How Asian Empires Are Made - Cedric Chin
01:10 Understanding Business Expertise
05:33 The Triad of Business Expertise
10:49 What Business School Misses Out
14:52 Why Are There So Many Conglomerates in Southeast Asia?
20:11 Not Everything Is About Corruption
23:48 What Makes A Good Tycoon?
29:03 Why Tycoons Are Politically Shrewd
31:37 Unique Features About Southeast Asian Markets
35:22 Kwek Leng Beng's Business Acumen
39:08 The Allure of Startups
41:41 How Robert Kuok Succeeded
46:07 Will There Be More Asian Tycoons?
49:09 What We Can Learn from Constellation Software
54:59 Cultivating Intellectual Dexterity
01:02:14 Advice For Fresh Graduates
01:10 Understanding Business Expertise
Keith 01:10 I'm going to first ask you a quick question about business expertise. What exactly is business expertise?
Cedric 01:20 That's a great first question. I've been asking that question for a long time because I wanted to be good at business. This requires a bit of setup. It's not just something that I made up. In the '80s, the late '80s, there was a branch of the US military that started funding this group of researchers. The challenge that they had was, how do you improve decision-making in high-stress situations? To compress a very long story, the group of researchers eventually came together around, as usual, something very common among such things—a disaster called the USS Vincennes disaster.
They started this development program of decision research called Naturalistic Decision Making. Now, where is this going? The core tool of Naturalistic Decision Making is the ability to interview experts and extract expertise from the heads of experts. You can see why this might be useful for the US military. So then you can figure out who the experts are, extract it, turn it into training programs.
About two decades into that program, or like one and a half decades, one of the researchers, the students of those researchers, turned out to be from a business family. Her name was Lia DiBello.
I actually started my podcast series—I have a podcast that I don't update a lot—but I started it because I wanted to interview her. She applied these techniques that at that point had been like 15 years on business people because she came from a business family. Her grandfather built an empire and then lost all of it. She knew a lot of business families. She told me that basically growing up, she knew a lot of chairmen of businesses in Middle America. So she decided to get a National Science Foundation grant to apply these techniques to business people.
Now you can imagine how excited I was when I found her. I found her in a chapter of the Oxford Handbook of Business Expertise, which is very thick, very expensive. There was just a chapter there that was like, "Expertise in Business."
I had been digging into expertise acceleration methods because after I left my old company, so I helped my boss build up a company from scratch to 4.5 million. 4.5 million in annual revenue. I was mostly in Vietnam, but I left because I wanted to start my own thing. I was looking for ways, trying to make sense of all the business people that I met in Asian contexts, in Singapore, in Vietnam. I was looking for ways to get better at business. I was not satisfied with a lot of the syllabus out there. So when I finally found this, I was like, this is great.
Somebody has actually done the work to try and extract, using methods that have been proven, that have been funded by the US military, what business expertise is. What she found is that business expertise is two things. The first thing I think is very easy to talk about. She calls it cognitive agility, which is that people who are good in business are able to update their mental models of what's going on when things change. In business, things change. You can't just believe that this thing is true and then stick to your beliefs. When evidence comes in, you don't change your mind.
This is a very quick way to die. So this is easy to understand. I think anybody who has worked in business, you know that good business people are able to change their minds when the evidence changes, and some people are not, and those people don't last.
05:33 The Triad of Business Expertise
The second thing is more interesting, a bit harder to explain. She said that basically if you think about it, a business is divided into three skills, and she calls it a triad, so like a triangle. The three legs of the triad are, she called it supply, demand, and capital. I called it operations, market, and capital. Also using her terminology, but I thought it was easier because I've been trying to explain this to people. They said that they find it difficult to reason about supply, demand—too academic. So what is it? I think operations and market are the easiest to understand. Anybody, if you take them off the street and ask them what business is, it's you provide some service, you make something people want. You obviously must run a business in a way that is adequately capable of delivering that service to a customer. So operations is like if you run a yogurt factory, you need to be good at running a yogurt factory. If you are doing software, you need to know how to make software. If you need to run it at scale, then that's a capability you need to build.
