By Robbie Shell
Our series on cities takes us to Hong Kong, home to nearly 200 alumni who work in a city known for efficiency, sophistication, cosmopolitanism, and, perhaps most of all, opportunity. Business, according to everyone we spoke with, is booming, fueled by new investments in China, continuing expansion throughout the Asia Pacific and constructions of a new airport, the linchpin of a massive harbor development project. On the following pages, alumni speak of their experiences in Hong Kong and of the future that lies ahead under Hong Kong’s reversion to Chinese sovereignty on July 1.
For Paul Cheng, it’s been an unusually busy 12 months.
On the company front, Inchcape Pacific — the Greater China regional arm of the £6 billion international distribution group Inchcape plc — formed a joint venture with Mainland Chinese partners to provide warehousing, logistics, distribution and retailing services in Shanghai.
This was followed a few months later by another joint venture to develop logistics operations in South China. Meanwhile, Nanjing Hong Kong Changjiang Co. Ltd., which is 60 percent owned by Inchcape, has opened its latest motors service and maintenance center in East China, and the container trucking joint venture, Land-Ocean Inchcape, is moving into a brand new 52,000 square meter terminal near Shanghai’s main port.
While these initiatives represent a tiny fraction of the Inchcape Group’s business interests throughout Asia, they reflect Paul Cheng’s strong belief that China is clearly the market of the future. “China is changing, and changing for the better,” he notes. “Reformists among the ‘old guard’ have done a remarkable job to date in opening up China to the outside world; in effecting the transformation from a centrally planned economy to a market economy; and in changing the attitudes and values of the Chinese people.”
Cheng himself is a close observer of that change, particularly given Hong Kong’s upcoming return to Chinese sovereignty on July 1 — an historic event in which Cheng is deeply involved. For nearly three years, he has visited Beijing almost every month to discuss key transition issues with Chinese officials. He is a member of the Preparatory Committee — the body appointed by China to prepare for the establishment of the Hong Kong Special Administrative Region — and a member of the 60-person Provisional Legislature, which will take over from the current legislature (on which Cheng also serves) on July 1 and serve until new elections are held in 1998. In addition he is a Hong Kong Affairs Adviser to the Chinese Government.
Born in China, raised in Hong Kong and educated at Lake Forest College and Wharton, Cheng talks frequently about the “One Country, Two Systems” concept devised by the Chinese government in 1978 as, he says, “the guiding principle for the reunification of China — not just with Hong Kong but also with Macau and Taiwan. Hong Kong in 1997 is the first test.”
If the test is passed, and Cheng believes it will be, then “the ultimate capitalist society (Hong Kong) will continue, largely unchanged, as part of the world’s largest Communist country (China).”
He is as bullish about Hong Kong after July 1 as he is about China. Both, he says, will thrive, despite what he acknowledges is increasingly negative international media coverage of the transition.
His optimism stems in part from the fact that China and Hong Kong each stand to reap significant gains from a smooth transition. “China is one of the leading investors in Hong Kong, with major interests in trading, banking and finance, property, manufacturing and transportation,” notes Cheng. “Total investment is estimated at close to $30 billion. As for Hong Kong, China is Hong Kong’s largest trading partner while Hong Kong is China’s third largest (after Japan and the U.S.). About half of China’s total exports are handled by Hong Kong. In addition, Hong Kong is the largest foreign investor in China, and now employs more than four million workers in South China.”
Ultimately, China and Hong Kong are tied together not only by history but also by shared knowledge. “Hong Kong is the most developed center anywhere in the world for information and expertise on China and China trade, and for the practical experience of doing business in China,” notes Cheng.
At the moment, Hong Kong remains one of Inchcape’s largest and most important operational centers worldwide. Inchcape Pacific is the leading distributor of motor vehicles in Hong Kong, and the premier marketing and distribution company, representing more than 200 brands. Hong Kong is the regional headquarters for the Inchcape Group’s global shipping agency network, while Inchcape NRG, a Hong Kong-based joint venture between Inchcape and Ricoh, is the largest independent distributor of office automation equipment in the Asia Pacific region.
