ENTERING GLOBAL MARKETS

The Chinese Way Of Business

What appears to be a good old-fashioned family business may be a $100-million international conglomerate
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FROM ITS OFFICES ON THREE continents, the company trades in a staggering array of products, from Thai tobacco to Chinese tea to American software packages. Its factories around the world produce everything from sport shirts to wristwatches. Last year, the firm's revenues topped $100 million -- a doubling of sales in just five years.

Yet for all its rapid growth and diversification, the corporate structure of the Chung Cheong Group would surely drive even the most creative accountant to distraction. Here is a $100-million company that finances its operations exclusively from cash flow. There is no corporate headquarters' staff, no chief financial officer, not even an identifiable chain of command. A board of directors is said to exist, but identifying its members is difficult, since nobody can recall that it has ever convened a meeting. Division heads, if you can call them that, are often found involving themselves in the day-to-day operations of other divisions. Ask any one of them for his phone number and you're likely to get a fistful of different business cards.

If the various enterprises of the Chung Cheong Group seem unrelated, know that those who run them invariably are related.

"Nothing we do really makes sense unless you see it in the context of the family," explains Wing Chung, number-four son and heir apparent to foundfer and patriarch K. S. Chung. "Like any family, things here get done on an ad hoc basis. Everyone does a little bit of everything. You can't chart it out on a piece of paper."

What you can chart, however, are the Chung family's triumphs. Over a period of 60 years, its members have survived depression, oppression, war, and revolution. Against entrenched and focused competition, they have mastered an array of product categories that would stagger the most sophisticated M.B.A. And in the arena of international trade, dominated by giant corporations and impenetrable government bureaucracies, the Chungs offer refreshing proof that, in business, family ties are still among the most powerful and enduring.

Although frail and nearly deaf, 82-year-old K. S. Chung oversees the family empire from a small office in Bangkok. Since coming to the teeming Thai capital nearly 30 years ago, he has built himself up from an itinerant, down-on-his-luck trader to a highly respected and influential business leader. The source of his success has always been his patience and the cunning and control he has brought to bear on his far-flung business operations. Although detached now from most day-to-day decisions, his business philosophy still dominates the Chung Cheong Group.

Born 20 miles from Canton when China was still a feudal state, K.S. was raised in Singapore, studied in Hong Kong, and started out in business trading with Malaysia. In 1929, he accepted an offer from his maternal uncle to take over operations of a small company shipping Chinese goods to Port Klang on the Malaysian peninsula, and upon his arrival, the company enjoyed an immediate success. Much of the credit. K.S. concedes, went to the company's new and energetic marketing manager. As a salesman, K.S. recalls, this manager was unstoppable, but attending to financial details was not one of his strengths, and K.S. soon found his company in a severe cash-flow crunch. "He was a great talker," says K.S. "He could tell you a lie and then you would find it out, and he'd tell you a better lie. I made the mistake of trusting him."

It would be a mistake K.S. made only once -- and one that, in many ways, still defines the company's management philosophy half a century later. For today, nothing so distinguishes the Chung Cheong Group as its determination to keep control of money and operations tightly in the hands of a few trusted family members.

"I started out with a failure and had many others," explains K.S., sipping a steaming cup of tea on a hot Bangkok afternoon, "but that is how this family got its training. Setbacks are not really bad. They make you grow up in your business philosophy."

Retreating from his Malaysian miscalculation, K.S. moved back to his native Canton, where in 1931 he opened a successful restaurant and launched a local newspaper. The combination of an inflated economy and harassment by local government officials dissatisfied with his paper's coverage might well have turned the newspaper into K.S.'s second failure had not an advancing Japanese army intervened, forcing his large family into exile in Hong Kong. When the safety of Hong Kong was also overrun by the Japanese two years later, K.S. returned to the occupied countryside outside Canton and worked as a translator and interrogator for units of British intelligence.

