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Thailand's Anxious Giant


International -- Asian Cover Story

THAILAND'S ANXIOUS GIANT

How Charoen Pokphand plans to ride out Asia's slump

As chairman of Thailand's biggest business group, Dhanin Chearavanont may be one of the richest men in Asia. But he still appreciates a good bargain. Sitting in a 23rd-floor conference room of one of his Bangkok office buildings, Dhanin discusses the strategy of his Charoen Pokphand Group. He points proudly to his white dress shirt. It was cheap, he says. He got it from one of his own stores. "It's not even $10," he boasts. He then points to his black acrylic socks. "These socks of mine, how much are they?" asks the Thai tycoon, who reputedly is worth more than $1.5 billion. "One dollar!"

Over the past three decades, Dhanin has helped transform what started as a modest feed mill business into a sprawling, $8 billion industrial behemoth. Still, Dhanin likes to think he has never lost touch with the common Thai consumer. Even as CP Group invested billions to push into chemicals, telecommunications, department stores, and other glamour industries, its core business has always been selling the sort of inexpensive products that Thai farmers and consumers could afford, such as feed, chicken, and shrimp.

Now Dhanin, 58, is hoping that the loyalty of average Thais will help CP pull through one of the most turbulent economic times in years. In Thailand, a currency and banking crisis has ground the once torrid economy to a near halt. That means consumers who buy CP Group telephones and shop in its stores suddenly aren't buying as much as they used to. And in China, where Dhanin has used powerful connections, or guanxi, to set up some 200 companies involved in everything from motorcycles to poultry farms, CP is running into increasingly tough local competition. Foreign investors, who once regarded CP companies listed in Bangkok and Hong Kong as must-haves in their Asia portfolios, have sent their shares tumbling.

But while the rest of Bangkok is in panic mode, Dhanin is staying calm. He believes that CP's food and retail businesses are recession-proof because they are aimed at the low end of the market. While CP's Thai units are tightening their belts by imposing hiring freezes and dropping marginal projects, he maintains the group still has the financial strength to carry through on promising investments in wireless phones and cable television. Indeed, as financially shakier upstarts drop out of sectors such as semiconductors and telecom services, Dhanin is positioning himself to snap up assets on the cheap and emerge stronger than ever when the business cycle turns up again. What's more, a weaker baht should boost CP's exports of poultry, seafood, and other agricultural products to Japan and other Asian markets. "Added up altogether, the impact [of the downturn] won't be so great," he says.

Dhanin also is convinced that with its reputation, formidable connections, and regional clout, CP is in a lot better shape than many outsiders think. Take its investments in China, which are held by Hong Kong-listed CP Pokphand. After a poor showing last year that pummeled the company's stock, CP Pokphand reported a sharp increase in earnings on Sept. 23.

How Dhanin handles the challenges will be watched not only by investors but by managers across Asia. The question: Can Southeast Asia's Overseas Chinese tycoons like Dhanin who have built empires based on instinct and a web of connections stay on top amid the intense competition of a global economy? And do their companies have the management depth to move beyond commodity products and local franchises to succeed in heavy industries and high tech, like South Korea's chaebol?

FAMILY BUSINESS. Except for some minor adjustments, Dhanin is betting that CP doesn't need to radically change a style that has worked so far. Charoen Pokphand started out in 1921 as a seed-trading business set up in Bangkok by Dhanin's father and uncle, both immigrants from China's Guangdong province. Over the years, the company expanded into poultry and food processing. In 1989, Dhanin took over as chairman because the family regarded him as the best at long-term planning. Three brothers remain key players in management.

Along the way, Dhanin has cultivated many contacts that have served him well. CP's business partners include companies as diverse as Honda, Bell Atlantic, 7-Eleven Stores, and Heineken. And on the political side, Dhanin's resume tells it all: adviser to the Thai Prime Minister; Hong Kong affairs adviser to Beijing; and even honorary lieutenant governor of the U.S. state of Kansas.