Market is also easy to understand. Market is not only who your customer is and how to reach them and how to sell the product to them, but also how do you reason about adjacencies to your current market? What competitive threats may exist because new competitors may emerge and if you don't have barriers to entry, they will be a problem for you. Also how to defend against competitors. So this one is easy to understand. Where it gets tricky, and this was something that I already started noticing because as I was operating, I was dealing with business people who seemed to understand things that I couldn't put a finger on. It was like we were playing checkers and they were playing chess. Capital is the third leg of the triad, and capital allows you to do things that people who don't understand capital, they're not able to tap capital markets, they're not able to come up with novel capital structures, they're not able to do. So what capital does is that it allows you almost like a whole different range of activities. We can talk about that. But the basic idea is that if you have three legs of a triad, now you can look at any business person and you can say, how have they succeeded? How good are they at each of these three legs?
I have talked to a lot of good investors and good business people over the last couple of years, ever since I discovered this triad and I popularized it because people don't want to read academic papers. They have confirmed to me that the triad is actually a very good way of reasoning about when you're looking at an executive team or you're talking to execs, you can sort of figure out exactly as she articulated in the original paper—how good are these people on all three legs? The other thing she said that was really interesting was that when two business people from unrelated industries talk to each other, they can evaluate each other's expertise because what they're looking for is the facility with which you reason about the relationships between the three legs of the triad. So if something changes in say the capital cycle, how does that impact how you're going to change operations and how does that, you know that competitors are going to die. So you change your operations so that you can go and take market share from your competitors. That's an example of somebody who understands the relationship between the three legs. People are not so good, they tend to be only good in one or two legs and they cannot see the relationships within the triad. So it's almost like they're blind.
When Warren Buffett met Bill Gates and they had a conversation, Bill Gates didn't want to meet Warren Buffett. What they were talking about was primarily, I think if I reconstruct this from biographies, Warren Buffett was interested in the software business. He was like, why would you win? Why would you survive? Why would you last two decades, three decades? Then Bill Gates will explain the shape of the game of like software to them. Then Bill Gates looked to Warren Buffett and Bill Gates will be asking Warren Buffett, very typical in any conversation Warren Buffett, you'd be like, can you explain through all the businesses you've seen, have you seen situations where there's a competitive advantage in this way or that way? So they could tell that both of each other, both of them, even though they had nothing to do with each other's businesses, had some facility because they understood the relationships between all three legs of the triad and they might not be able to articulate it but once you have this frame you cannot unsee it.
Keith 08:09 It's almost like a magical kind of glasses that you wear, that you can understand the dynamics, the invisible dynamics that's happening behind the scenes.
Cedric 08:17 When I discovered this, I lost it. You know, I'm not bad at operations. I'm kind of sucky on demand, on market, because every time my boss let me handle a deal, it would go badly. So I knew that I was not very good at that. But I knew nothing about capital. Whereas my boss, who I built the company up with, he graduated basically Cornell Financial Engineering, and he was an investor. So he didn't lack that. I saw him at the facility with which he could reason about, you know, how much money do we keep in inventory? We were making point of sales systems. We mostly sold to Singapore businesses, but how much to keep in inventory? What's the likely return on investor capital? These were not things that they teach you when you're just doing startups. I was very optimized for startups when I was younger. So it was like, I could tell, okay, here is a syllabus. I suck at this, I suck at this. I can now go hunt people who are good at this and then learn from them.
Keith 09:08 It's not just a syllabus but it's also a descriptor of your, perhaps your strengths and weaknesses as an operator. Before we go into diving deeper into the triad, I wanted to go back to the earlier point you made. You said you were dissatisfied with what was out there in the market before reading about the triad. My question to you is what do you think is lacking out in the market? In other words, what is Harvard Business School not teaching?
10:49 What Business School Misses Out
Cedric 09:35 I now have a better respect for what they teach because I can see how it can be useful. A lot of the people who do go into business school though, I find that they become Common Cog subscribers. I'm like, why—you went to an MBA, I didn't go to an MBA, what are you getting out of this? The problem with business school is that it doesn't teach you how the pieces fit together in real businesses. Whereas my background is pretty much like doing business, helping my boss grow the company. Then also like just trying to ask the question of all these great business people that I was counterparties with—why are they so good? And how? Whenever they had the chance, I would be there doing a deployment and I would be talking to them about the business. I will ask them, you know, if they go lunch, I will go have lunch with them and then ask them. How do you get started and how do you get good? Then they will of course do the very Singaporean uncle thing of, no need to think so much, just do. I just do. I start this business with four friends, then they all three quit, then, you know, I just kept at it. Not very satisfying also to just talk to really good—you can tell that they know what they're doing because they will run circles around us in deals. But very difficult to get the expertise out of their heads. So you can sort of see why I went down the path of Naturalistic Decision Making.