At the war's end, K.S.'s British connections served him well. In 1946, he opened the Pacific Trading & Agency Co. -- even today, the family's flagship operation -- and quickly won from the Allies coveted licenses to import Australian construction equipment, European steel, and, most important, Chinese raw materials into war-ravaged Japan. Business was booming, and financial security seemed within grasp. But in 1950, fate -- again in the form of an invading army -- seemed to intervene, this time across the 38th parallel. When Mao's Red Army entered the Korean conflict some months later, U.S. officials in Japan quickly slapped an embargo on all trade with the People's Republic of China. K.S.'s enterprise shriveled, and for the third time, he found himself facing financial ruin.

In desperation, K.S. shifted his trading base to Thailand, which had a long history of tolerance toward the Chinese. But this time he took nothing for granted. He was careful to develop political as well as business connections. He adopted a Thai name and Thai citizenship and cultivated close ties with the military leaders who have long controlled much of the country's economy.

Even today, reducing political risk is a key management objective. This is a family -- and a business -- that has friendly relations with both Chiang Kai-shek's political heirs in Taiwan and their Communist archrivals from the mainland. Money and assets are spread among no fewer than a dozen different countries and territories. And children -- the next generation of company executives -- are now sent off to become citizens in such politically stable countries as the United States, Canada, the United Kingdom, and Switzerland.

This family diaspora also serves an important business function. For with members settled in so many countries, speaking the local language and maintaining strong local contacts, the Chungs enjoy an access to critical market information and new business opportunities usually reserved for only the largest multinational corporations. As a result, the family has been able to diversify its product line intelligently, expand its markets, and prevent overreliance on any one business, customer, or supplier.

"There is a safety in being in so many countries," K.S. explains as he stands to end a lengthy interview. "Our assets are not our expertise or money, but the family members themselves. By keeping them in different places, we maintain maximum flexibility to do our trading, no matter what happens in any one place."

When he first arrived in Thailand, K. S. Chung was very much the entrepreneur on the run -- albeit one with a brood of 13 children to support back in Hong Kong. A picture-postcard nation of rice paddies, water lilies, and gold-domed temples, Thailand offered Chinese natives such as Chung a haven after World War II. Today, the Chinese account for roughly 10% of Thailand's nearly 50 million people, and as much as one-third of the population of Bangkok.

Although the political conditions in Thailand proved unthreatening, the business opportunities K.S. found there were meager. He had come hoping to replace China with Thailand as a source of foodstuffs and raw materials for his Japanese customers, but even with the addition of a small sideline operation importing American tobacco, K.S. could barely eke out a living. So desperate were things in those early days that he set up a little cookie shop downtown -- and to this day, his offspring refer to him jokingly as a cookie merchant.

Patience, however, is a traditional Confucian virtue, and one well suited to business. And after several years, K.S. saw an opportunity for expansion in his tobacco-importing sideline.

It seemed that for generations, the farmers of northeast Thailand had lived in grinding poverty. Depending almost totally on subsistence rice production, their incomes were only a fraction of those enjoyed by residents of the more prosperous cities, or even agricultural areas like the "golden triangle" that includes northwest Thailand, with its ideal conditions for growing opium. In the northeast, once the rice harvest was over, rural families would often pack up and trek to Bangkok, where the men would toil in odd jobs and women would sell themselves at the city's many brothels.

By the mid-1960s, economic despair in the high plateau had spawned political unrest. Poor farmers, backed by local Communists, had taken up arms and begun to challenge the military-controlled central government, in much the same way they had in neighboring Laos, Cambodia, and Vietnam. In response, officials in Bangkok looked for ways to improve the region's economy by heping farmers to diversify their crops. And the crop they focused on was tobacco -- an "Oriental" tobacco traditionally produced in Greece and Turkey that, when blended with American tobacco, produced a cigarette with a particularly pungent aroma.

