A Tale of Three Billionaires

Reading Time: 10 Minutes

Joe Studwell’s book How Asia Works is well known for its macro analysis of the East Asian growth miracle. But his book Asian Godfathers is underrated for its stories and description of how money is really made in Southeast Asia (and the two British colonies: Hong Kong and Macau - an area I will call “the region”). He focuses on three time periods: first in the late 19th and early 20th century when big businesses made their money via commodities, during World War 2 when fortunes were created by trading with Japanese occupiers, and in the post WW2 world when states were being formed in the region. 

Commodity Capitalists

Commodity capitalists, as the name suggests, made their money by selling commodities. How did this work? They did it because of two factors: colonialism and immigration. Europeans from the Portuguese in the 17th century to the British in the 19th had been trying to conquer Southeast Asia. However, in the end only the British prevailed in Malaya and the Dutch in Indonesia. With the signing of the 1824 Dutch-British treaty, this was made permanent. When the new governments started, they had to raise revenues in some way or the other. The method they chose was revenue farms. In a revenue farm, the government granted a monopoly on a large part of the land to a farmer in exchange for a fixed fee. Typically this was done by auction, but it did happen that the bids in the auction were too few to get a good price, or that payment was late or there was collusion among the bidders. Due to inexperience, (or whatever reason Studwell doesn’t state in the book) the middlemen buying these got a great deal on the revenue farms. 

The second macro trend in those times was immigration. There were large numbers of Chinese migrating into Southeast Asia in the late 19th and early 20th centuries. First China was in a difficult place then. There were rebellions, wars and long periods of political instability. The worst was the Taiping rebellion where a man who claimed to be Jesus Christ’s brother led a rebellion against the Qing dynasty that led to over 20 million dead. The second reason was that steamboat technology made it easier to migrate. After the Opium Wars forced open Chinese ports, there was a perfect combination of push and pull factors that led to Chinese migration to Southeast Asia. Along with the Chinese, several Indians also migrated to SEA with most working under contracts they could not read, and with conditions that would be considered inhumane today. These provided cheap labour for plantation and mine owners in Malaya and Indonesia. 

And this is where our first billionaire comes in.

Oei Tiong Ham is probably the biggest billionaire you haven’t heard of. First because he made his money in the late 19th century and second because his business doesn’t exist anymore - it was nationalised by the Indonesian government under Sukarno in 1961. But when he was alive, he was extremely powerful. Born to an established businessman in Java, Oei won his first opium revenue farm in a supposedly competitive auction. Starting with this he made an opium empire with this business Kian Gwan. Oei made opium his “core” business. He used the money from it to fund everything else he did.

 How did he sustain it? Political connections seem to be the answer. His daughter writes of him lavishly dining with senior Dutch officials and giving gifts. It paid off for him. In the 1880s when there was a global economic downturn and farms began to fail, he got important tax concessions from the government. The money from his state guaranteed monopoly on opium went to other industries: sugar plantations and processing, shipping and later banking. Was Kian Gwan’s success all because of monopoly and nepotism? I don’t think so. He was the first Indonesian business to hire Dutch engineers and accountants. Other sources also mention that he was the first to use Dutch accounting systems, so I think he wasn’t only relying on state protection but also had advantages himself. 

Oei moved to Singapore in 1924 presumably to avoid a war profits tax levied by the Dutch (and he was not the last Indonesian tycoon to do that!). Kian Gwan was later nationalised by the Indonesian government in 1961 by the Indonesian government. Today it’s a shadow of what it was under Oei and his sons. 

Wartime Collaborators

Wars are profitable, and even more when the occupying force has a large appetite for resources and the means to pay for it. The best example of this is the Japanese in Southeast Asia. They killed, interned or forced most of the existing capitalists to flee. This created new opportunities for enterprising ones to make money off the Japanese.

It’s tempting to think that WW2 was a very long time ago, and mentally distance it away from ourselves. But I don’t think that’s possible when you look at Stanley Ho, the late Macau gambling billionaire. When the Japanese landed in Hong Kong, Stanley Ho’s uncle - Sir Robert Ho Tung - gave him a job which he quit to start his own venture. Ho worked with local godfather Peter Lobo, the Japanese and a group of local Chinese businessmen. The Macau Cooperative Company as it was called was a government enforced monopoly on all trade in Macau. The Macau Cooperative bartered anything Macau had for food. So they usually sold gasoline, kerosene, tugs, lighters and anything Macau had to offer. The MCC was crucial to maintaining the food supply of Macau, but it came at the cost of collaborating with the brutal Japanese occupiers. By his 24th birthday, Stanley Ho was a millionaire. A large part of his money came from the MCC.

