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Moving downstream

Melanie Stern is section editor of Families in Business magazine.

Qian Hu's dragon fish should save a little of their mysterious luck for patriarch Kenny Yap, as he boldly swaps his company's wholesale business for a retail empire. Melanie Stern reports

Even on the other end of the telephone line, the sound of gritted teeth behind the trademark happy grin of Qian Hu Corporation's Kenny Yap is palpable.
As if July's unveiling of a 33% drop in profit for the first half of 2004 was not enough, two-thirds of Kenny's independent board directors, Robson Lee Teck Leng and Tan Tow Ee, dumped almost their entire personal shareholdings (33,000 shares or 83%, and 110,000 shares or 92%, respectively) in the company shortly afterwards. They were following the banks' recommendations on the stock from 'hold' to 'sell'; the company lost some 23% of its value on the Singapore Stock Exchange in the fortnight following the announcement.

The 39 year-old Yap won't comment on the actions of his officers but admits he was naïve in his expectations for the company in 2004, juxtaposed against the cost of his ambitious expansion plans. "I had to accept the fact that the market is short-term, and we just have to live with it," he concedes. "I should have been more conservative in our Q1 guidance."

Much of the drop in profits came from the cost of preparation for an audacious strategic move. The large-scale ornamental fish breeder will dump most of its business as a back-end distributor in specialist fish and pet accessories, shifting upstream to the front-end in retail operations in what Kenny calls "moving from owning the business to owning the customer." The company plans to roll-out 100 'Pet Family' stores across Singapore, Jakarta, Bangkok, Shanghai and other countries in the region by the end of 2005, pushing its pet accessory brands including fish foods 'Ocean Free' and 'Aristo-Cats Yi Hu', and pet food 'Bark', through those outlets.

Kenny believes the front-end is where the money is and that the risk will pay off handsomely. He refers to US industry estimates on expenditure, showing that between US$5-$10 in accessories is spent for every $1 spent on purchasing a fish.

In markets like Thailand and Indonesia where such operations don't yet exit, Qian Hu will operate a combination business of wholesale and retail. Kenny's vision is to replicate the success of Western rivals such as the US's PetSmart and UK outfit Pets At Home, which took the pet market from a cottage industry to a multi-million dollar Wal-Mart style model. "You can imagine in 30-40 years a world where we buy our pet fish like we buy our groceries – a sort of K-Mart for fish, with a high degree of variety and service all under one air-conditioned, well-organised roof," Kenny muses.

Ornamental fish breeding will remain the core of the business, but this strategic sea change has most stockholders spooked. Shareholders asking Kenny about the new direction via Qian Hu's online forum use the legends 'risky', 'margins', inevitable impact on short-term growth' and 'intense competition' as frequently as they do the full stop. They, like the analysts, believe the transformation will take several years to deliver value, and that in the interim the company will haemorrhage cash as it invests in new stores, qualified staff and production outsourcing costs.

They don't want a reprisal of the share losses seen this July. They may just have to have faith in Kenny's long-term view. "Any business without risk is not a business at all – as long as the risk is calculated, it's the duty of every businessman to take some and not avoid it totally," says Kenny. "We have discovered that the market for pet accessories is not only growing, but is a few times bigger than the market for just aquarium accessories. By opening bigger pet stores we can increase the range of products to non-fish, and diversify our business.

"If we don't move to the very front-end of distribution, I'm afraid that one day we'll wake up and find the company is neither here nor there. We have a better chance of surviving at the retail end," Kenny explains. "And if it wasn't Qian Hu, someone else might make this move."

Yap is a well-known figure in Singapore. At 20 years of age, Kenny turned his hobby into his family's salvation. One of hundreds of pig farms, Kenny's father's business was closed by the Singapore authorities in 1985 as part of a nationwide drive to outlaw 'dirty industries' that saw fatal animal diseases passed to humans, and to free up land for commercial development. The family – Kenny, his parents, his four brothers, two cousins, uncles and aunties, were all left without a livelihood. Kenny turned to his love of keeping fish, and roped in his brothers Yap Kim Choon, Yap Hock Huat and Yap Ping Heng, turning the pig-pens into fish ponds and breeding guppies for local exporters.

Two catastrophic events – a thunderstorm in 1989 that washed away the farm's entire stock, and later a breeding mistake resulting in the loss of their new stock – quickly impressed upon Kenny the need to diversify his risks. Three years later, Qian Hu was exporting its various breeds globally and the next few years were about expanding breeding capabilities by farm acquisition across eastern Asia. In 2000, the company was admitted to the Singapore Stock Exchange.

Kenny has raised Qian Hu's profile in all the right ways since then. As well as receiving a number of entrepreneurial gongs from prominent business associations for himself, the company has ranked top of Singapore Business Times' Corporate Transparency Index (CTI) every quarter through 2002 to the present day – against major Singaporean players like Chartered Semiconductor and banking giant OCBC. As the patriarch of an Asian family-owned company – considering both the typical stereotypes about family companies anywhere on the planet and the additional criticisms of chaebol and keiretsu – Kenny's attitude to professionalising his family company and employing the governance standards US regulators have spent much time fruitlessly trying to instil in their corporates, has reaped widespread recognition.