K.S. got wind of the project through the government contacts he had carefully cultivated over the years, and when the first Thai tobacco became available, he found willing buyers in Taiwan. His success led him to suspect that there was a large potential market for the Thai leaf, if only enough of it could be grown. But the northeastern farmers were suspicious and rather set in their ways and, given the political situation in the region, government officials were reluctant to press their program much past the suggestion stage. K.S. spent years pleading with and cajoling the generals to be more aggressive about the tobacco initiative, lavishly entertaining them and their cronies. Still, nothing happened.

"Everyone thought he was crazy," recalls Karl Kunz, then a Peace Corps world-development worker in Thailand and now a top executive in the Chungs' Thailand operations. "Everyone rejected him. The word was that you'd never get large numbers of Thai farmers, who are very independent, to cooperate on anything like this."

But in 1969, persistence finally paid off. That year, K.S. convinced a tobacco processor from Oxford, N.C., one W.A. Adams Inc., to enter a joint venture, Adams International, to promote the growth of Oriental tobacco. Adams offered tremendous technical knowledge and the potential of large markets around the world. And with this American commitment, K.S. began to find that government officials were suddenly more interested in his project. When, in 1974, the giant Phillip Morris concern started buying the Thai Oriental leaf, business picked up even more, and in one year exports from Adams International jumped from 70 to 580 tons. Today, those exports stand at more than 3,000 tons, with revenues topping $8 million.

K.S.'s patience with officials was complemented by the patience with which he dealt with the northeastern farmers. Rather than simply buy their cooperation with cash, he insisted on developing a tobacco-growing culture in the region, providing education and on-site technical assistance along with seed, manuals, and tools. He realized his challenge was not simply to produce an annual crop, but to change agricultural habits developed over centuries.

"What K.S. did was think long term," says Kunz, who now heads up Chung's burgeoning computer operations in Bangkok. "He thought from the farmer's point of view, and in his time frame, and he was willing to put in the resources."

Today, there are more than 23,000 Thai farmers enrolled in Adams International's tobacco program. Where the seasonal rice crop might bring in a mere 3,000 Thai baht, an off-season tobacco crop can earn a small farmer nearly three times as much. Once improverished, many farmers in the northeast now enjoy unprecedented prosperity. And the success of the program has helped to reduce the specter of a peasant insurrection.

"Before, the farmers here lived in huts. Conditions were terrible. If the rains came just a little late, people couldn't get enough to eat," recalls Kaen Phootsree, a former official of the Thai government's tobacco monopoly and now a branch manager of the Adams-Chung joint venture. "Now they have houses, refrigerators, and even hand-made pickup trucks. People are very appreciative of the Chungs."

In the dark days after the collapse of his father's Japanese enterprise, Wing Chung lived with his grandparents in a tiny apartment in Hong Kong, sharing a bed with two of his brothers. The family lived off the proceeds of his grandfather's retirement kitty and what money K.S. was able to send back from Bangkok. But by 1958, the family's finances had sufficiently improved to send Wing to the University of California at Berkeley, where he received a degree in mathematical statistics. He went on to earn a master's degree from Columbia University and an IBM Watson Fellowship.

With his impressive credentials, Wing at first saw better opportunities for himself outside his father's modest business. He joined up with Hoffmanne LaRoche Inc., the giant pharmaceutical company, married a Chinese woman from an upper-class Beijing family, and settled down to a comfortable lifestyle in suburban New Jersey.

In 1972, however, after years of prodding from K.S., Wing finally agreed to join the family enterprise and help it chart a new course. For to Wing, as to his father, the success of the Thailand tobacco operation suggested that the family need no longer serve as traders and middlemen living off thin margins. The Chungs had now seen the profits that come from adding value through management, technical assistance, and manufacturing.

The switch of emphasis away from trading was also one required by a world economy that was becoming increasingly internationalized. "All our old customers were getting more sophisticated, and soon they would not need us anymore," Wing explained over lunch at a Los Angeles restaurant. "The second- or third-generation manufacturer or merchant in Hong Kong speaks English and has his own contacts overseas. So they are learning to do without middlemen like us. To survive, we have to become more sophisticated in what we do. We must start creating value."

