firms.
But why is it that Asian companies are predominantly product manufacturers in the first place? This
could ironically be a result of the Asian values of hardwork and sacrifice. It is far easier for the Asian
entrepreneur to get orders, take capital risk in investing in tangible assets, and work hard in
producing the required products with quality and precision, rather than to build business models
that have direct ownership of the end customers. To do the latter would require interacting
intensively with the end customers, a task which is beyond that of a lone powerful entrepreneur. As
a result, Asian entrepreneurs are unwilling to share the rewards with their “undeserving” staff who
did not take risk or sacrifice, thus treating employees as expenses, making most or all of the
decisions and keeping most of the resources and information themselves, running the firms as a
“one-man-show”, and facing potential business continuity challenges from succession woes.
As an illustration of the unconventional Asian firm, take the case of Keyence, whose 67-year-old
founder Takemitsu Takizaki liberated the firm, established in 1974, from manufacturing conventions
and built a knowledge-based enterprise in sensors for use on automated factory assembly lines
serving over 100,000 customers in 70 countries with a US$16 billion market capitalization. Takizaki-
san, who stepped down from the CEO role to be the Chairman in 2000, understood keenly that
Keyence cannot improve on Japan’s legendary manufacturing efficiency. So, unlike its competitors,
which focus on manufacturing and leave sales to distributors, wholesalers and agents, it deliberately
avoids making products, except for manufacturing steps that involve trade secrets which are kept in-
house.
Most of its 3,000 employees are either sales or research staff. In their direct contact with the
customers, Keyence’s in-house sales team pick up new product ideas on frequent factory visits. They
would report back to the research department on what new machines their customers would find
useful. They also tell the production department about demand for existing products, helping
Keyence to regulate its output and reduce inventories. To excel in these areas, Keyence had to
cultivate a meritocratic culture and it is “notorious” for having one of the highest-paid salaries in
corporate Japan for its employees. Bright young people from rival firms are attracted to Keyence by
the performance-based pay. The engineers also get the chance to do their own research, rather than
labouring for years under grey-haired supervisors.
The recent lament of China’s richest man, as ranked by Forbes, also highlights the Asian neglect in
the control of customer ownership. Zong Qinghou, the 66-year-old founder of Wahaha, one of the
largest beverage and dairy company in China, planned to venture into retailing by opening 100
department stores and supermarkets because “the main purpose for us to venture into retailing is to
have a bigger say in distribution.” Zong complained that when doing business with big supermarkets,
14

15. Wahaha’s suppliers and distributors were often hit by payment delays, extra charges and high
operating costs.
Ownership of customer also helped IBM, which is celebrating its centennial year this July, to stave
off a near-death experience in the early 1990s. When Lou Gerstner took over as CEO in April 1993,
IBM had three consecutive years of financial losses, including losing a record $8 billion in 1993, and
was about to be broken up. Lou reduced the Big Blue’s dependency in mainframe manufacturing,
which was supplanted by personal computers and servers, and built the global platform for services
to provide higher value to customers, a core business which today accounts for over 40 percent of its
overall profits. Lou had multiplied the market cap 10-folds to $100 billion by the time he passed over
the leadership baton in 2002 to Sam Palmisano, who quadrupled earnings and created another $120
billion in shareholders’ value in 10 years as he positioned IBM in software and analytics.
Likewise, GE Healthcare increases the switching costs for its expensive diagnostic-imaging
equipment and biomedical devices by having ownership of its customers with its low-cost AssetPlus
web-based software. AssetPlus allows the customer to track and manage inventories of the products,
schedule servicing, and follow regulatory requirements online. GE uses it to access customer data
and offer technical support, thus shortening service response times and increasing efficiency. Today,
the service component constitutes around 40 percent of GE Healthcare’s revenues. Similarly, the
PlantWeb system in the Process Management division of Emerson, a global engineering and
technology company, allows Emerson salesmen and the plant operators to know when to replace or
add a valve or measurement device even if they are offsite. Such services account for around a
quarter of its revenue.
Besides B2B services examples such as Keyence, IBM, GE, and Emerson, B2C companies such as
Amazon are able to leverage its scalable infrastructure and virtuosity in analytics in delivering a
dependable and enjoyable customer service experience. For instance, it is able to exploit consumer
behavior data and patterns to recommend products to induce purchases and when rivals sold out of
items, Amazon responded by raising its prices an average of 10 percent, yet delighting customers at
the same time. As a result, the customer-centric Amazon has grown bigger more quickly than any
company in retail history. Wal-Mart took 27 years to hit $30 billion in sales while Amazon did it in 16
years.
In addition to the B2B and B2C examples, there are also companies that are able to embed customer
ownership in their services business model. Take Automatic Data Processing (ADP), the world’s
largest payroll processor serving over 550,000 clients in over 100 countries with a market cap of
US$27 billion. ADP was started as a struggling two-man office in 1949 by the late outstanding
entrepreneur Henry Taub after the accountant noticed how devastated employees at a clothing
store were because they were not paid one week by the proprietor who fell sick. Taub was inspired
to make sure no employees serviced by ADP, now estimated at 31 million or one in six in the U.S.
alone, would miss a payroll. ADP was also the original on-demand software-as-a-service model, after
going public in 1961 to raise funds to digitize its system to scale the business further, which would
later inspire other software-services companies such as salesforce.com.
A service-based economy does not emanate from taking a broad sector or industry approach, such
as identifying “services” such as healthcare, education, media etc. Such a headlong approach can
only get the growth engine going only so far.