"I am the youngest in my family working in the business, and in order for my family colleagues and shareholders to trust me I have to put everything on the table. I look at the shareholders as if I have a thousand brothers," says Kenny. "Some people like dealing with family members because as owners, we're intrinsically more passionate about it, but others dislike it because they're afraid that the family are abusing their power at the expense of the shareholder. But I want to let people know that family businesses can also be transparent, and it is down to our generation to let people know that [family companies] can be responsible. We run our family business regardless of nationality, religion or surnames which is key in this part of the world."

Still, the current board is typical of Eastern family companies, and reflective of the fact that the Asian ornamental fishery industry remains dominated by family businesses. Kenny's top deputies are his cousins Alvin and Andy, while the managerial talent is drawn from the wider family pool. Kenny's brother Kim Choon oversees the Wan Hu fishery, part of the holding company, brother-in-law Tan Boon Kim is MD of Qian Hu's Thailand farm; and a second brother-in-law Lee Kim Hwat oversees the company's plastics operations, which manufactures the specially reinforced plastic bags used to transport fish abroad. Independent directors Chang Weng Leong, Robson Lee Teck Leng and Tan Tow Ee complete the non-family part of the company, and though Kenny won't be drawn on it, perhaps Robson and Tan's time is drawing to a close with the no-confidence vote in their recent share sales.

Just as he learned to his chagrin in the storms of 1989, risk diversification remains of paramount importance to Kenny's business, and he has pledged that Qian Hu will not take more than 5% of its annual earnings from any one product or part of the business, in order to restrict falling to the dependency trap. The major snag in the plan is the company's best-selling product, the Dragon Fish or Asian Arowana, which in 2003 accounted for nearly 25% of sales and the maximum 5% turnover – and looks set to increase its dominance under Kenny's leadership.

Prized in Chinese and other Far Eastern cultures for a resemblance to the mythical dragon and their connotations with wealth, health and prosperity, Dragon Fish are popular – the Thai Prime Minister Thaksin Shinawatra keeps a large collection,  according to Yap.

Yap also explains that many of Singapore's wealthiest entrepreneurs and  listed corporations (mostly family-run) own multiples of Arowana (usually only one per tank, as they are aggressive and cannot share their space) in their offices and lobbies. Singaporean shopkeepers display them in their shop front to attract customers.

"Dragon Fish are a prehistoric species and they can live to 100 years old. They're extremely robust and can withstand the passage of time through many years without having to change their form. Genetically they are built to be very strong," explains Kenny. "They are at the top of the food chain in fish terms and so that clearly means that no one can hurt them. If a business can run like a dragon fish, it can last for generations."

Arowana sell for anything from $300 for a 15–20cm juvenile to $30,000 for an 80cm prize-winning champ. Some are priced according to Chinese lucky numbers, such as S$38888. As an endangered species, breeding is carefully monitored by governments and relevant agencies: each fish is microchipped and only sold if certified, to protect against the booming black market.

Kenny believes the relationship between the Arowana and contemporary Asian generations will grow steadily. Indeed, online enthusiast forums talk about an emerging trend for Eastern Asian students and graduates saving hard to buy just a single juvenile. In 2003, Qian Hu signed a long-term deal with Temasek Life Sciences, part of Singaporean state conglomerate Temasek Holding, to research ways to boost production and cross-breeding of the fish, investing roughly 10% of its annual profit (based on 2003's full-year results) each year. The company also spent the last year or so securing its pipeline by buying up a string of major Arowana farms across Singapore and Thailand.

Only time will tell if Kenny can have it both ways. "We accept that because of their high value,  Arowana will continue to be a major item for us, and contribute more than 5% which is against our own product domination rule – but it is also why we own the farms that breed these fish," says Kenny. "In Singapore, almost 50% of households keep fish as pets, and across Asia interest in these fish is slowly heating up; even in a recession, quite a few businessmen will consult Feng Shui teachers when their business is not that good and fish carry many of the elements of this practice." The figures strongly support the case that an economic recession can actually mean boom-time for the Yap family. In 2002 while Singapore's economy suffered the effects of the SARS epidemic and terrorism, Qian Hu's fish sales shot up 52% on the previous year.

Catcalls of nepotism or bad family governance isn't likely to be a problem for the next generation of Qian Hu's leadership, if Kenny gets his way. He has made it clear to the family that after his generation, they will not get to run the company unless they can prove they are the best candidate for the job. No shares will be passed to them, so no automatic directorships will be awarded. In fact, Kenny reveals that one of the drivers for listing the company was to keep it out of family hands. Why?

"I believe if things are given, they're not treasured," Kenny explains. "If you want to be professionally run with a strong structure, you need to list to facilitate that transformation. So after my generation there will be no family members – only managers who happen to be from the founding family. Any family candidates must be excellent professionals and have a true passion for the business we're in. If this was the case we would create a job for them."

A holding company controls the family's 70% stake. "But we're never going to pass those shares to the next generation, although they'll benefit from the dividends."

Recent consolidation has been tough to swallow for some of the weaker players who have kept their trade in the family, but Qian Hu has outstripped all of them by identifying itself more closely with its global rivals, and Kenny certainly hopes that his distribution gamble will see the company join those ranks. It's almost a shame that Kenny is so adamant Qian Hu will not continue to be dominated by the founding family – they could be a fine example of a contemporary Asian, globally-minded family enterprise.

"We're very blessed that we managed to turn our hobby into our career," Kenny concludes. "The values and culture we created will be what sees us through succession out of the family. I guess I'll have to keep telling my managers to uphold these virtues as the business grows."

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