Asia: Polar opposites

Anuj Chande is an International Business Partner at Grant Thornton UK; Vishesh Chandiok is Country Director International Business at Grant Thornton India; Howard Hackney is Head of Family Business at Grant Thornton UK.

Indian family businesses are some of the most optimistic in the world, while UK family family businesses are the least. Anuj Chande, Vishesh Chandiok and Howard Hackney take a close look at what the future holds for family businesses in each country

Family businesses are often key drivers of a country's economy accounting for upwards of 60% of the economy. Many are small businesses, but others turn over millions if not billions of dollars each year and include names such as Bacardi, Hasbro, Patak's, Versace, Birlas, Godrej, Reliance, Mittal Steel, Vedanta and Littlewoods. While they all face differing legal requirements, regulation and tax regimes, there are a number of similarities that these family businesses encounter, no matter where they are in the world.

Grant Thornton's recent International Business Owners Survey (IBOS) 2006 showed that family businesses in India were the most optimistic in the world with a balance of 89%, whereas UK family businesses were amongst the least optimistic in the world with an optimism balance of only 2% – a marked difference between the two.

By exploring the industry sectors family businesses are present in, the problems they face, how they feel about the future and the differences in economic conditions may help explain why these two nations are at polar opposites in terms of their optimism levels.

Predominant sectors
Family businesses around the globe operate across the majority of industry sectors. However, when it comes to family business in India and the UK there are a number of differences in the sectors they operate in and the sectors they are absent from.

In India, almost all non-government owned businesses are managed and controlled by a group of family shareholders. Hence family business is a wide spread phenomenon across numerous industry sectors including, IT, professional services, property and automotive. Research of the Top 100 listed Indian companies shows that as many as 46% of those businesses are family-controlled, 30% are government controlled, 18% are subsidiaries of multinational corporations, and therefore only the balance (6%) are widely held enterprises.

Traditionally, family business in the UK operated across all sectors of society. However, we are now seeing a decline in a number of sectors such as the automotive, manufacturing and construction sectors. This is mostly due to the large outlay of capital required for such businesses, but could equally be attributed to the large scale in which these industries now operate and the difficulties of being able to compete on such a scale. The predominant sectors we now see UK family businesses operating in are tourism, leisure and hospitality. A significant number, however, are based in retail and distribution.

Asian family businesses in the UK operate in similar sectors to UK family businesses, but primarily across the property, hotels, food, CTN (confection, tobacco and newsagents), technology and clothing sectors. One sector that is slowly becoming more popular for UK Asian family businesses to operate in, and will grow rapidly in the future, is financial services. Like their British counterparts, they are generally not involved in areas such as manufacturing, automotive and construction.
 
Given the way organisations operating in knowledge-based industries have flourished in India and the significant presence of family businesses in these industry sectors, this would go some way to explaining why Indian family businesses are more optimistic than their British counterparts.

Prevalent problems
Due to the inherent nature of family businesses, there is a specific set of issues that they tend to face that sets them apart from other companies. Some of these issues include:

- succession planning (including surviving beyond the second generation);
- how to reward family members (and non-family members) accordingly;
- equity ownership by family (and non-family) members;
- introducing family members (and non-family members) into the business;
- retirement and estate planning;
- managing conflict;
- preserving wealth;
- drawing up a family creed (vision and values document) to drive the business forward;
- strategic planning;
- financial structure;
- exit from the business.

The overriding problem appears to be the inability to recognise that the business has a problem in the first instance. Rather than resolving the issue, blame is often diverted to other areas of the business – avoiding addressing the cause of the problem altogether. Many family businesses are also wary of inviting outsiders in to help them resolve these issues, as it is almost as if they are admitting they have a problem with their family rather than the business.
 
With only a quarter surviving the first generation and roughly 10% making it to the third generation, one can assume that the largest issues faced by family businesses are conflict resolution and succession planning.
 
In UK family businesses, the patriarch is likely to step down in his 60s and have more of a 'clean' exit from the business. Whereas, in many Asian family businesses (both in India and the UK), the patriarch will often still be signing company cheques and having the final say in the business in his 70s and 80s – a situation that can all too easily cause conflict. Recent research supports this, with only 13% of Indian family businesses expecting an ownership change in the next ten years, compared to 31% globally.

