Clayton Hebbard is Managing Partner of Grant Thornton in Thailand and specialises in family business consulting.
Five years after the meltdown of the Thai economy and the beginning of the Asian crisis, family businesses are clearly in transition
Thailand means "land of the free" and throughout its 800-year history, Thailand can boast the distinction of being the only country in South East Asia never to be colonised. Arguably, this is due to the pragmatic policies of its leaders, as well as its geographical location between British and French colonies.
The strength of the Thai economy is founded through King Bhumibol Adulyadej, the longest serving monarch in the world (more than 50 years on the throne). He has provided stability in often tumultuous times, including a number of military coup d'états and factionalism among the political parties.
What has often surprised observers is that most political parties, while forming coalitions, have had similar ideologies and macro-economic policies. There appears to be a real balance of power between the monarchy, the bureaucracy, the politicians, the military and the private sector – creating a truly pluralistic system.
The economic miracle
Decades of policies favouring the private sector, and outright protectionism during the 1960s to the 1980s, laid the foundation for Thailand's so-called economic miracle of the late 1980s. With its diversified industrial base, the Thai economy was well positioned to take advantage of the realignment of world currencies that took place in the mid- 1980s when the yen was forced to rise against the US dollar.
During this economic miracle period, business groups built on the basis of family ownership have been a crucial agent both for economic growth and the upgrading of the industrial structure. These groups transformed their business bases from agro-industry and traditional export-oriented businesses (such as the labour-intensive garment and textiles industries) to steel, telecommunications, petrochemicals and retail on a scale to match the developed countries. Construction also flourished as the property sector overheated and led to the bubble economy.
Level of influence
To gauge the level of influence that family businesses have in Thailand, Figures 1 to 4 summarise the distribution of the top 5,000 firms in Thailand in terms of their annual turnover (in 1997) by type of firm, comprising public limited companies (PLCs), limited partnerships, registered ordinary partnerships and branches. Out of the 5,000 firms, 475 (less than 10%) belonged to PLCs and yet their combined turnover accounted for 32% of the total turnover of the 5,000 firms in 1997.
In 1997, out of 1,056 foreign registered firms in Thailand only 68 were PLCs and their total turnover represented only 15% of the total foreign firms income. This is largely because many leading foreign firms have been reluctant to list their subsidiaries on the local stock exchange.
A critical situation
In the wake of the current currency crisis in Thailand, around half the leading family businesses are now facing a critical situation. It is reported that a third have already applied to the bankruptcy court or asked the government for help under the Business Rehabilitation Act, in order to resolve default problems. Nevertheless, many companies have undertaken extensive restructuring. They have promoted the downsizing of their expanded business bases, concentrated on two or three core businesses and have started tough negotiations with creditors.
One of the other keys to the success of family businesses in Thailand has been assisted by the protectionist legislation relating to the ownership of certain types of businesses. With some sectors completely closed and others requiring local partners, this has enabled many family groups to establish strategic alliances with foreign corporations. When advancing into new businesses or industries, local business groups with no information, production technology or marketing know-how have frequently utilised foreign partners' managerial resources through the joint venture system.
Despite these measures, many family-run businesses have encountered financial difficulties after the economic crisis. Thai Petrochemical Industry (TPI) Group, owned by the Leaophairat family, offers an instructive case of a family-run business. The grandfather of the founders of the TPI Group, a teochew overseas Chinese, started a rice milling business in central Thailand before World War II. After the war his son, Phorn Leaophairat, migrated to Bangkok and established a traditional trading house – Hang Hong Yiah Seng (Thanapornchai Co Ltd) – to export rice and import textile goods. He successfully expanded his business and Hang Hong Yiah Seng became one of the five largest rice exporters (ha-sua or five big tigers) in Thailand by the 1960s.
Phorn's sons, the third generation of the Leaophairat family, were educated in the United States and obtained degrees in business administration and chemical engineering. After returning to Thailand, three sons – Prachai, Prathip and Pramuwan – jointly set up a new ambitious petrochemical firm, Thai Petrochemical Industry Co Ltd (TPI), in 1978 (listed in 1995). This was fully supported by the government policy of promoting heavy industries by utilising natural gas produced in the Gulf of Siam.
When the government announced the liberalisation of industrial investment in the cement industry, the brothers expanded their industrial base to this field by establishing TPI Polene Co Ltd, in 1987 (listed in 1990). TPI soon became the second largest firm in the petrochemical industry, while TPI Polene grew into the second largest local firm before the crisis. TPI Group (not including Hang Hong Yiah Seng Group's companies and other family-owned firms such as Union Bangkok Insurance Co Ltd) consisted of as many as 44 firms between 1978 and 1996.
Such quick expansion was financially backed by large loans from domestic commercial banks (especially Bangkok Bank PLC and Krungthai Bank plc) and foreign financial institutions (IFC, etc). As a result, dollar-based external debt amounted to B14.46 billion (€350 billion) by December 1997.
Immediately after the crisis, TPI suspended construction of new petrochemical and cement plants, and started negotiations for debt restructuring with 400 creditors in December 1998. Prachai and his brothers decided not to yield control rights over TPI to their creditors and finally decided to apply to the bankruptcy court in January 2000. TPI Polene followed suit in June 2000.
Why did TPI Group collapse after the crisis? Why could it not effectively supervise increasing external debt? The case of TPI and its affiliated companies can be explained by focusing on the structure of its ownership (pyramid structure) and management structure. The three brothers controlled all affiliated companies as chairmen, vice-chairmen, directors-cum-executives, CEOs and presidents.
The Board members of almost all the companies under TPI's control overlapped with Executive Committee members of each company. In the case of TPI plc itself, the 20 board members included two independent directors, while Sunthon Hondaladarom (Finance Minister in 1959-1963 and 1963-1965) was invited to be its chairman.