The seed of this new approach was planted in the tobacco fields of northeast Thailand. The basic task of managing the Thailand operation had produced an enormous need for accurate record keeping, but conventional computer systems did not perform well in the rough, rural environment of the Third World. What they needed was a system that was rugged and could be used by several people at the same time.

A solution suggested itself in 1978 when Wing ran into Kwok M. Ong, an old school chum from Berkeley. Along with two fellow engineers at the Jet Propulsion Laboratory, in Pasadena, Calif., Kwok had been working on a new microcomputer that could serve several users at once. Now he and his colleagues agreed to go out on their own and, with a $50,000 investment from the Chungs, formed a joint venture called Action Computer Enterprise Inc. By February of the following year, the first California-made computers had been shipped to tobacco operations headquarters in Banphai, a small village 400 kilometers from Bangkok.

While Kwok Ong and company chairman Herbert Siegel perfected the multi-user technology, Wing Chung turned to marketing Action's Discovery line of computers throughout Asia. Using contacts developed by the family's traditional trading business, he scored success upon success in Asian markets that had often been impenetrable for small U.S. companies: markets such as Hong Kong, Thailand, and -- most notably -- China. By 1984, tiny Action, operating from Hong Kong with 25 sales and service employees, had become a leading U.S. computer manufacturer on the mainland, with Chinese customers accounting for nearly one-third of the company's $5 million in annual revenues.

More recently, relations have soured between the Chungs and Action executives in Pasadena. To the family, who owned roughly a third of the company, it seemed slow in adapting to the new conventions of the fast-changing computer industry. To the Action execs, coordinating operations with the far-flung Chungs was providing frustrating.

"When you're trying to make a major strategic decision, it's hard to synchronize with them," explains chairman Siegel. "You can't just say, Let's have a board of directors' meeting, when everyone's all over the place. In fact, it's impossible to tell even how they make decisions. I don't think there's any method at all. The guy you're supposed to be dealing with on computers could be off selling tobacco or watches."

One decision the Chungs did take, however, was to shift their energies from Action and launch their own computer firm, Universal Digital Computer Inc. (UDC).

Dressed in a freshly pressed blue suit and white shirt, Victor Chung, 31 is the model of the young Chinese capitalist. Armed with a degree from Berkeley and a thorough knowledge of the latest developments in the computer field, he carries himself with the quiet self-assurance of someone born to money and power. And as the number-one son of the number-one son of K. S. Chung, Victor is his grandfather's favorite offspring and a future leader of the family's business empire.

Actually, only a decade ago, Victor Chung was anything but the worldly capitalist. Along with nearly 40 other Chung relatives, he was part of the family that had chosen to stay in China after the Communist revolution. Until his departure, he had had precious little exposure to business, computers, or even his relatives overseas.

Like many Chinese families, the Chungs were bitterly divided by the 1949 revolution. As Mao's forces closed in on the retreating Nationalist forces, the fervently anticommunist K.S. wanted all of his 13 children to join him in the relative safety of Hong Kong. But many of his offspring, including his eldest son, Charlie, and his daughter, Po Woon, stayed behind.

"My father wanted us to go, but we all believed that the country needed us and that the Communists would be good for the people," recalls Po Woon Chow, now a key executive in the family's Vancouver operations. "We thought it would be a good system."

At first, events seemed to justify their optimism. As well-educated professionals, the Chungs and their spouses all found important niches within the Communist system. Po Woon and her husband, Kowling Chow, moved to Beijing, where she took a top union job while Chow served in the cultural-affairs office attached to Prime Minister Chou En-lai. Charlie won an appointment as a professor of chemistry in one of Canton's leading universities.

With the onset of the Cultural Revolution in the mid-60s, however, the fortunes of the Chung family took a turn for the worse. As highly educated professionals from a bourgeois family, they were now entitled not to privileges but to "reeducation" in the country. Chemist Charlie Chung, for instance, found himself feeding pigs on a farm far from his laboratory in Canton. Kowling, the scholarly son-in-law, supervised road construction crews.

