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Hocus
Pocus & Fundamentals
By Michael Alan Hamlin
March 22, 1999
"We need to go back to fundamentals,"
Li & Fung chairman Victor Fung advised business and government
leaders attending the recent Asia Society conference in Manila.
"Asia has been driven by entrepreneurship. By SMEs," he
argued, suggesting that the bursting of the Asian asset bubble and
the increasingly troubled fortunes of big business don’t mean
that the region’s competitiveness has eroded.
Mr. Fung reminded listeners that
Asia still has at least three fundamental components of competitiveness
working in its favor: a young, productive population, high savings
rates providing domestic capital and liquidity, and a strong work
ethic. The Philippine situation differs somewhat since it does not
feature the high savings rates most other Asian countries do, as
other speakers during the conference pointed out. However, foreign
investors usually cite the productivity and educational attainment
of the Philippine workforce as a principal investment incentive.
This means that while the Philippines demonstrates the capacity
to attract value-added foreign investment, doing so consistently
is vitally important to recovery because there is little capacity
for domestic capital formation.
Which makes Mr. Fung’s point
all the more important to the Philippines. And that point is that
economic development is driven by small firms that supply multinationals
and international markets, not the grandiose dreams of big business
and conglomerates that rely principally on domestic consumption.
"The basis of the Hong Kong economy is its 300,000 small companies.
Forty percent of these companies are operating across borders,"
in said, "in two or more locations. They are mini-multinationals."
Because these dynamic firms operate
across borders, Mr. Fung says that liberalization is not a threat,
but an opportunity, so "we should hasten the process of liberalization."
Mr. Fung knows what he’s talking about. His successful firm
excels in managing what is popularly known as an extended value
chain, a virtual organization encompassing raw material suppliers,
manufacturers and assemblers, printers, and shippers aside from
its own value-added processes.
The success of his company is anchored
on a network of relatively small firms that provide the inputs and
services Li & Fung requires to profitably meet the demands of
its European and North American customers. But the viability of
that network depends on the free flow of goods and services between
Asian countries.
This is for a couple of reasons.
First, within Asia mini-industrial clusters are beginning to emerge.
The principal features of these clusters are professionalism, quality,
and innovation. While low cost remains a consideration in choosing
Asian suppliers, it is not the consideration. The priorities are
the capacity to meet commitments, produce according to international
standards, and originality. Second, Li & Fung finds that the
best yarn producer, the best textile manufacturer, and the best
garment assembler are located in different Asian countries. Cost
consideration then becomes not a matter of who can fulfill their
part of the supply chain at the cheapest price, but how cheaply
materials and finished product can be moved across borders.
In other words, liberalization contributes
to the capacity of small companies to increase the value-added of
their products and exports because the high tariffs that confined
them to low-cost manufacturing are disappearing. As a result, they
become integral components of an international value chain that
consistently contributes in a meaningful way to local economies.
But if we look at who dominates the
business agenda in politics and media, it is not these engines of
growth, but big business. That doesn’t necessarily imply that
the agenda big business pushes is detrimental to the interests of
mid-market enterprises. In fact, in most cases they are in fairly
close alignment. There are exceptions, of course. The obvious ones
are local, uncompetitive manufacturers that have failed to create
internationally competitive organizations and the large retailers
who want to keep the market to themselves to the detriment of consumers
as well as the economy.
The problem with big business domination
of the business agenda, however, is that it creates the perception
that the robustness of the economy is tied to a few large firms.
This is true everywhere, so it is not a uniquely Philippine or Asian
circumstance. But importantly, it takes our eyes off the fundamentals
Mr. Fung says really account for Asian prosperity with the result
that both government and private-sector resources are funneled toward
support of big business to the detriment of mid-market enterprises.
The fallacy of these circumstances
was expressed to me not too long ago but Banthoon Lamsam, president
of Thailand’s struggling Thai Farmers Bank. Aside from recruiting
fresh equity to rehabilitate his Bank, Mr. Banthoon said that future
profitability is closely tied to the mid-market — another term
for small- and medium-scale business — sector. Even without
the bursting of the real estate asset bubble, Mr. Banthoon says
that big business, "with its grandiose dreams," has not
been a profitable sector for the bank. Because all banks wanted
to do business with the largest firms, of which there were relatively
few, these firms were able to negotiate tough terms. On top of that,
the Asian crisis actually made them a worse credit risk than well-managed
mid-market firms.
The lesson here is that recovery
doesn’t depend on how well big business does. Big business
is a beneficiary of recovery. Recovery depends on mid-market enterprises,
the true engines of growth.
Copyright © 1999 The Events
& Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.
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