Dhanin has proved especially masterful at playing up his ethnic ties in China, where he became a trusted partner in government plans to develop the economy. Solid connections with Beijing leaders, for example, meant that when the government wanted to set up a motorcycle plant in 1985, it turned to CP to manage a project with Honda, even though the Thai company had no prior experience.

It is perhaps the desire to further such connections that caused CP to surface in Washington's Donorgate controversy. The Democratic National Committee has returned about half of the $517,500 in donations from a Thai woman, Pauline Kanchanalak, who said she was consulting for CP Group. Dhanin visited the White House with her in 1996. She made a donation to the DNC the following day. The normally easygoing chairman bristles at the suggestion that anything about the meeting with President Clinton was improper. "I'm not just an ordinary businessman," says Dhanin. "I'm not without reputation. For him to meet with me was fair and reasonable."

EXPORT PUMP? But while connections may have helped Dhanin during Asia's go-go years, it is CP's management skills that will be put to the test in the tougher times ahead. Dhanin sees the baht's 37% drop since July as an opportunity to pump up exports. Poultry-related exports, for example, will likely increase by 20%, CP officials predict.

In Thailand, he believes CP's positioning in low-end retailing will pay off now that consumers are more budget-conscious. Dhanin says customers will turn to bargain outlets like Lotus Supercenter, the wholly owned superstores modeled after Wal-Mart Stores Inc., or Siam Makro Co., a warehouse club venture with Dutch company SVH Holdings. In fact, Dhanin is angling to buy the joint venture outright.

Not that CP will be able to coast through the downturn unscathed. Siam Makro "is going to be hit pretty hard," predicts Eric Henderson, an analyst with ING Barings International in Bangkok. He figures the chain's earnings will drop this year because "everything is pointing downward for the Thai consumer."

Weaker domestic demand also will add to the travails of TelecomAsia Corp., Charoen Pokphand's telephone and cable-TV operation. The joint venture with Bell Atlantic Corp. has more than $850 million in unhedged foreign debt, 50% unused capacity in telephone lines, and a stock price that's down 40% for the year. "The situation is totally different than what we expected five years ago," concedes Vallobh Vimolvanich, vice-chairman of TelecomAsia. With so many empty buildings in Bangkok not needing telephones after all, the company's outlook this year is "very bad," says Orawan Karoonkornsakul, an analyst with Merrill Lynch & Co. in Bangkok.

Undaunted, TelecomAsia is pushing ahead with its next big project. Later this fall it plans to unveil a $500 million new "personal communication telephone," or PCT, network. A PCT is a wireless phone that customers can use as an extension of their regular fixed-line telephone number. The project, backed by Japanese suppliers, is the first of its kind outside Japan. It costs one-third less than regular cellular service but has a more limited range. TelecomAsia is betting that consumers paying more attention to their budgets will choose the far cheaper PCT over cellular service. "This is aimed directly at the lower end" of the market, says Dhanin.

The group also has its hands full in China, where CP has invested $4 billion in a slew of ventures. Overcapacity and protectionism at the local level are causing CP to rethink its strategy in several ventures. What's more, Dhanin's fabled guanxi network no longer carries the weight it once did. Local competitors, both government-owned and private, are now everywhere.

CP is feeling the pinch. In the motorcycle business, for example, CP's operations in Shanghai, and in Luoyang in central Henan province, are quickly losing market share. Companies across the country decided that the industry--which has exploded in the past few years--was the place to be: In 1996, China had a demand for 6.5 million motorcycles but capacity to make 9.5 million. That has put intense pressure on producers like CP's Ek Chor China Motorcycle, which has to contend with illegal knockoffs. Traded on the New York Stock Exchange, shares of Ek Chor are off 23% so far this year.

In addition, provincial governments provide tax breaks to consumers who choose local brands over those made by foreigners--even well-connected ones such as CP. "Each province is protecting its own industry," says Thanakorn Seriburi, president and director of CP's vehicle division. "We've got a good product but no market. It's a real headache." Making matters worse, the Shanghai government, concerned about pollution and congestion in the city center, has imposed restrictions on the number of motorcycles Ek Chor can sell.