To answer your question, I think the context around which I entered or got interested in business is also important. So we are roughly the same generation. You know, as well as I do, that startups were huge when we were growing up—or well, they were not so huge when I was growing up, but they definitely became very large when I was in university. I think you were in university not that long after I was. So startup rhetoric. There is a large body of knowledge at this point built around startups and it did not explain to me how business people in Southeast Asia got big. If you go looking, you can find other businesses in the West who are similarly family-run businesses that are conglomerates that are multi-generational. There is a very famous essay, I think about "Startups Equals Growth" by Paul Graham. He asserts that a startup is a business that's designed to become large. This makes startups different from hairdressers and from kopitiams and restaurants, most restaurants. I always found that very, very reductive. Samsung started out as a dried food shop. It is now a multi-billion dollar conglomerate. So Samsung wasn't a startup, but it grew big. Robert Kuok started out in rice and sugar trading. Now the Kuok group, the Kerry group of companies is incredibly large. So I never accepted Graham's assertion, even as I was drinking the startup Kool-Aid, that there's only one way to grow a large business. This just didn't make sense to me. I was quite sure that people had figured this out. But it was very difficult to find the answers to how you may grow a multi-product, multi-business unit conglomerate to become very large. So when I left part of the journey to figure this out, was like, I'm sure there are people who have figured this out and documented it and written about it. Where are they? Then you go start chasing it down. But most of them are not actually in Harvard Business School. Most of them are slightly off the beaten path. That makes sense, because what's the point of business school? The point of business school is to train an officer class for large companies. So they have to teach a standard syllabus, which is broadly useful. The questions I was asking were very niche. So anyway, yeah, I hope that answers the question. I was trying to answer that particular question, which led me down this very weird path.
Keith 13:36 It seems to me that in especially Southeast Asia, if you look at Indonesia, Malaysia and actually even China, a lot of the tech companies essentially operate like conglomerates. Even though you might say they're tech companies or tech startups, but if you really look at the business structure or the way they operate and run, a lot of them actually look a lot more like conglomerates. What is it different about our part of the world in terms of the markets as compared to the US, as opposed to the popular literature?
14:52 Why Are There So Many Conglomerates in Southeast Asia?
Cedric 14:06 I think specifically for Southeast Asia, the answer is that our domestic markets are not very large. You had a prior guest, who's a friend, and he at the end of his podcast with you, he talks about how there are no large domestic markets, so it doesn't really support large single product companies. So therefore, the configuration that works for this region is conglomerates that run many businesses. That is borne out by two more pieces of evidence, which is that I think the Lightspeed Report by Kevin Aluwi, that's an amazing report that it was quite depressing to read because over the last decade, I think we had this dream, that Southeast Asia is the next China. I bought it. I didn't think very critically about it because I was busy running the business. Whenever I talked to my friends in the VC world or in the startup ecosystem, they would advance this narrative to me. It turned out to be false for reasons articulated in the Lightspeed report.
The other sort of piece of evidence is that actually it's very obvious. You read the biography of Robert Kuok. There is a part in the biography where he complains that he always felt that he hit his ceiling. He said that if I was in a big ocean like in America, large domestic market, I could just focus on one business and grow. But because I was always, I wanted to grow, but I was always a big fish in a small pond and I'll tap out that small pond and then I would need to find another small pond. My entire life, starting from the '60s onwards, was just looking for another pond and another pond and another pond. So he had to expand horizontally. One way to think about this is that businesses are creatures in an ecosystem. Not every ecosystem demands the same set of creatures. So a different configuration has been proven to work in Southeast Asia and in China for different reasons. So I would separate China and Southeast Asia. The configuration that tends to work when your domestic market is smaller tends to be a collection of businesses as opposed to just one very large business.
There are other historical path-dependent things that lead American businesses to be more singular. A huge part of it is the antitrust movement. The Sherman Antitrust Act. If you read the biography of John Rockefeller, who pretty much was the reason the Sherman Antitrust Act was created, there was like a 30-year period of monopoly and incredibly horrible behavior, unchecked behavior. I think the American people, if you take a look at the ethos of the culture, they're very suspicious of centralized power, which is, you know, the origins of America. Over the years, this path dependence of you got the Sherman Antitrust Act and you got the Clayton Antitrust Act, which ironically led to a conglomerate boom in the '60s. But then there was like a huge financialization in the late '70s when Michael Milken invented basically the junk bond or the high yield bond approach to doing leverage buyouts. Then all the conglomerates got crushed because these people would raise huge amounts of debt, take on the conglomerates, strip them out like a carcass, cut them out into various individual companies and generate a lot more shareholder value, meaning that you buy it for say 100 million, but if you carve it off apart, you can sell it off for 600 million and everybody becomes rich.