After Cheng graduated from Wharton, he spent eight years at Richardson-Vicks (then Richardson-Merrell) in New York, Singapore, Malaysia and Thailand. He returned to Hong Kong in 1969 to work for Warner Lambert where he headed up the Asia region in the mid ‘70s. For the next 10 years he was a partner with SpencerStuart & Associates executive search firm. Cheng joined Inchcape Pacific as an executive director in 1987 and was named chairman in 1992.
In 1995, he took on the added role of chairman of Rothschild (Hong Kong). The Rothschild Group, which operates in more than 30 countries and employs more than 2,000 people, has been doing business with the People’s Republic of China since 1953. In 1994 it opened a representative office in Shanghai.
In recognition of his service to the international business community in Hong Kong and Asia, Cheng was decorated “Chevalier de l’ordre de la Couronne” by the king of Belgium in 1991.
Hong Kong “will change after 1997,” Cheng says. “To think otherwise would be naïve.” Among those changes will be “the greater influence of Mainland Chinese-backed corporations, which will become increasingly active investors in Hong Kong and will seek more listings on the Hong Kong stock exchange,” although not at the expense of a “level playing field for other companies,” he adds.
Hong Kong will not “lose its international flavor,” Cheng notes. “After 1997, I expect it to be business as usual.”
As a credit officer in Citibank’s Hong Kong office in the mid ‘70s, Robert Nien specialized in real estate lending. A major account was Hopewell Holdings, at the time one of Hong Kong’s largest property developers.
In 1976 Nien accepted a job with Hopewell. “I’ve been here more than 20 years and grown with the company,” he says.
“Grown” is the key word. Nien is one of seven executive directors of a company with net assets of approximately $3 billion, a workforce of 8,500 employees spread throughout Southeast Asia, and diversified interests ranging from power plant operation and highway construction/investment to residential and hotel development and property management.
“When China opened up in the late ‘70s, we were one of the first companies to go into infrastructure investment,” notes Nien, who was born in China and educated in a Catholic school in Hong Kong. “A power station that we built in southern China became a model for other private power station projects in the mid to late ‘80s … Two years ago we completed a 123-kilometer expressway from the border of Hong Kong to the city of Guangzhou (formerly known as Canton). It’s the most modern freeway in China.”
Current company projects include: a 102-kilometer network of four interconnected roads in Guangdong Province in China; an elevated road and train system in Bangkok, Thailand; a 16-kilometer three-lane suspension bridge in Guangdong Province and a planned road project in the Philippines.
In addition, Hopewell already owns or is developing extensive properties, including hotels, apartment buildings and shopping centers, in Hong Kong, Thailand, China, Macau and Malta. (Indeed, Nien’s favorite restaurant and hotel are company-owned.)
Many of Hopewell’s projects are on a build-operate-transfer (BOT) basis, which means that the project is privately owned and operated for a predetermined number of years before reverting to government control.
Hong Kong over the past 20 to 30 years “has been a very aggressive place where things get done quickly,” notes Nien, who is responsible for the company’s financing and accounting functions. “It is compact. There is very little bureaucracy or red tape within the government and very little corruption. It means that Hong Kong has been able to sustain progress.
“We expect to change a little after July 1. Hong Kong will probably be a little more bureaucratic and things will probably rely a bit more on relationships. But whereas there were uncertainties a few years ago about what the July 1 turnover will mean, gradually that uncertainty has faded away. Many who emigrated to the U.S. and Canada have actually returned because the employment opportunities here are quite good. People in general are more confident.”
“If you want to invest successfully in China,” suggests Carl Loo, “you need to do two things right. First and foremost, find the appropriate Chinese partner who has not only the requisite strengths but whose interests are fully aligned with your own. Second, ensure that your Chinese partner puts their own capital into the venture.”
That strategy is the linchpin of First Eastern Investment Group, a Hong Kong-based private equity firm specializing in direct investment in China. First Eastern, founded in 1988, currently manages $400 million from institutional and private clients.