But when Prachai became CEO and vice-chairman and his two younger brothers were appointed president and directors in 1988, TPI was put under the complete control of owner-family members. This resulted in the independent directors and foreign advisors not being able to wield any power against the three brothers. Furthermore, TPI did not disclose detailed information on its debt composition and investment plans.
A number of groups have had similar fates as TPI, including Alphatec Group (semiconductor industry) led by Charn Assawachok (applied to the bankruptcy court in May 1998); One Holding Group (finance) led by Pin Chakkapak (May 2000); Bangkok Metropolitan Bank Group (financial conglomerate) led by Udane Taechaphaibun (the government took over in January 1998); Thanayong Group (property business) led by Khiri Kanchanapak; and TBI Group (textiles) led by Sukree Phothirattanangkun (May 2000).
Reforms and reorganisation
In contrast, several local groups, such as Siam Cement Group (owned by the Crown Property Bureau), CP Group, the Thai Farmers Bank Group, Bank of Ayudhaya Group, SPI Group and Central Department Store Group launched reforms to downsize their widely diversified business activities, accelerated reduction of external debt, shifted their fundraising sources from bank borrowings to new issues of corporate bonds and promoted alliances with new foreign partners.
The development of CP Group serves as a typical example. Immediately after the currency crisis, it undertook drastic corporate restructuring and downsized its business by concentrating resources in two core fields: agro-industry and telecommunications. In the process, it transferred profitable sectors of its retail business to foreign partners and then de-invested from the petrochemical industry. It also shifted its business base from trading to manufacturing; diversified into growing industries; introduced new management styles such as the divisional department system; established company headquarters to centralise its decision-making process; listed affiliated companies on the stock market to attract fresh capital; employed professionals in finance, technology and investment planning; and developed intensive human resource development programs.
Thanks to these reforms, CP Group has enjoyed rapid growth over the past three decades, becoming the third largest group in Thailand after Siam Cement Group and Bangkok Bank Group.
CP Group also streamlined all agro-industry-related firms (shrimp culture and processing, feed milling, and processing of broiler-chickens and swine) and reorganised them into Charoen Pokphand Foods plc (CPF) in December 1998. Through this reorganisation, CPF became a holding company to supervise its operations in the agro-industry sector and the core firm to attract foreign investors, which took about 39% of total shareholdings, and quickly improved its financial indicators (D/E ratio, net profit margin, ROA, etc). CPF also is active in promoting information disclosure and decided to increase its Board members from 10 in 1996 to 16 in February 1999 by including two new independent directors.
Nevertheless, the Chearavonont family, ultimate owner of the CP Group as a whole, continued to keep control over ownership and management of CPF. Also, 13 out of 16 directors of the Board came from owner-family members (four persons) or long-time employed staff in the CP Group (nine persons). The Charoen Pokphand Group Company, which is a non listed holding company, also holds 31.4% of the total shareholdings of CPF. Therefore, even innovative-type family business such as CP Group have not easily given up control of listed companies after the crisis.
A more modern type of family business ownership pattern may be found in the telecommunications field, in SHIN (formerly Shinawatra) Group. The SHIN Corporation plc, a computer service and holding company of SHIN Group, was owned by the Shinawatra family (54%) and foreign institutional investors (30%) in 2000. The SHIN Corporation serves as the largest shareholder of the three major group companies of the Advance Info Service plc (cellular), the SHIN Satellite PLC (satellite television service) and Shinawatra Infomedia Technology plc (all listed on the local stock market).
The Shinawatra family does not directly involve itself in these firms and has entrusted management to professionals recruited from the Communication Authority of Thailand and other companies of high reputation. The SHIN Group seems to have achieved complete separation between ownership and management, and serves as an example of a modernised business group among the local telecommunications industry.
Due to these individual reforms, family businesses seem to be recovering from the crisis. The key elements that can explain the quick growth of family businesses during the past few decades are:
- High potential of human resources among family business;
- Continuous management reforms in terms of ownership structure, and organisational and management style;
- Speedy and flexible responses to changing government policies that give incentives to promoted industries or undertake liberalisation in the financial sector and industrial investment;
- Strategic alliances with foreign capital by means of joint-ventures, which enable local firms to advance
into growing industries, such as telecommunications, petrochemical and retail.
Thai family businesses have not had a human resource problem due to the fact that since World War II owner-families of the leading business groups have tended to send their children abroad for higher education. After returning, they have worked in foreign or local large firms as apprentices, and then moved to family firms as top executives or middle management. As a result, new generations have frequently become key persons in the modernisation and improvement of the corporate activities of family firms. Therefore, these firms have not had to face a "manpower" shortage and thus have not had to recruit outside the family.
In Thailand family-owned businesses are now facing serious challenges due to several changes on a local, regional and international front. As far as the South East Asian market is concerned, these include the launching and development of the newly-established regional stock markets, and the tendency to manage and build conglomerates and giant enterprises.
On an international level, challenges come from free trade agreements and the World Trade Organisation, which will allow international giants to compete with these companies in the local market by the year 2005.
In the past 18 months Thailand's political landscape has changed dramatically. Taksin Shinawatra has taken over as Prime Minister with landslide victories on the back of populist policies and reforms. As a successful entrepreneur and member of a modern family business, Taksin has committed himself to assisting family businesses in Thailand.
He has devised an agenda specifically to support small and medium enterprises (SMEs). Taksin has realised that SMEs ideally could become a new taxable base for the country. To spur the development and encouragement of SMEs, his government has created the SME Bank, which will provide soft credit to Thai entrepreneurs.
With the government providing appropriate stimulus to assist family businesses and with the events of the past five years providing useful lessons, Thailand's family businesses both big and small are clearly in transition.