Due to this path dependence, there's this belief that conglomerates are a more inefficient structure, that there is a conglomerate discount, which is that public markets in the West will give you a valuation discount—it will be less than the sum of the parts of the business. So therefore conglomerates are less popular and they don't get talked about. People will give a very glib answer in Asia for why conglomerates dominate—because corruption. The other thing that they would give is that Asian business people are not worth studying because corruption. What is there to study? They're corrupt, they're rich because they're corrupt. There's nothing interesting, nothing challenging about the ecosystem. So that's a very long-winded answer to sort of get at why mainstream sources of business information cannot explain our operating environment in Southeast Asia where you and I sit. You have to look a bit, you have to think a bit harder and look for sources that do exist but are not as mainstream in order to explain the business dynamics here.
Keith 18:55 If you could help me understand a little bit more about why that corruption label or argument doesn't really work and if we were to look a little deeper, what would you find?
20:11 Not Everything Is About Corruption
Cedric 19:09 The interesting story to me, which I haven't really dug into is why America became less corrupt from the time of Rockefeller to, I'd say, I think by the '60s, it was already quite uncorrupt, '60s, '70s. I've asked members of Common Cog, the site that I write, I have asked the forum and people said I should go take a look at Francis Fukuyama, but I haven't had the time to dig into this. I'm primarily a merchant. So I just read business first and then leftover, I read political economy. But it is true that at the time of Rockefeller, it was possible to buy senators and everybody bought senators in the US. Business in Asia is actually more similar to business in the US at the turn of the century in the late 1800s.
So to rephrase your question, it's not true that analysis about corruption is mistaken. It's that often in business schools, they teach a Platonic idea where corruption doesn't exist. They don't actually have a playbook for here's how to survive in the time of Rockefeller, because they don't need to. We can run our businesses in the West, in developed economies, even in Singapore with rule of law. You can assume that rule of law exists. But if you're operating in Vietnam or Malaysia is actually not too bad. Vietnam, Indonesia, you quickly learn that rule of law is not that real. You have to figure out a different set of principles. China as well, rule of law is not that real. So analysis of Asian tycoons is it is legitimate that they are rich because in many cases, in most cases, many cases, the ecosystems they operate in have weak institutions, which means that they can do political capture of weak institutions, and then they can build a moat around their business. Because it's usually a politically granted moat. I give you a monopoly. If you have a monopoly on flour in Malaysia or rice, then you are guaranteed to be rich and you can go off on your other business adventures and take that cash out of that monopoly and expand indiscriminately.
But the more interesting question is to ask is that given this operating environment, what does skill look like? So then you can differentiate between this tycoon is worth studying, this tycoon got lucky. He was savvy enough to maintain political, what do you call it, goodwill, such that he could hold on to his government-granted monopolies. But actually, every time he tried to expand into some place where he's not protected, he just gets crushed. There's a lesson in that, which is that, actually, a lot of things that business schools write about, including things that I write about, about operational excellence and how to use data and things like this, which I figured out over a couple of years, don't actually matter in business, depending on the business. Sometimes if you have a government granted monopoly, it doesn't really matter how good you are at running the business. In fact, a lot of these businesses are badly run, but it's okay. That's just how business is. I guess life is also a bit like this.
Keith 22:32 So then how do you separate between the good ones and the lucky ones?
23:48 What Makes A Good Tycoon?
Cedric 22:38 This is a very useful question to ask when you're studying Asian tycoons. I think it might be helpful to talk about what is the core arc of every Asian tycoon. Every Asian tycoon, and you can go and test this. When you go and read any Asian tycoon biography, they all follow the same arc. The arc is like this. First, they start out in business. Usually it's trading, but the reason it's trading is because a lot of these first generation tycoons, were under colonialism and war and trading is the only thing they can do. They get a start in trading and the ones who are successful, they all learn three things, is they learn calibrated risk taking. They learn they have a nose for demand. They understand that you cannot just unlike many startups today who believe that you can create demand or create a new product people will want it. They are always very attuned to this one got demand, this one no demand, okay, no demand, okay, just shut down the business. The third thing they do is they get a sense for due leverage or power, which comes in useful when you're dealing with politicians with government power.