15

16. Services sustainability has to stem from equitizing customer ownership based upon performance
and interaction, trust, mutual respect and interdependency. This inevitably requires an economic
moat and in having a team and a system. A lone entrepreneur who believes that he has work so hard
and sacrificed so much, or a “I-did-it-all-by-myself” mentality, often does not believe in sharing with
other “undeserving” people if he does not possess the right heart.
A critical mass of outstanding long-term entrepreneurs will be the key to how the sprawling Asian
SMEs can transform themselves into multibaggers and for Asia to create its very own Prosperity 500
companies, as opposed to the Fortune 500 companies. Only long-term entrepreneurs have the right
heart to foster a one-for-all team environment that triggers the intense instinct, emotional focus
and commitment with regard to actively planning for the enterprise’s future as one cohesive singular
enterprise, to accept and embrace those who want to contribute, and to engender love amongst the
members despite differential rewards and efforts as all work towards the objective of creating a
lasting structure that can contribute and give more towards the society. And it will be a fit enterprise
and society for fighters to live in, a special and eternal Home.
16

17. The Scale of Life in Business and Performance-Based Value Investing
By KEE Koon Boon
Commerce would not have progress beyond the barter system without the invention of a system of
weights and measures. Before there was the traditional Chinese steelyard (gancheng), buyers and
sellers eye the heap of goods to determine their weight. It is difficult to achieve a fair trade. With
the gancheng, the object to be weighed hangs at one end of the beam, while the weights at the
other end are slided left or right until a perfect balance of the beam is found. Reading of the mark
where the weight-string rests is made to determine the weight of the object. There are 16 markings
on the arm of a gancheng, such that 16 qian is equivalent to 1 liang and 16 liang is equivalent to
1 jin (or 604.79 grams). The Chinese unit of measurement was based on the number 16 instead of 10.
But why 16? The wisdom behind this number will help us understand why Sam Walton and Amazon
Inc grew stronger over time like a sturdy oak, why Vanguard Group is the world’s largest mutual
fund manager with $1.6 trillion in assets under management, and why investors deserve a
dependable investment product by insisting upon performance-fees-only asset managers.
16 is the sum of 7, 6 and 3. 7 stands for the Beidou Seven-Star Constellation, which symbolizes the
need to have the right direction in our heart when we use the measurement tool to make money
and not be too greedy. 6 stands for the directions North, South, East, West, Up, and Down, which
cautions us to stay centered in our ethical principles when making money. Lastly, 3 stands
for Fu (Good Fortune), Lu (Prosperity), Shou (Longevity). When we make money by squeezing
one liang improperly out of others, we lose Shou (Longevity); wrench two liang and we
lose Lu (Prosperity). Give money back to the customers and society in a sustainable way and we
gain Fu, Lu, Shou. Thus, the 16-unit scale is not merely a tool to measure and make money, but more
importantly, it is a scale to guide and measure our values in life and in business.
The late retail giant Sam Walton, whom the world’s greatest investor Warren Buffett felt was the
greatest CEO of all time, saw the anomaly of retailers overcharging the customers. Sam seeks to
correct things by being a champion of the customer with Wal-Mart’s “Everyday Low Prices” by
passing along cost savings back to the customers to make better things ever more affordable to
people of lesser means. This resulted in Wal-Mart gaining Fu, Lu, Shou and its astounding
multibagger success to over S$200 billion in market capitalization from its initial listing size in 1970
of S$40 million.
Jeff Bezos sacrificed the comforts of his investment banking job to establish Amazon in 1994 with
the support of his wife and the life savings of $300,000 from his parents. Now, the internet retailer
beats its brick-and-mortar giants at their own game by delivering goods cheaper to its customers.
Surveys by Morgan Stanley and Wells Fargo found that Amazon sold a broad range of items 6 to 19
percent cheaper than Wal-Mart. By leveraging its scalable infrastructure and virtuosity in analytics in
delivering a dependable and enjoyable customer experience, the customer-centric Amazon has
grown bigger more quickly than any company in retail history. Wal-Mart took 27 years to hit $30
billion in sales while Amazon did it in 16 years and its market cap multiplied to nearly $80 billion.
17

18. Similarly, John Bogle saw the anomaly of mutual funds charging exorbitant fees to investors for
professing to beat the market, when in fact most of them lagged the market benchmark. Bogle set
up Vanguard in 1974 to pioneer low-cost index mutual funds for retail investors. By passing back
savings to the investors from advisory fee reductions and economics of scale, its low-expense model
enables Vanguard to deliver competitive returns without chasing complex risk that they did not
understand or respect. Bogle estimated that the costs of securities intermediation in the funds
management industry in 2007 are $528 billion. These include sales loads, management fees,
operating and marketing expenses, transaction and advisory fees, hidden turnover costs, and soft
dollars, and they recur year after year at around 2.5 percent of average assets. Vanguard’s economic
moat allowed it to have around a 1 percentage point savings, which, when applied to $1.6 trillion of
assets, produces savings of $16 billion annually.
Commerce is not merely about the measurement of the weight of profits collected in multiple clever
transactions to build abstract personal wealth. Only in the endeavor to perform first for customers,
and serve them with the highest possible integrity and character, can commerce find its foundation
for durable business success and create society’s abundance. The secret at Wal-Mart, Amazon and
Vanguard to gaining the “Fu, Lu, Shou” multibagger success is that the less they take, the more the
customer and fund investor make. That is why enterprises designed for the public weal are the
quintessential Lion Infrastructure – the bigger it is, the easier, not harder, it gets.
Bogle shared a meaningful story from Reverend Fred Craddock who was known for his
conversational preaching. Craddock, when visiting in the home of his niece, strikes up a conversation
with an old greyhound dog.
“I said to the dog, are you still racing?”
“No,” he replied.
“Well, what’s the matter? Did you get too old to race?”