To compensate, Ek Chor is cutting back and trying to consolidate. In July, 800 workers were laid off in Shanghai, with another 800 to go soon. That will leave just 2,800. The company plans to let workers go at its Luoyang plant as well. Ek Chor is considering diversifying from motorcycles to engines and is trying to increase coordination among its Chinese partners. Since its Shanghai joint-venture partner is a competitor of its Luoyang partner, the two companies have not worked closely together before. Now, CP is trying to change that. "If we can join forces in the marketplace," says Senior Vice-President Thomas Chia, that would be "one way of lowering costs and cutting duplicating expenses."

CP's huge agribusiness in China is suffering from some of the same problems. It has joint ventures, wholly owned enterprises, or other businesses in 28 of the country's 31 provinces, with total assets of $1.8 billion. The group's many poultry-related joint ventures in China alone account for $2.5 billion in revenue, says Thirayut Phitya-Isarakul, president of CP's agribusiness. But the profit margins in poultry are small, at about 5%. So pressure on prices can quickly hit the bottom line. Shanghai Dajiang, located in the small suburban town of Songjiang, an hour's drive outside of town, is experiencing that problem: It has lowered prices for feed twice this year in the face of intense competition from local rivals like Hope Group of Sichuan province. First-half earnings for 1997 plunged 22%.

Still, Dhanin is convinced CP has an edge in China. While mainland companies are becoming more competitive, Dhanin believes CP's operations are better managed. On that basis, he's moving ahead on other projects. Over the summer, CP opened its first Lotus superstore in Shanghai's Pudong district. The bright, airy store attracts some 20,000 customers a day to buy its roast duck, fresh banana bread, microwave ovens, children's clothes, and large appliances, says Kevin Griffin, vice-president for operations at Lotus. Like others at the superstore, he used to work at Wal-Mart in the U.S. He has tried to bring an American marketing approach to Chinese employees. CP plans to open several more Lotus stores, as well as another warehouse club, modeled on Wal-Mart's Sam's Clubs discount superstores.

BEIJING FROST. Yet CP must balance its China expansion with a new kind of reality--the fact that the government no longer needs its help in starting new projects. Last year, Beijing rejected CP's bid to invest in a major new venture. CP wanted to link up with a local Chinese company, find a Japanese technology partner, and build a silicon-wafer fabrication plant in Shanghai. But after first agreeing to the project, Beijing abruptly reneged. It decided that the Japanese and the local partner should go it alone.

Fortunately, Dhanin still has Thailand. He hopes that his government contacts will help it turn the economic crisis into an opportunity. For instance, CP executives are saying they would like to pick up some of the pieces from the collapse of other ambitious groups that have foundered, such as semiconductor giant Alphatec Electronic Co. "We have been approached and said we are supportive of the project," says Sarasin Viraphol, a former top Thai Foreign Ministry official who now is CP's executive vice-president in charge of electronics. Sarasin keeps an inflatable life raft in his office--a gift from a friend who said it might come in handy in case the seas of the private sector get rough. He will likely need it.

Still, most observers feel that while the group is in for some rocky times, CP's resources will enable it to survive when others sink. "Every firm is in trouble when there's a massive currency devaluation," says Ray A. Goldberg, who supervised a Harvard business school case study of the CP Group in 1995. "But if any kind of company could weather these storms, it's this kind of company."

Charoen Pokphand may well prove to be better positioned than most Overseas Chinese companies to ride out Asia's crisis. It may even profit immensely from a regionwide shakeout. But whether it will also be able to stay afloat while preserving its traditional family-style capitalism remains to be seen. That depends in large part on the ability of Dhanin to adapt to the new environment.By Bruce Einhorn in Bangkok, with Sheri Prasso in New YorkReturn to top


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