They run their businesses for a while. Usually when you talk to Asian business people, Chinese businessmen, whatever Asian business people, they'll be just like, don't think so much, do. But the skilled tycoons actually do think a little. You see Robert Kuok making sense of his experiences in his biography, which is why he made certain decisions to leave certain businesses and move to others. Some business people, some Asian tycoons are not very reflective. So they just randomly thrash about. Sometimes they succeed, sometimes they fail. They don't develop a theory for what makes a business good? What makes an opportunity worth chasing? Robert Kuok did. He actually, this is one reason which I really like reading his biography. You can see that he's making smarter and smarter decisions as time passes. So that's stage one.
Stage two is, sorry, this is stage two. Stage two is they're running a business and some of them are beginning to realize that, some businesses are better than others. The thing that makes a business good is actually lack of competition. Or to be more precise, what is the biggest problem in business? The biggest problem in business, in any business, is competitive arbitrage, which is you find something good, you make a lot of money. Other people see that you're making a lot of money. They copy you, they cut their prices and other people copy them and cut their prices. Eventually everybody just gets slowly competed down until no profits. The technical term is that the margins get competed down to the opportunity cost of capital, at which point capital leaves that particular business sector. The smart tycoons as they're executing and competing, they're realized that actually very sien, very tiring to compete. I need to find a way that allows me some breathing room so that I can relax a little. If I take my foot off the gas or I'm distracted by some family problem, the business doesn't crumble to dust. So they start looking for, we now call it moats, thanks to the language of Warren Buffett, which didn't exist in the '60s and '70s. He was still creating it. But at this point, we can call it moats, or powers, seven powers by Hamilton Helmer. In all of these environments, the easiest moat is a government-granted monopoly. So they go after a government-granted monopoly, or some of them are just really lucky and they luck into it and there's no skill involved and they never develop a theory for why some businesses are good and they don't develop a theory for their success. So you can separate the tycoons, the ones who realize this and the ones who don't. Then you can go and study the ones who realize this. But the meta lesson from this journey, is that it is again possible to do well in business and in life by being lucky and the path dependence of the early luck then leads to an unbeatable advantage.
So let me just close off the arc and I'll answer your question. So after that, they draw cash out of the monopoly protected businesses and then they can spend it on whatever they want. It could be buying nice cars or nice condos, but a lot of them also expand into other businesses. Now, why this is? The Western theorists have a whole bunch of like, oh, the cost of capital is low and a conglomerate structure. Maybe. I don't think people, Asian tycoons think that in such sophisticated terms. I think they believe that diversification is safer. So if anything bad happens to any one business, your empire doesn't collapse. I also think that there's also some element of to maintain political access, you want to be able to be useful to politicians. So therefore, like it helps if you're able to help them with national advantages or maybe they're just corrupt and they want money. So, okay, fine. So they have to grow. Then the third thing, the final thing of the arc is that can they last? Because in Southeast Asia, as you well know, political regimes don't last forever, not in every country. When there's regime change, if you're tied too closely to one particular side of the winning party, when that party gets thrown out, then you are in trouble and your empire might be broken apart. So the good tycoons are shrewd enough to play both sides or they are not so tied with just one political party or the other.
So from this arc, you can now start to reason about what is skill. With the caveat that again, skill does not matter. You can just get rich and it's okay. Who cares? But if you want to figure out who to study, then the first thing is, can they expand to businesses? So this is a marker of skill. Can they expand to businesses where there's no protection? Robert Kuok is pretty good at that. The one that I really like is this Singaporean tycoon called Kwek Leng Beng. He is very good at expanding into businesses where there's no protection. He's very good in foreign markets as well. Can they last? The ones who are just political cronies, only last the duration of one leader. Then the leader gets deposed and then the business empire just collapses. So we don't talk about them. Obviously no skill. The third thing is, so that's from the political connection side of things. But then the third thing is that can they survive a capital cycle turning? There are good times and there are bad times. As the old Warren Buffett saying goes, you only know who's wearing pants when the tide goes out. So the worst case scenario for an Asian tycoon is the tide goes out, the capital cycle turns, and then they have to sell off some of these incredible moat generative, sorry, moat protected cash generated assets. For as long as they can hold on, to the moat protected cash-generative assets that's throwing off cash year after year, decade after decade, they are fine. Their family is fine. Their empire is fine. But if they lose this, then the entire basis of their wealth vanishes. So, one marker of expertise is to look when the going gets tough. Are they able to hold onto these crown jewels? This is the framework for how you can look at Asian tycoons and go, this one actually worth studying. This one is a lucky, again, caveat, if you get lucky also nevermind. Like you don't have to get good if you're lucky.