“No, I still had some race in me.”
“Well, what then? Did you not win?”
“I won over a million dollars for my owner.”
“Well, what was it? Bad treatment?”
“Oh, no,” the dog said, “they treated us royally when we were racing.”
“Did you get crippled?”
“No.”
“Then why?” Craddock pressed, “Why?”
The dog answered, “I quit.”
“You quit?”
18

19. “Yes,” he said, “I quit.”
“Why did you quit?”
At last, the reason: “I just quit. Because after all that running and running and running, I found out
that the rabbit I was chasing wasn’t even real.”
Bogle believed that the rabbit that he has been chasing in his career, which is “essentially giving
investors a fair shake in their quest to accumulate assets for a secure future”, is real. It is not the
illusory rabbit of success – defined by the measured wealth, fame, and power – but rather the real
rabbit of meaning - defined by the immeasurable integrity and virtue.
Yet, there seems to be something missing in the long hard chase for the rabbit of meaning in the
asset management industry. Stage 1 is epitomized by fairness in Vanguard’s low-cost business model.
Stage 2 requires a sense of caring to inspire the extra level of intensity and dedication in performing
for investors. Such performance-based caring is an exacting and demanding business that requires
the ablest and most dedicated navigators providing value above all without loads, hidden charges,
soft dollars, and without fixed management fees. Asset managers who truly care do not get paid any
fixed fees and are paid only performance fees after they execute their job with excellence.
Yes, the pursuit of a mission that honors society as a whole is painful and requires sacrifice, tough-
mindedness and discipline. Then, rather than chasing after that rabbit, finding that it is fake, and
quitting in dismay, like the greyhound, it is worthwhile to chase the real rabbit of life and business
despite the pain and sacrifice, and then keep running, and running, and running, as hard as we
possibly can.
19

20. The Global Roar and Heartbeat of Japan Inc’s Outstanding Entrepreneurs
By KEE Koon Boon
If there is a vantage point for the roar of the far-sighted and hardworking entrepreneurs to radiate
globally, symbolizing that profound panoramic awareness-looking everywhere, it would be from the
temple-topped hills of Kyoto.
Kyoto, the ancient capital city of thousand-year old temples with a population of 1.5 million, had
become a hub of entrepreneurial activity in post-war Japan. Spared from the annihilation of Allied
bombing campaigns, Kyoto was one of the few places with infrastructure intact enough to set up
small to medium-size businesses, chu-sho kigyo, while other parts of Japan laboriously rebuilt old
conglomerates.
Rigorous and friendly domestic rivalry prepares the entrepreneurs for global fitness to conquer
world markets with innovations and performance, driving one another to new heights of
performance. They actively seek competition with the best companies in the world as they are
acutely aware that greatness on a global scale is attained only by confronting the best – wherever
they may be. And when entrepreneurs in the city faced trouble, they often turned to one another.
From amongst the litters of entrepreneurs rose several global champions, particularly Kyocera
(advanced ceramics and solar electric generating systems), Murata (capacitors, ceramic filters),
Nidec (motors). But it is their social mission that distances these Raion Entrepreneurs from the rest
in their staying power and endurance.
Born into poverty, Kazuo Inamori lost his family home at age 13 and almost died that same year after
contracting tuberculosis. A religious neighbour handed him several Buddhist religious tracts, urging
him to meditate on the meaning of life. As he meditated, his TB subsided. His reprieve left Inamori
with the idea that he should strive for the betterment of humanity.
Carrying this value in his heart, Dr. Inamori built two world-class companies from scratch in the
course of a generation – global advanced ceramics company Kyocera (founded in 1959) and Japan’s
second largest telecommunications firm KDDI (established in 1984), with a combined market
capitalization of nearly US$52 billion and employing 80,000 kindred spirits. Through his commitment
to society, which include the creation of the Nobel-class Kyoto Prize which honors contributors in
technology, science, arts and philosophy by his Inamori Foundation, Inamori-san, 79, carries the
voice of entrepreneurship on a global scale as the “Entrepreneur for the World”, an award he was
presented with during the World Entrepreneurship Forum in 2009.
As president of Seiwajyuku, a business leadership association dedicated to nurturing business
owners and entrepreneurs, Inamori-san, ordained as a Buddhist monk at 65, offered this advice to
entrepreneurs: “If your goal is to be a rich and beautiful celebrity, or if you are not willing to sacrifice
yourself for the world and other people, do not try to be an entrepreneur. Entrepreneurs have heavy
responsibilities and must share the fruits of their labor with employees and shareholders. We must
always have criteria in our hearts that can help us answer the question, ‘What is the right thing to do
as a human being?’ and guide us to do what is good for society and humanity in our daily work.”
20

21. “The creation of employment is the largest contribution to society”, Shigenobu Nagamori, founder
and president of Nidec, said resolutely. Founded in 1973 with the help of three friends – all, like him,
engineers – Nidec is the world’s largest maker of miniature precision motors for electronic devices
with a US$9.5 billion market cap. In 1979, the team developed a novel, electronically controlled, or
brushless-design, spindle motor for hard-disk drives (HDDs) to change the operation of conventional
motors, reducing the energy consumption of electric motors by up to a third. With motors
consuming more than half of the world’s power demand, he “captures the souls” of his troop of
more than 96,000 employees with the vision that they are helping to contribute to cutting the
world’s power needs by improving the performance of the motor they make.
Nidec extended its global reach into nearly every corner of the electronic-motors world through a
series of 30 acquisitions since 1984 to expand its technology base and distribution network, such as
the motor divisions of US engineering firm Emerson and French autoparts maker Valeo, Sankyo Seiki,
Hitachi’s Japan Servo, Toshiba’s Shibaura, divisions from its primary customer Seagate. And Nidec
grew without laying off a single employee throughout its history, even at acquired companies that
were struggling.