As he sat in his Bangkok headquarters pondering the rumors and occasional dispatches he received from China, K. S. Chung trembled for his offspring. They had been disobedient in staying behind, but there seemed to be no justice in their new suffering. He considered it his duty to get them out at all costs.

President Nixon's 1972 visit to China provided the first opening in the Bamboo Curtain, and K.S. immediately set about to get his family through it. With the help of family connections in Hong Kong, he and two sons wrangled invitations to the Canton Trade Fair, at the time the only event open to Western businesspeople, and once in their native country, they began pressing the bureaucrats for exit visas for their relatives. It would take scores of letters and six years of visits by K.S. and his sons before the family finally received permission to emigrate.

Having reestablished contact with friends and officials in China, however, the Chungs were not content merely to wait for their visas. They also began exploring business opportunities. As early as 1973, Wing was arranging the first shipment of U.S. tobacco to China since the Korean War. And more recently, the family has invested more than $2 million in a series of joint ventures with the Chinese, from watch factories in the north to a taxi company in Canton to a fledgling tobacco-growing operation on an island in the Gulf of Tonkin.

As for the once-Communist Chungs, many have taken quite naturally to capitalism since they were allowed to leave their homeland. K.S.'s second son, Chung Lok Fai, a university-trained engineer, has used his Beijing contacts to open up North Korea as a new market for Thai tobacco. And Wong Yung Tung, a cousin who emigrated from Canton, has helped set up the family's various watch operations, including a joint venture with Shanghai's two largest watchmaking plants. Indeed, watches now rank second only to tobacco as a source of Chung Cheong Group revenues.

Similarly, it has been young Victor who has been instrumental in putting the family's China connections in the service of the computer business, first at Action and now at UDC. With such large customers as the Industrial & Commercial Bank of China, which controls more than half of the retail banking trade in the world's most populous country, UDC is well positioned for China's transformation into an industrial economy.

"We've been building our reputation with the Chinese Administration of Computer Industries for years," boasts Victor, who predicts that UDC's China sales of $250,000 last year could reach as high as $5 million this year. "We may be a small family business with no limited resources and no [proprietary] product, but we have the right connections. That gives us an excellent chance."

For all their Chinese customers and partners, the Chungs provide a wealth of knowledge about the world outside China. In computers, that means UDC's access to the latest developments, such as Silicon Valley's Convergent Technologies. For products such as watches or garments, it is badly needed information about market trends and new fashions, from outposts in Hong Kong, Vancouver, and Los Angeles.

"The Chungs know the outside world far better than us," notes Pan Weigang, an official with Shanghai Silk Corp., a Chung supplier that produces millions of dollars' worth of silk each year without benefit of a design or marketing staff. "We don't know much. Our people can't travel very much. Maybe in 10 or 20 years we will have our own designers, but we will have to rely on the Chungs for a very long while."

As he rides through the city's crowded streets, K. S. Chung reflects on the most recent shifts in the direction of the Chinese economy. A new tax on "excess profits" of privately owned companies has already cut into the bottom line of the family's Canton taxi operations. But more important, it is a sign that orthodox Marxism is apparently on the rise again inside the Forbidden City, and that anticapitalist measures will soon follow.

"The whole trend is very unfortunate for us when things start closing again," Wing explained to me after returning from a visit to Shanghai. "People are more cautious now. It's going to be tough to make deals."

K. S. Chung has seen these sort of shifts before, and over the years, he has learned to survive them -- and sometimes prosper from the experience. Even at 82, he thinks in much longer terms than this quarter's results, this year's political trend, or even next year's economic outlook.

"After a lifetime abroad, I can say our future will be in China," says K.S. confidently, staring ahead at the traffic. "China is opening up, and there is no going back. It will, of course, take time. Not for me, maybe even not so much for my children, but for the grandchildren. But it will happen. And the family will be there."

Last updated: Jun 1, 1987




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