In Singapore, the history remains shrouded in more secrecy. Studwell says that an octogenarian confidante of a tycoon told him that the Civilian War Memorial was funded by the profits made from collaborating with the Japanese. It was funded by the Singapore Chinese Chamber of Commerce and Industry - whose members were the largest businessmen in Singapore. Studwell can only name Ko Teck Kin the president of the SCCCI and Tan Kah Kee’s son-in-law Lee Kong Chian but I wouldn’t be surprised if other names were there. 

Li Ka-Shing

I don't know who did Li Ka-Shing’s PR but I really want to meet them. They’ve converted his image from what could have been “evil monopolist who made his money fleecing consumers” to “hardworking old man with a frugal lifestyle”. Here’s how the image of Li goes: he arrived penniless in Hong Kong in 1940. He worked very hard and earned enough to start his own business and then was a trailblazing businessman who pushed away the old oligarchs of Hong Kong. Now he’s retired and spends his money on philanthropy. 

There are a few things that are wrong with that: first he had several family connections that made it much easier and second he made his money in collusion with the government. 

Li Ka-Shing did come to Hong Kong penniless, but what the story doesn’t mention is that he got his start working for a wealthy uncle that owned a moderately large watch company (today it has 6,000 employees for a rough indication of size). He then married his first cousin (the daughter of the rich uncle), and built his father in law’s business up. An anonymous source says that Li’s mother in law also gave him substantial financial backing. This myth that he was fully self made is false, but a minor one relative to the rest of them about him.

What is the most surprising about Li’s businesses is that he has made almost all his money in oligopolies. In almost every single business Li is involved in, there are barriers to competition in it - and all of them would not be allowed in any competitive economy . From real estate to shipping and grocery stores I don’t think Li’s businesses have seen competition what his equivalents in America or Britain would have seen.

Real estate is a great example. The colonial government set the scene for the oligopoly when they decided to fund their budget with land sales. All land was Crown land till decided otherwise. The government auctioned land with a twist - anyone who paid a land not designated for conversion had to pay a large conversion premium before it began. The effect was to rule out small players in the market and create an oligopoly. A paper found that the lowest return on one of these transactions (including the conversion premium) was 77% and the highest was 364%!

Li’s supermarkets are another great example of behaviour he got away with but would be illegal in any other developed country. Li’s PARKnSHOP and Jardine’s Wellcome control about 70% of the groceries market in Hong Kong. When Jimmy Lai’s ecommerce AdMart tried to set up shop in Hong Kong, their trucks couldn’t enter any building residential or commercial owned by Li. Let  me put that into perspective - if you ran a store in any building owned by Li’s real estate business Cheung Kong, you couldn’t get any shipments from AdMart. If you lived in a service apartment owned by Cheung Kong, you couldn’t get a delivery from AdMart. AdMart failed for a large number of reasons, but this manoeuvre would be illegal elsewhere and shows Li’s regulatory advantage. (This Asiaweek article claims more than the book does about the refusal to deal and I wouldn’t be surprised if it was true). 

Another place where Li had a dominant position was shipping. Despite having labour costs far lower than other countries with similar per capita GDP, terminal handling fees in Hong Kong are fairly high - one report estimates them to be double of that in Germany. Why does this happen? Concentration among port berth owners is the reason. Li’s Hutchison owns 14 out of 24 ports and this has remained his “core” business that funds his real estate business. Indeed in the 80s when Hong Kong’s property market fell due to a global recession and a local political crisis due to the impending Sino-British Joint Declaration, In this time, his shipping business issued a special dividend to owners of the preferred stock. Unsurprisingly, Li was the largest owner of the preferred stock making it a transfer from holders of common stock to him. 

In 1996 there was a scandal where Peregrine, an investment bank run by a close associate of Li’s, put a sell note on Hutchison - Li’s holding company. The stock fell about 13% and Li swooped in to buy shares of the company. The fact that Philip Tose went on Li’s payroll in 1998 after Peregrine went bust only adds to the suspicion that there was market manipulation. 

In the end, just like Chris Patton, I think he’s a genius. An unethical one, but definitely a genius who used the tools at his disposal to earn more money than he can use. 

Moral of the Story?

The moral to businessmen is that they will be entering an unfair place but also that their competitors in Southeast Asia haven’t faced competition in a long time. When they face competition that they can’t crush (see ComfortDelGro versus Grab in Singapore), they are forced to relent, and can’t fight. You need to have experience fighting competitors so that you’re prepared when the inevitable large competitor arrives. (This seems to be a pattern from the military, to pandemic fighting, and even autoimmune diseases)

From a policy perspective, it shows the doom loop you can get when you have business and government elites with the same incentives. The problem here is deeper than corruption. Corruption implies transactions motivated by money - tycoon pays government money, government is happy and repeated. But the problems here are different. The incentives of the government and tycoons are related. There needs to be no exchange of money and you can have a dysfunctional economy! That was true with Oei Tiong Ham and it is true with Li Ka-Shing. Is Li corrupt? That doesn’t matter. What matters is that the Hong Kong government has an interest in keeping his real estate business alive!