Through a manga-style comic book that tells his story and distributed to schoolchildren in Kyoto,
Nagamori, 67 years old and the youngest of six children born to a poor farmer, hoped to inspire
them to found their own ventures based on the right values: “I believe if you want to be an engineer,
money’s not the only thing. Engineers are often pursuing a dream about inventing new products that
will benefit other people.” Powered by these deep-seated values, the inner motor in Nagamori
drives him to work all year round, including Saturdays and Sundays, and he takes only a half day off
on January 1st – the one day of the year when nobody works in Japan.
The inventions of Inamori, who was the first person in Japan to synthesize Forsterite, a kind of
ceramic that played a pivotal role in electronic circuitry for TV sets, helped supported Japan’s global
revolution in TV manufacturing in 1950s after WWII. Kyocera’s advanced ceramic materials also
fostered the development of the semiconductor industry. Similarly, Nagamori’s inventions in motor
technology also sparked the ubiquity of HDDs that are used in computers, mobile music players, cell
phones, car navigation systems, and other digital equipment.
Outstanding entrepreneurs want to build and scale their businesses so that they can give more. Only
when we have the desire to give, then can we want to persevere in building something meaningful.
This urge to build in order to give is the magnetic north to scale a durable economic moat and they
work obsessively to realise this vision. The works and the roar of outstanding entrepreneurs such as
Inamori and Nagamori are akin to the resolute gong of the temple bell. They resonate because the
sound reverberates in our hearts, stirring the everlasting values that matter: Sacrifice, Honor, Duty,
Hardwork, Fairness, and Humility.
The roar of these eternal values is heard most clearly by diligent and caring value investors.
21

22. Looking Through the Italian Lenses to Build Asia’s Prosperity 500 Companies
By KEE Koon Boon
Why is it that throughout the financial crisis, Italy has remained Europe’s second-largest export
economy, after Germany, despite Italy being ranked as the 80th place in the World Bank’s “Ease of
Doing Business” survey because of his strong labor unions, seemingly boundless bureaucracy,
organized crime, and endemic tax evasion?
“Work always came before everything.” Words behind why Italy has withstood the worst of the crisis.
Words uttered by a man who grew up with an orphanage education at age 7 in post World War II
Milan and severed part of his finger in a mold-making factory while working as an apprentice to put
himself through design school. Words spoken by someone who understood that passion in building
something lasting entails sacrifice.
Words by Leonardo Del Vecchio, the founder of Luxottica, which is the world’s largest eyewear
company with a market cap of US$18 billion that has multiplied more than 20-fold since its listing in
1990. Importantly, it is one of Europe’s most respected companies that is responsible for
revolutionizing and dominating the entire eyewear industry, creating a fashion concept out of a
functional item and putting luxury glasses on the world.
These far-sighted long-term entrepreneurs underpin Italy’s ability to provide a counterbalance to its
high public debt and stay resilient as they sought to protect their wealth by reinvesting in their
businesses, combining both manufacturing know-how and service expertise to globalize their firms
with fierce competitiveness.
Italian small and medium enterprises contribute to 80 percent of the economy and employ 80
percent of the workforce; these figures are rather similar to the Asia Pacific region except that the
Asian SMEs account for only 30 percent of exports. SMEs make up the backbone of the Italy’s
economy trying to extend exports or to open up overseas branches. Italian executives are also fond
of saying that 40 percent of a German Audi vehicle is made up of Italian goods. These agile creatures,
darting between the legs of multinational monsters, are hungry global champions, with some of
them such as Luxottica scaling up to become world leaders.
A critical mass of long-term outstanding entrepreneurs will be the key to how the sprawling Asian
SMEs can transform themselves into multibaggers and for Asia to create its very own Prosperity 500
companies, as opposed to the Fortune 500 companies. This is particularly so when Asia is bigger
economically in size because products and services sell better as a result of rising cultural
cohesiveness and superiority.
Agordo, in the province of Belluno near the Dolomite Alps in northeast Italy, is the place where
Leonardo Del Vecchio started Luxottica in 1961. Italian excellence had historically been developed
and organized around industrial clusters – sunglasses in Belluno, cashmere in Biella, leather in
Arzignano, handbags in Prato, textiles in Carpi, furniture in Manzano, ceramics in Grottaglie, pasta in
Parma, mechanical engineering and packaging machinery in Bologna – to leverage upon the
22

23. competencies, resources, and social capital of one another to compete as a network rather than as
individuals.
Using his metalworking skills picked up as an apprentice to a tool and die maker in Milan, he first
made spectacle parts, followed by complete eyeglass frames in 1967 under the Luxottica brand and
ended the contract manufacturing business by 1971. By this time, ten years had passed since Del
Vecchio established Luxottica in “Stage 1”. Most SME business owners would have been contented
to keep what they have. Long-term outstanding entrepreneurs distinguished themselves as far-
sighted people doing things with a long-term approach because they strongly believe that is the only
way to build a truly durable and excellent business.
Del Vecchio saw early on that know-how in design and manufacturing, service excellence,
globalization of the business, and financing vitality are inextricably linked as crucial ingredients for
building and scaling a durable economic moat that is needed for sustained growth. After his first ten
years, he laid the groundwork in the next twenty years to craft his magnum opus. He first acquired
Scarrone, a wholesale distribution company in 1974. Subsequently, he set up its first international
subsidiary in Germany in 1981, the first in a rapid period of international expansion.
