Updated: May 20, 2022
Growing up in Britain as I did in the 60s and 70s, one remembers only too well the unhappiness and upheaval that resulted from the demise of the steel, shipbuilding and coal mining industries, though of course in their place new ones evolved, my own being a good example.
"Shareholders in emerging countries often tend to be further down the pecking order than other stakeholders such as employees or the state"
As I have been able to witness firsthand, it was the rapid emergence of Asian corporations, first in Japan then in Korea and Taiwan, which caused the death, by asphyxiation, of British eminence in steel and shipbuilding. Indeed, it is this speed of progress in Asia that has so excited me over the years, and still does.
Looking back at 1992 provides some fascinating insights, not just into how Asia got there, but also into how things have changed since. Despite the industrialisation taking place within Asia at that time, not one of the top twenty companies in the MSCI Asia Pacific ex Japan index at that time was a manufacturing company. True, countries like Korea and Taiwan were not yet represented in the index, but even if included their industrial bellwethers would not have made the top twenty.
What were these twenty index heavyweights? Half of them were banks or property companies. Nineteen of them were in developed Asia (Australia, Hong Kong, or Singapore). And two of them were airlines. On the surface, it looked like Asia was all about services.
And in some respects that observation was correct. Hong Kong and Singapore were too small to be anything other than service centres while Australia never felt the need to process what it mined, accepting it lacked the location and economies of scale required by manufacturing. But if the observation was correct, to extrapolate it would have been a mistake, as the top twenty today looks very different.
Fast forward 17 years and neither airline appears on the list. That, however, should not surprise anyone, given the state and nature of the industry, even if Singapore Airlines is now the biggest in the world. The largest company today is five and a half times bigger than the largest in 1992, and it is still the same: Australian mining giant BHP Billiton. Apart from BHP, only one other company kept its place on the list, National Australia Bank. Having had no representation in 1992, China, India, Korea, and Taiwan between them now hold ten spots. Although all 6 property companies are gone, the number of financials has doubled to 8, four of them Chinese.
But prominent are four manufacturers, Hon Hai Precision, Pohang Iron and Steel (POSCO), Samsung Electronics and Taiwan Semiconductor Manufacturing (TSMC), all world leaders in their respective field. Starting from scratch, these companies had set about acquiring the necessary skills in the key areas of technology, research, design, execution, branding, logistics, sales and quality.
Along the way they needed to raise capital, persuading people that they had a good idea. Indeed, they faced stiff headwinds, often from a westerly direction. For example, in 1969, the World Bank told the South Korean government that their idea to build an integrated steel plant was a “premature proposition lacking economic feasibility.” Later, in 1984, Intel founder Gordon Moore (of “Moore’s Law” fame) dismissed Morris Chang’s notion of manufacturing silicon chips under licence as “a bum idea”. Today, POSCO and TSMC are global paragons.
But despite the emergence of these manufacturing leviathans, rapid growth remains something that must always be viewed with suspicion, particularly in fast-paced Asia where corporations have often got carried away. Had you, for example, invested $1,000 in the MSCI China index in 1992 (its inception), by the end of last month you’d only have had $765 left. This despite the real value of China’s economic output growing by 356%. There are a number of explanations why stock markets do not necessarily mimic economic activity. On the one hand, shareholders in emerging countries often tend to be further down the pecking order than other stakeholders such as employees or the state. On the other, companies in emerging markets often fail to consider whether return on capital for a given project will exceed cost of capital, with banks, sitting comfortably on collateral, not inclined to advise them otherwise.
All told, the process of creative destruction that was and continues to be behind America’s success is alive and well in Asia. But as an investor, being on the wrong side of this force can be a disaster. Investing in China in 1992, in Taiwan or Japan in the late 80s, in Vietnam in 2006, in crazily priced IPOs at various times (the latest one in China, a cement company, recently debuted at 95 times historic earnings) would have been painful. No, despite Asia’s rapid growth, we have found that it is the “steady Eddies” that have produced the best returns over time.
We are (happy) shareholders in both Samsung and TSMC, but much of our successful investment track record is down to the likes of Swire Pacific and Unilever Indonesia. These are companies that have been around for more than fifty years and will almost certainly be for another fifty. Investing is a marathon, not a sprint, in which the tortoise often wins. And Asian tortoises, it should be noted, get an extra boost from the tailwind of progress.
Published in Scotland on Sunday
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.