Investors in First Eastern’s seven funds — six China funds that are structured as joint ventures with major Chinese enterprises, plus one Taiwanese equities fund — range from GE Capital, Bechtel Enterprises, Dow Chemical and the United Nations pension fund to Credit Suisse, Barclays Bank, NatWest pension fund, Nomura Securities and investment arms of the Singapore and Hong Kong governments.
Over the past four years First Eastern and its Chinese partners have made 35 investments in manufacturing enterprises and infrastructure projects in eight provinces in China. “We have exited five,” notes Loo. “The internal rate of return on those investments has ranged from 20 to 70 percent.”
Each of First Eastern’s funds is managed by a team of six professionals, half from First Eastern and half from its Chinese partners. “In order to protect our interests,” Loo says, “we reserve the right to appoint the deputy general manager and the CFO of the joint venture or the investee company.”
What blue chip investors in First Eastern’s funds get in return for their money, says Loo, are strategic relationships with major Chinese enterprises and ministries at a time when the country is increasingly transitioning to a free market economy.
Loo brings to First Eastern a broad range of experience. He was born in New York, lived in Hong Kong from ages 7 to 14, and attended Phillips Academy in Andover, Mass., before coming to Wharton. A Thouron scholar, he studied philosophy, politics and economics at Oxford, worked in corporate finance at Morgan Stanley for two years and graduated from Harvard Business School in 1985. He spent the next two years with Boston Consulting Group, then returned to Hong Kong and managed a real estate development company founded by his late father-in-law. In 1990 he joined a private equity firm called Morningside Asia where he oversaw Southeast Asian investments for a Hong Kong family before joining First Eastern two years ago.
Once Hong Kong reverts to Chinese rule in July, Loo predicts that it will become “a less international and more Chinese city. By that I mean that personal relationships will become more important. The system will run more on who you know and the relationships you have, rather than on political and legal institutions per se. A lot more importance will be put on personal trust rather than faith in institutions.
“Hong Kong has long been the most effective place to conduct business in Asia,” he adds. “In the last 25 years it has also been a regional headquarters for operating in the Asia Pacific because it is strategically located and has an efficient infrastructure. Also, English has been the medium of communication.
“Much of this will change. Hong Kong will become more of a hub for foreign companies doing business in China. Companies operating regionally may look for other places to establish their headquarters. The standard of English may deteriorate because mainland Chinese prefer to communicate in Mandarin and written Chinese.
“I think this will all happen sooner than people think. Many mainland Chinese companies will be establishing operations here in Hong Kong. It will be their window on the outside world.”
In 1982, after two years with the Arthur Young management consulting group in California, Kent Yeh was “summoned” back to Hong Kong to join the family business.
“Actually I was partly summoned and partly given an offer,” he says. “My father had started the company, a custom carpet manufacturer, in 1955, and there was a need for professional managers to run it. This is especially difficult in Asia where the culture is such that employees like the boss to be an owner rather than an outside professional. Every time the board found a manager they couldn’t keep him very long.”
Yeh obeyed the summons, and he and his wife moved back to Hong Kong where Yeh went through the company ranks, first as a mid-level manager, then as a member of the export department and now as managing director, or the equivalent of CEO. His father is no longer active in the business.
Tai Ping Carpets is a $40 million public company with about 3,000 employees if you add in factory workers. They design and manufacture custom carpets for the high end of the market, including hotels, restaurants and wealthy individuals.
“When I joined the company, we were one of the first in Asia to invest in a fax machine because we knew it would be very useful for sending designs back and forth,” says Yeh. “But now everyone has one at home. So that is a big difference between then and now. At the same time, the technology of carpet manufacturing has not changed much. It is all hand done and very labor intensive.”
One of Yeh’s main responsibilities is maintaining relationships with hotel groups, institutions, customers and designers. Although the company has sales offices around the world, Yeh is frequently on the road meeting with existing and potential clients.
“We have factories, or associated factories, in Thailand, the Philippines, Indonesia and two in China,” he notes. The company closed down factories in Singapore and Hong Kong because of high costs. “Manufacturing in Hong Kong is generally too expensive and it’s difficult to find young people who want to work in factories. In addition, most Asian countries impose very high import duties on luxury goods.”