A key breakthrough came when he struck a licensing deal with Armani in 1988, and Armani
continues to hold a 4.88 percent equity stake in Luxottica till this date. The Armani coup proved to
be the first of many licensing deals. Thus, Luxottica became one of the biggest consumer companies
that consumers have never heard of, making sunglasses and frames for most of the famous brands
under license which include Bulgari, D&G, Salvatore Ferragamo, Prada, Burberry, Chanel, Polo Ralph
Lauren, Versace, Miu Miu etc.
“Stage 2” commences when the company was listed in New York in 1990 (later in Milan in December
2000). The listing not only exposed Luxottica to the disciplines of financial accounting and
governance, but also enhanced its ability to acquire other brands as Luxottica embraced the difficult
and painful path to stay focus to deliver results. This started with Italian brand Vogue (1990),
followed by Persol and LensCrafters (1995), Ray-Ban and Revo (1999), Sunglass Hut (2001), OPSM
(2003), Pearle Vision (2004), Cole National (2004), Surfeyes (2006), and Oakley (2007). Luxottica now
possesses its own brands and a wide-reaching network of more than 6,000 retail outlets. Its group
sales hit a record high of nearly US$8 billion in 2010.
While Del Vecchio, now 76 years old, continues to hold a 67.6 percent stake in Luxottica, he made
the bold move back in July 2004 in appointing an outsider as CEO. The executive is Andrea Guerra, a
low-profile and respected executive who had helped Merloni (now called Indesit), the Italian maker
of washing machines and other white goods, to double its sales and treble its earnings during his
four years in charge. Luxottica has since grown from strength to strength and US$9 billion in
shareholder value has been created.
Interestingly, in its family of over 60,000 employees, the number of women working in Luxottica –
where 60 percent of its customers are women – accounts for over 60 percent, and over 30 percent
are in senior positions. This is a stark contrast in corporate Italy which lags behind most
industrialised nations in terms of working women at all levels of seniority.
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24. Luxottica also gave back to those in need. OneSight, a Luxottica Group Foundation, is a family of
charitable programs dedicated to improving vision for those in need through outreach, research and
education. It has since helped millions worldwide to improve their vision.
Value investing is about having an eye for the long-term outstanding entrepreneur who is born every
day, even under the most austere of conditions and environment. A healthy seed can withstand
adverse conditions for extended periods of time, waiting for the right combination of conditions for
growth to begin.
It takes diligent and caring value investors to understand how outstanding entrepreneurs are able to
assemble the building blocks in the environment, captured from a roiling sea of material, and set
them into place as required, and how they burst asunder the limits of existing knowledge when they
introduced their new innovations to positively create value for the customers and society.
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25. Turkey’s Long-Term Entrepreneurs and Value Investing
By KEE Koon Boon
Godiva chocolate – owned by Yildiz Holding’s Ülker. New York’s 26,500 “Taxi of Tomorrow” for the
coming next decade – high chance of being manufactured by either Koç Holding’s automotive group
or Karsan Otomotiv. The third-largest household appliance brand in Europe, behind Sweden’s
Electrolux and Italy’s Indesit – owned by Koç’s Arçelik. Europe’s fifth largest brewer (and also the
largest independent European brewer) and the sixth largest bottler in the Coca-Cola bottler system
worldwide – Anadolu Efes.
These are some of the integral economic engines powering “the new indispensable nation” of the
21st century, or how Turkey’s Prime Minister Recep Tayyip Erdoğan describes his country which has a
GDP of $770 billion, now the world’s 17th largest and Europe’s 6th largest economy.
GDP has grown from $250 billion since the ruling ruling Justice and Development Party (AKP) took
office in 2002, average annual income has tripled from $2,500 to more than $10,000, and more than
$80 billion of foreign direct investments has poured in. In contrast, Egypt’s per capita GDP was little
changed in two decades at $2,160 in 2009.
Turkey is an overwhelmingly Muslim country with 73 million people and has a democratically elected
government and a secular regime that is established by modern Turkey’s founder Kemal Atatürk
since the fall of the Ottoman Empire after World War I. With a literacy rate of 85 percent, youthful
demographics are also working in Turkey’s favor to sustain productive growth: more than a quarter
of its population is under 15 years old and 6.3 percent are over 65.
In his 2009 book “The Next Hundred Years: A Forecast for the 21st Century”, author George Friedman,
also the founder of the private global intelligence firm Stratfor, argued that Turkey will be one of the
great powers of the future. Goldman Sachs economist Ahmet Akarli projected in a 2008 report that
Turkey could potentially emerge as the third-largest economy in Europe after Russia and the UK by
2050, overtaking Italy by the early 2030s, and Germany and France by the late 2040s.
Turkey’s strategic geographic location in Eurasia – between Europe, Middle East, Caucasus, and
Russia – offers gates to both the East and the West, fostering it as the center of regional trade as
well as a productive economic power in its own right. Making good use of the opportunity that
comes from signing a customs union with the European Union in 1995 – notwithstanding that its EU
membership has been on hold – Turkey is now the world’s biggest cement exporter and second-
biggest jewelry exporter. Its construction order book is surpassed only by China’s. It is Europe’s
leading maker of TVs and DVD players and its third-biggest maker of motor vehicles. Singapore-
based investor Jim Rogers wrote in his 2003 book “Adventure Capitalist: Profitable Lessons from a
Record-Setting Drive around the World” that he was “stunned” to discover that there were Turkish
corporations “that were the largest of their kind in Europe”.
Turkey’s vibrant economy has become a source of stability for its complex society in a sea of
conflicts – and the “Aslan Entrepreneurs” have been the vanguard to this contribution.
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26. These long-term entrepreneurs play a crucial role in building economically competitive
multinationals in the global arena. Long-term entrepreneurs want to build and scale their businesses
so that they can give more. Only when we have the desire to give, then can we want to persevere in
building something meaningful. This urge to build in order to give is the magnetic north to scale a
durable economic moat and they work obsessively to realise this vision.