A more recent issue family businesses are facing is the reluctance of the second generation to take over the business. In Asian family businesses, the second generation are qualifying as professionals (both in India and the UK) due to parental pressure. Then when the first generation decide to step down, the second generation are averse or outright refuse to join the family business, as it is not perceived to be exciting or rewarding enough. This is, perhaps, less of an issue in India with the growth attractions of the Indian economy. This is particularly prevalent in the UK in retail- and hospitality-based Asian family businesses and in many cases leads to businesses closing down or being sold outside the family. In UK family businesses, the attraction of professional employment has always been there, so when the second generation declines to become involved with the family business it is more to do with a lack of interest than any other factor.

When it comes to rewarding family members appropriately recent research has shown that 51% of Indian family business members are of the opinion that they are entitled to differential pay arrangements than non-family employees in comparison to only 28% in Europe and globally. Much of this comes down to a feeling that non-family employees can never feel the same passion for 'their' businesses and hence the question of pay according to qualification, experience or the job performed, irrespective of whether a family member or not, does not arise. In the UK, ­family members tend to accept that they will be paid the going rate but will be rewarded in other ways such as share ownership.
 
The mixing of bedroom and boardroom politics assumes even more significance in the Indian context, when a large proportion of family business members also live together in one house – in a joint family – with sometimes as many four generations living under one roof. In the UK you are unlikely to find extended families living together in this sense.

While these specific family business problems are unlikely to be reasons for the huge difference in optimism between the two countries, more general business issues may go some way to explaining this.
 
The IBOS results showed that the biggest constraints to expansion facing UK family businesses were the lack of a skilled work force and regulation/red tape, with 35% of businesses (equally) citing this as the main cause. Without a skilled workforce and significant levels of regulation/red tape present in the business environment, it makes it extremely difficult for a business to grow exponentially. Similarly, Indian family businesses also cited regulation/red tape as their biggest constraint to business (29%), but only 23% felt that the lack of a skilled workforce was a constraint to business – perhaps going some way to explaining the huge gap in optimism for the future.

Future growth
We can expect to see much of the same growth that has occurred in family businesses over the past 10 years – but in reality the future will be closely linked to their ability to grow and adapt to changing market conditions and, even more importantly, cope with changing generational attitudes.
 
As businesses in India develop and diversify, the availability of talented top management resources within the family are bound to fall short of the requirements of those Indian conglomerates of the 21st century. This will naturally lead to business units being spun out into independent companies and being left to professional managers, where the original promoter family takes a back seat from the management.
 
One could not have dreamt of Indian businesses thinking of admitting independent directors into their boardrooms, let alone conceding to advice from private equity investors. Today, with the change of regulation and the abundant availability of capital, the opportunity available to family businesses in India has changed from a national one to an international one. Indian family businesses will carry on making the most of the new business environment and continue acquiring businesses which are household names in almost every country in the world, even China.

For Asian family businesses operating in the UK, as the second generation takes over from the first, they will be in a very enviable business position in that they have the hard work ethic values of their fathers, combined with a western education. A powerful combination that will make them highly successful in the future.

For UK family businesses, while they are not coping with significant cultural changes, much of their future success will lie with their ability to solve the problems at an earlier stage and develop and diversify as market conditions dictate.

For all family businesses, the future will be closely linked to their ability to solve the problems they face day-to-day or risk having their businesses fail or even sold off. The ability to solve those key constraints to business such as regulation, the lack of a skilled workforce, a shortage of working capital or long-term finance issues will determine their success or failure.
 
However, the future does look quite bright, with 83% of Indian family businesses and 61% of UK family businesses predicting that their turnover will increase in the coming year. So we can expect to see plenty of family businesses continuing to be masters of their own destiny and passing their business on to the next generation.

Lagging optimism levels
While the success of the sectors family businesses operate in may go someway towards resolving why UK family business optimism levels are so far behind their Indian counterparts, in reality the main answers lie with the market conditions the country is experiencing.

India is emerging as one of the new powerhouses of the world. It's economy continues to be extremely buoyant the stock market is breaking all time highs on a weekly basis, foreign direct investment has increased substantially, global acquisitions by Indian companies have grown exponentially and overall business confidence is extremely positive. The growing reliance on the private sector and trade liberalisation – just like in China – is proving fruitful for family businesses who are clearly taking full advantage and thriving as a result.

In stark contrast, the UK has recently seen higher interest rates and taxes have reduced disposable income. Consumer spending has slowed more abruptly than expected, economic growth has slowed to its slowest since 1992 and optimism levels have fallen sharply. The UK confidence figure is actually below the overall EU figure for the first time for many years – explaining why family businesses in the UK are having such difficulty in remaining optimistic about the future.