Yeh was born in Hong Kong and graduated from Berkeley. He and his wife, a Stanford graduate, have two sons.
Tai Ping manufactures about 6,000 carpets a year. “We get to deal with a lot of people who appreciate beauty and color and design,” says Yeh. “I find that very refreshing.”
In 1980, a Thai-based agricultural company called the CP Group made two moves: It hired Bhanusak Asvaintra to work in its Hong Kong office and it decided to invest a small amount of money in China.
Today, the CP Group — now an approximately $8 billion company that manufactures motorcycles in China and has power plants and real estate there as well — is one of China’s biggest investors. “Back then, we realized that China was going to change, that the Chinese believed communism had taken them about as far as it could and that it was time to look for other forms of enterprise,” says Asvaintra. “Yes, it was risky for us, but we weren’t investing all that much in the beginning.”
The CP Group (known within China as the Chia Tai Group) was one of the first foreign companies to enter China. “The Chinese government listed our business registration number as 001,” Asvaintra remembers.
Hong Kong and China are closely linked, he notes, not just by the upcoming change in government but by mutual advantage. China offers a huge market for investors and Hong Kong “offers China sophisticated technology, management know-how, good ports, and advanced communications.”
Asvaintra, who was born in Thailand and came to the U.S. to attend St. Paul’s School and Wharton, earned an MBA from the University of Chicago and then worked for Chase Manhattan in New York. Chase’s global training program sent Asvaintra to Hong Kong in 1972 where he remained with the bank for four years before starting his own garment manufacturing business.
He feels that “people accept the fact that Hong Kong is going to continue to prosper. In these last few months alone, property prices have gone through the roof…“Hong Kong is basically now a service economy. Manufacturing is too expensive. Most of the factories have moved into China.”
“Investing in Southeast Asia means investing with family-owned businesses,” notes William Ebsworth, chief investment officer for Fidelity in the region.
Specifically, that means “understanding family dynamics and looking for partners who treat minority shareholders fairly. That’s why we employ analysts who speak the languages of the countries we invest in.”
Fidelity’s track record in Asia is excellent. Ebsworth and a staff of 30 investment professionals now manage more than $9 billion, up from $4 billion in ’95 and substantially up from the $400 million under management when Ebsworth arrived in Hong Kong in 1990.
Fidelity’s presence in Asia includes offices in Hong Kong, Singapore, Taipei, Sydney and Tokyo, staffed by analysts, fund managers and traders representing 11 different nationalities. A team of 20 analysts based in Hong Kong visits approximately 3,000 companies throughout Southeast Asia each year. Another 16 based in Tokyo make more than 2,000 visits in Japan.
Analysts specialize in both countries and sectors, and Fidelity builds portfolios stock by stock, rather than by making top-down allocation decisions on entire markets, says Ebsworth. “Fidelity’s bottom-up approach means we hire people with local understanding in each of the markets. We generally recruit MBAs who grew up in Asia and went abroad for university. Our fund managers all started as analysts.”
This has helped Fidelity build a strong track record despite generally mixed markets in Asia. “Stocks have been oblivious to all the rhetoric about the dawning ‘Asian Century,’” notes Ebsworth. “Ironically, the U.S. market has been the place to be over the past three years, as America has regained competitiveness while Asia has become a more expensive place to operate.”
Fidelity’s client list includes retail customers from Hong Kong, Europe and America in mutual fund accounts as well as domestic and foreign institutions such as British Steel, Hong Kong Telecom, Hong Kong University and the British Post Office.
Ebsworth, who earned a BA from The Johns Hopkins University in Baltimore, joined Fidelity in Boston after graduating from Wharton. Over the next six years, he rose from analyst to assistant fund manager and then fund manager in the firm’s Boston and Tokyo offices before relocating to Hong Kong in 1990.