As a boy, Kamil Yazici worked at his father’s little grocery store in Istanbul and learned how to trade.
Yazici partnered with Tuncay Ö zilhan in 1969 to set up two breweries and created what is now one
of Turkey’s most popular brands, the Efes portfolio of beer. For more than 20 years, Efes enjoyed at
least a 60 percent domestic market share. Most entrepreneurs would have been contented with
keeping what they have. But not the dynamic duo.
They combine specialization in product and know-how with global selling and marketing expertise to
continue the expansion of the operations of their company, Anadolu Efes, beyond the comforts of
their home market. Today, Efes not have a dominant position in the Turkish beer market with 86
percent market share, but it is also the fifth and third largest brewer in Europe and Russia
respectively, and is also the largest independent European brewer. In addition, Efes is the sixth
largest bottler in the Coca-Cola bottler system worldwide since having control in 1998. As a result,
Anadolu Efes had risen 12-fold in the last 10 years to over US$8.8 billion presently.
Long-term entrepreneurs know that the painful cultivation of a trustworthy structure and long-term
vehicle is critical to transfer stable succession to another management team, as well as specialized
and intangible assets that cannot be capitalized easily in the markets. These are essential but much-
neglected ingredients required for multibagger success. Without a durable economic moat, the
collection and reporting of high profits in “Stage 1” may not necessarily lead to increases in long-
term market value since the dissipation of specialized and intangible assets will change the way the
firm conducts its operations, contracts with stakeholders, and governs itself, and the risk of blow-up
rises substantially in “Stage 2”.
At Efes, a corporate restructuring was first proposed in 1999 and carried out in July 2000 to merge
four separate Efes beverage group companies into one combined entity, avoiding operational
duplications, eliminating inter-group transactions and matrix ownership structure between the
companies, and protecting shareholders from intra-brewery changes in business focus and sales
strategy. The enhanced transparency and simplicity in both corporate and capital structure led to a
clearer observation of the company’s operations and financial performance. The consolidation of
international bottling and brewing earnings through IAS reporting also brought the value of those
companies into daylight. With the valuable economic moat in place, the second-generation
partnership between the two families with a competent professional management team became
scalable as it established its operations in Russia and the former Soviet republics in 1999. The stable
partnership continues till now to sustain growth. And Efes grew together with the society in which it
operates, helping to support the Turkish farmers and tourism activities, create more than 40
permanent educational, health and social institutions, and open thousands of summer sports camps
throughout Turkey to generate interest in basketball.
A long-term outstanding entrepreneur is not merely a merchant but a man, with a character to form,
a mind to improve, and a heart to cultivate. Long-term entrepreneurs put their work, their will and
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27. their world in the services of others. Diligent value investors dedicate their life to finding
multibagger long-term entrepreneurs.
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28. Eclipse of the Jin and Hui Merchants: Lessons for Entrepreneurs and Value Investors
By KEE Koon Boon
Pinnacle to pits. Such is the tragic and thought-provoking path of the powerful Shanxi-based “Jin
Merchants” and Anhui-based “Hui Merchants” during China’s Ming Dynasty till their demise in the
late-Qing Dynasty as they could not cross the chasm to “Stage 2”.
They were richer than the emperor and their business empires stretched as far as to Asia, Russia and
Europe. The powerful Shanxi “banks” (piaohao) offered a full array of financial services, establishing
the remote inland Shanxi province’s Pingyao and the nearby Qixian and Taigu counties as the
premier financial centers or China’s Wall Street then; the first and largest of them, Sunrise Provident
(Rishengchang), was the modern equivalent of JPMorgan.
They were extremely hardworking; the Hui Merchants were also called “Hui Camels” as camels
symbolize their propensity to tolerate hardwork and overcome adversity in harsh conditions. They
were highly educated and cultured; the Hui Merchants were also called “Confucius merchants” and
one in five imperial scholars came from the Anhui province then. They worked in “teams”; family
groups and clan members collaborate to dominate geographies and industries ranging from tea,
timber to textile.
So why and how did these two powerful business empires went into oblivion?
Both the Jin and Hui Merchants, for all their vast accumulated wealth, did not invest for growth in
building an economic moat, a unique durable business model.
Take the case of Dashengkui, one of the largest business empires established by three “Jin
Merchants” then. It had 20,000 camels, dominating the logistics business in China, particularly in the
transport of tea to Mongolia, Xinjiang and Russia. Its assets were said to be so vast that they can be
converted into enough 50-liang tael to lay a road that stretches from Ulan Bator (the capital and
largest city of Mongolia) to Beijing.
Despite the advent of steamship as a low-cost and efficient transportation means, Dashengkui failed
to invest any of its profits or reserves in upgrading its logistics assets. Also, the Jin Merchants who
dominated the tea trade and became very rich, used the profits and cashflow from the businesses to
fund their lavish lifestyles and indulge in asset speculation, purchase land and rebuilt their houses.
In 1866, without the burden of tariffs, the Russians started to transport tea from China via the sea
route and subsequently exported the tea to Europe and Middle-East. They established modern
processing and manufacturing facilities in places such as Hankou, Jiujiang, Fuzhou, making use of
coal-based steam turbine technology and machines rather than the manually-driven turbines and
labor-intensive manufacturing methods used by the Chinese Jin Merchants.
The Russians produced high quality and low-cost tea bricks in huge quantities and had the added
advantage of transporting via the cheaper sea route instead of the conventional land-based path
dominated by Dashengkui. The fortunes of the Jin Merchants started to take a sharp deterioration.
They were contented to rely on their core business of piaohao and pawnshops for the cashflow to
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29. speculate in property and to fund their lavish lifestyles. As a result, they missed the opportunity to
convert their piaohao into banks, including declining the invitation to invest in the current HSBC.
Hu Xueyan (1823-1885), dubbed the richest-ever Chinese entrepreneur and known as the “Red-
Topped Merchant” (hongding shangren) after the scarlet tasselled hat which reflected his position as
a first-grade imperial official and awarded the “yellow mandarin jacket”, was probably the most
celebrated Hui Merchant.
Despite the realities of the Industrial Revolution exposing the weaknesses of the labor-intensive
manufacturing methods employed by most of the Chinese merchants as compared with the modern
machines which western companies invested heavily in, Hu, a veteran in the silk business, insisted
on using labor to process raw silk. At that time, the western companies had the upper hand and
deliberately depressed the price of raw silk in China.
In May 1882, Hu purchased raw silk in bulk, hoping to monopolize the supply in order to force the
cartel of western companies to buy at higher prices. Hu was an accomplished opportunistic trader all
his life and he was highly confident that his Fukang “Bank” was “rock-solid” in providing the
financing to fight the battle with the western companies.
Unfortunately, after two consecutive years of drought in Europe prior to Hu’s purchase, Italy had a
good silk crop harvest. Raw silk prices plummet and Hu’s unsold inventory depressed the silk market
further. A French navy fleet also arrived at Shanghai, threatening to attack China.
With the prospects of a Sino-French war breaking out, cash became king and banks withdrew their
short-term loans. Trade halted and there were massive property and asset disposals in Shanghai.
Bank runs erupted, impacting Hu’s “rock-solid” Fukang Bank. By December 1883, Hu was bankrupt.
Hu died in 1885 in the same year as did General Zuo Zongtang, who provided Hu protection and
patronage, enabling Hu to get and stay rich.
Their neighbors, the Ningbo Entrepreneurs, were more far-sighted, reinvesting their profits into
building sustainable industrial businesses rather than making speculative asset transactions that
yield transient profits, making the successful transition to Stage 2.
While investing for growth is critical, it is important for value investors to note that making capital
investments without allocating them to build a team and an economic moat is likely to be an
inefficient and value-destroying exercise. They will fall into the general category of firms described
by finance researchers Sheridan Titman, John Wei and Xie Feixue in their 2004 JFQA paper. These
firms that increase capital investments substantially destroy future firm value in the long-run
because investors consistently fail to appreciate managerial motivations to put the best possible spin
on their new “growth opportunities” when raising capital to fund their “expenditures”.
In addition, value investors need to be discerning in understanding that investing to build an
economic moat to build up the intangibles and core competencies for sustainable and scalable
growth could depress short-term cashflow. Thus, the financial numbers may not look appealing from
a historical snapshot perspective.
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30. Established by Mr. Sze Man Bok and Mr. Hui Chit Lin in 1985, Hengan grew over 20-fold from
US$480 million to US$11 billion since its HK listing in 1998 to become the largest producer of
personal hygiene products such as tissue paper, sanitary napkins, pantiliners and baby diapers.
Interestingly, Hengan was below a billion market cap post listing until 2004. From 1998 to 2003,
Hengan invested a total of around S$140 million in capital expenditures and conserved cash. The
capex figure scaled six-folds to a total of S$830 million from 2004 to 2009 as Hengan invested heavily
to move up the value chain in higher-end products and to distinguish itself from the hundreds of
low-end producers. Annual profits grew six-folds from a size of S$57 million in 2003 to S$400 million
in 2009, creating S$12 billion in firm value in the process.
Long-term entrepreneurs need to appreciate that generating profits via collecting transactions will
not lead to sustained multibagger returns. Hu Xueyan, the consummate trader in accruing multiple
profitable transactions all his life, witnessed the horror of not building a durable economic moat
when he opened his warehouses that were stockpiled with unsold silkworm pupae. The silkworms
had metamorphosed into moths and Hu literally watched his fortunes flutter away.
Profits need to emanate from, housed and reinvested in an economic moat to be rejuvenated,
propelling the enterprise to scale new heights and generate sustained multibagger returns. Without
doing so, they risk blowing up in Stage 1 like the Jin and Hui Merchants.
It is the task of value investors to dive through the rumpus and bustle of cabal in poignantly troubled
times in a vigilant watch for outstanding entrepreneurs devoted in their intensive task of building an
economic moat.
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31. Reforming corporate governance
Business Times Singapore
Published November 25, 2010
Investors need to understand interaction between underlying business model dynamics and those
running the enterprises
By KEE Koon Boon
Snatch. The action undertaken by Harpies, the spirits of sudden, sharp gusts of wind in Greek
mythology who would snatch away (harpazô) things from the earth. They had plagued the old blind
King Phineus such that whenever a plate of food was placed before him, the winged Harpies would
swoop down and snatch it away, befouling any scraps left behind.
CORPORATE governance, as elucidated by leading finance researchers Andrei Schleifer and Robert
Vishny, ‘deals with the ways in which suppliers of finance to corporations assure themselves of
getting a return on their investment. How do they make sure that managers do not steal the capital
they supply or invest in bad projects?’
A formerly popular group with retail and institutional investors of around 150 Singapore-listed
Chinese companies, the worth of the S-chips has dwindled significantly from around S$40 billion in
market value by more than half due to the continuous gust of cold wind in mis-governance and
accounting scandals blowing across these firms.
Attention and discussion on corporate governance reforms in minimising managerial agency costs
and to align managerial interests with the shareholders had centred, perhaps narrowly, on the
‘agents’ or the ‘chess pieces’, some of which include the independence and quality of the
independent directors in their monitoring efforts.