“I was born overseas and have moved quite a few times,” says Ebsworth. “I’ve lived in more than a dozen cities and Hong Kong simply works better than any of them. Why? Because we have the strongest human infrastructure — the best cops, civil servants, doctors, lawyers, plumbers, nurses and so on. If we have one worry about Hong Kong’s reversion to China this year, it’s a drift toward China’s less efficient social infrastructure.
“If we can retain the people who make Hong Kong work and keep corruption down to a manageable level, this city will remain Asia’s premier financial center long after the July 1 handover.”
George Hongchoy joined Jardine Fleming in late 1992, just before the big rush of funds from U.S. money managers entered Asia. “I was lucky because the company was about to go through a big growth period. For me that meant more responsibility early on and more exposure to the markets than I would have had otherwise,” he notes.
The funds rush was precipitated by an influential Morgan Stanley analyst’s tour through Asia in 1993 and his subsequent “maximum bullish” recommendation. “The stock market went up 6,000 points to 13,000 in about five months,” Hongchoy says. “A lot of that money was put into private enterprises in China and then into Hong Kong and the rest of Asia. It changed the whole investment climate in this region.”
Most of the banks in Asia, especially U.S. ones, base employees in Hong Kong and Singapore and require them to travel from there to clients in other countries. “We call these people ‘suitcase bankers,’” Hongchoy says. “It’s hard for them to build up relationships and establish networks, whereas we have a local team in just about every country in Asia.” The Flemings Group manages approximately $76 billion, out of which the bank manages approximately $21 billion.
Hongchoy was born and raised in Hong Kong. He graduated from the University of Canterbury in New Zealand, where he spent five years in accounting and banking. After graduating from Wharton he worked for Arthur Andersen in Hong Kong before moving to Jardine Fleming.
He and his wife Dannie have a year-old daughter named Natalie.
Hongchoy is optimistic about the July 1 return of Hong Kong to Chinese rule. “There are some disturbances but I think on the whole things will work out. Obviously different sovereign powers have different political philosophies but at the end of the day Hong Kong is really driven by economics…
“It’s important to remember that China has a lot of money in Hong Kong. Why would they want to jeopardize their own wealth?
“Many managers I have talked to are concerned that thousands of journalists will come from all around the world on July 1 and try to find something wrong because that will justify their coming here. That means, of course, that something will go wrong which will then be blown way out of proportion …
“I’m afraid that people in the West generally are not familiar with what is happening. When they complain that this is not going to be a western-style democracy, they don’t understand the historical context.”
Hong Kong, says Sanjay Sehgal, is “very work-driven. Five minutes after you meet someone you exchange business cards. It’s fast-paced, like Wall Street, rather than laid back, like Boston.”
Sehgal, who worked in Boston for LEK Partnership from 1992 to 1994, is now a partner with Schroder Capital Partners, Ltd., where he and eight other professionals manage a $225 million private equity fund. “Our philosophy is to invest in companies that are benefiting from the rising consumer expenditures in Asia in such areas as food, clothing, entertainment, health care and telecommunications. We take anywhere from a 10 percent to a 100 percent stake,” he notes.
So far Schroder Capital Partners, Ltd. has made seven equity investments (with five more in the pipeline) in health care and textile companies, a cable TV channel and a fast food franchise.
Sehgal, who was born in Bombay, earned a bachelor’s degree in engineering from the Indian Institute of Technology and a master’s degree in electrical engineering from Columbia. He worked for GTE labs in Waltham, Mass., for two years before attending Wharton.
His wife, Lisa Popick Sehgal, W’83, WG’91, is responsible for their current assignment in Hong Kong. While working for Fidelity in Boston, she was offered the position of retail marketing director at Fidelity Investments in Hong Kong. “We wanted to gain international experience so it seemed like a good move,” notes Sehgal, who by then had worked for LEK Partnership in London — with assignments in Stockholm and Manila — and Boston. He landed a job with Schroder in Hong Kong as a principal and within a year was promoted to partner. The Sehgals have a five-month-old daughter.
Contrary to popular belief, “Hong Kong is really a service economy,” Sehgal adds. “Less than 20 percent of its business is manufacturing. And right now, the economy is robust. Everyone’s business seems to be doing well.”