We need to step back and look instead at the ‘chess board’, the rules of the game in Asia that
influences ownership behaviour and the accounting mechanism, in order to avoid the plight of
Phineus with managers or controlling owners leaving defiled returns for the minority shareholders
and an awful mess for the authorities to clean up.
Wedge. The word to understand the Game. That sharp divergence between cash-flow or equity
rights and control rights in the typical Asian firms. Controlling owners are tempted to tunnel assets
out of firms where they have low cash-flow rights but high controlling rights to firms where they
have both high cash-flow and controlling rights, oftentimes their closely held private firms in which
they are the dominant shareholders.
Let’s take the case of Satyam to understand the Wedge.
Ramalinga Raju tunnelled out US$1 billion in cash and assets from his listed vehicle Satyam, where
he and his family held around 8 per cent equity rights, to his 100 per cent owned private property
firm Maytas, to participate in Hyderabad’s property market. With Maytas, they can get 100 per cent
of the cash flow as compared to 8 per cent in Satyam.
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32. When the credit crunch started to melt away the prospects faced by his private firms, especially as
Hyderabad’s property market cooled with prices and rents falling more than 30 per cent, he could
not bring the dwindling money back to Satyam from his 300-odd private business vehicles for
accounts-keeping and maintenance of a competitive dividend yield.
Raju decided to raise cash from investors to make up for the bogus US$1 billion in cash and assets by
injecting some of his private assets into the listed Satyam. The price tag of the acquisition to ‘de-risk’
the business? US$1.6 billion.
Minority shareholders rejected his plan, decrying a ‘woeful misuse of cash’. Past enamoured
investors abandoned Satyam one by one, and share prices fell, which triggered the margin call in
Raju’s personal pledged shares. Bankers force-sold his shares, resulting in the price to plunge further.
Like Raju, many of the S-chip controlling owners have multiple private business interests, property
development in particular, outside of their listed vehicles.
How did the distorted incentives in the Wedge work its way to be manifested in the accounts?
First, the controlling shareholders will engage in ‘propping’ activities to artificially inflate the sales
and assets of the listed firms through related-party transactions (RPTs) to entice the funds of
investors who did their ‘fundamental analysis’ of the firms. Artificial accrued sales are booked under
‘other receivables’, while the bogus cash-based sales stay hidden in the ‘cash & cash equivalents’.
After ‘propping’, ‘tunnelling’ or expropriation of these assets out of the listed firm follows,
engineered through related-lending and transfer activities which are rarely paid back by the
controlling shareholders. These cash transfers are done artfully, often in short-term transactions in
order to be qualified as ‘cash equivalents’. That explains why most of the artificial cash balances in
these firms typically earn low average interest rates, at below one per cent, when the typical bank
rate in China varies between 5 and 10 per cent.
In other words, there is left-side in via propping, and right-side out via tunnelling.
Take the case of the high-profile and ‘highly profitable’ S-chip Sino-Environment. Footnote 12 of
their 2008 Annual Report revealed that the average interest rate earned from their 728 million yuan
(S$143 million) cash in the balance sheet is merely 0.56 per cent. In Footnote 13, the amount due
and dividend receivable from its subsidiaries in the company accounts is 282 million yuan. In their
group accounts, the amount of non-trade receivables is 240 million yuan out of the 276.5 million
yuan in total receivables.
From Footnote 12, Sino-Environment possibly made dubious related-party acquisitions, financed by
the IPO and secondary equity offerings, to cancel the artificial receivables that were created in
collusion with the related parties, and booking the set-off as goodwill and intangible assets which
stood at 228 million yuan.
In a Raju-deja vu fashion, property was involved. According to news articles reporting about the
firm’s situation, its chairman Sun Jiangrong reportedly tried to siphon away a 100 per cent stake in
Chongqing Daqing Property, which owned properties in China worth 10 billion yuan, to his Hong
Kong private firm called Top One Property Group, and later to a Chinese firm owned by his brother.
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33. Thus, rather than hearing again that inevitable lament why boards – often skin-deep installations –
work so poorly so often, regulators should thrust the corporate governance stake right into the heart
of perverse behavioural incentives where it matters most: by having mandatory disclosure of the
ultimate unseen ownership and private business interests of the controlling owners at these Asian
firms to hopefully curb the growing opaqueness in the Wedge between ownership rights and cash-
flow rights disguised under the increased usage of nominee shareholdings and non-disclosure.
While controlling owners may view the tunnelling of that $1 out of the firm to be enhancing or
protecting their own interests – albeit at the detriment of the minority shareholders – particularly in
bad times when they fear losing the value of what they have built, they need to appreciate that they
are putting to risk the going concern of their companies to enjoy that elusive valuation premium of a
multibagger that usually comes from putting that $1 – and more – back into a single, focused
business vehicle, and riding through the ups and especially downs of the business cycles with their
reputations intact.
Investors should take heed of the rules of the game, and pay due respect in seeking to understand
the interaction between the underlying business model dynamics and the people running the
enterprises. It would be premature to speak of ‘fundamental’ analysis using possibly rigged or
incomplete accounting numbers due to propping and tunnelling to fashion elaborate, but garbage-
in-garbage-out, valuation models, or ‘technical’ analysis of possibly manipulated prices and volume.
When value investing is applied properly and rigorously in Asia to identify the right entrepreneurs
and managers who are serious in building their business model into a legacy, and to protect, to
guard, to preserve the assets of the investors, the rewards can only be bountiful, especially in a
tempest-tossed environment.
The writer is a lecturer of accounting at Singapore Management University, and a director of Aegis
Group of Companies, a Singapore-based investment management organization
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