Keith 29:45 I think you just need to get sufficiently good. You don't need to optimize for the maximal function if you hit the satisficing function. If you're lucky, I guess.
Cedric 29:49 Yeah.
Keith 29:50 Before we go into some of the case studies or examples that you've highlighted, I wanted to tie it back to the triad. So if you look at the triad that you've highlighted, which is you have the operations, the market and the capital. How does this three feature differently or how is this configuration different in say our part of the world versus say the west?
29:03 Why Tycoons Are Politically Shrewd
Cedric 30:21 So the first thing is we have less developed capital markets. So in a lot of tycoon stories, you will see that capital expertise in this part of the world is slightly different. It's only recently that you can sort of say, we have a private equity roll up and everything. We're always behind the West on this because our capital markets are not very developed. On the capital side of things, it tends to be dominated by again, political access. You have political access, you can do certain things in your capital markets. Maybe the most craziest example of this is Dhirubhai Ambani selling into a retail market non-convertible bonds. Then suddenly the bonds are convertible. Which you're like, what? Then it gets turned into equity. Which waters down the existing equity holders and then the bond buyers are shafted. But because the equity prices of Reliance Group kept going up, this is back in the '70s, this is all public knowledge, then people are like, okay, lor.
The short answer is that operations, market and capital, there is an element of political access in Southeast Asia that doesn't exist in the West. This is actually not 100% true. In fact, in some parts of some of the essays, I point out that if you regard government regulation in the West as a form of government intervention, you can find really good American companies that have moulded themselves into a shape that perfectly fits the government regulation. The example I give is Transdigm and Heico, which we can, we don't have to get into, but basically the short of it is that the airplane market, especially the airplane parts market is very regulated and it's impossible to find it. In order to create a replacement part for an airplane, you need to get a regulation, get it to be approved, which takes years. So what they do is they go and buy all the makers of these parts and they jack up the prices. They have no choice but to buy because what to do? You cannot create an alternative part. You have to take years for each part to be recertified. It is not true that this doesn't exist in the West. It's just that people don't talk about it as much. It is a bigger deal in Southeast Asia for the reasons that I've outlined, weak institutions and so forth.
31:37 Unique Features About Southeast Asian Markets
One consequence of this actually is that operations are not so important. You get a lot of executive chairmen in Southeast Asia. These are both chairman of the board and CEO. Not very good for corporate governance, but not very good for corporate governance if you're a minority shareholder. Very good if you're the family controlling the company. This structure exists because they recognize that the important thing is controlling the market and sometimes helped along by government help policies and also getting capital, which is again, also tied to government policies. So therefore, it is a legitimate criticism that most Southeast Asian companies, especially of these Asian conglomerates, are not particularly well run. But the point is, the structure of the ecosystem is such that it doesn't need to be well run in order to make money. Yeah, so that's, I think, the short of it. Now, even with this ecosystem, it's possible to spot really good capital operators.
So I said I am my Kwek Leng Beng. If you look at what Kwek Leng Beng has done over the course of his life, Hong Leong Finance, he cut his teeth in Hong Leong Finance. He convinced his father to move into hotels and then he started rolling up hotels throughout the world. He's only able to do what he does because he is very skilled on the capital side of the triad. He has said actually that the reason I succeed in hotels is because of my background in finance and real estate. That many other hotel operators, they're just operators. They don't think in terms of capital cycles and they don't think in terms of how do you make money given that capital cycle turnings are a thing. There is a, in his biography, by Peh Shing Huei, there is a line where Peh Shing Huei interviews a CEO of I think one of the large international hotel chains. I think it might be Hilton, CEO, retired CEO. He says Kwek Leng Beng is unique because he plays the hotel game in a way that actually when you run hotels, you don't make a lot of money. So what he does is he waits for the capital cycle to turn. He finds a distressed seller of an amazing hotel, of a premier hotel, and then he buys that at cheap prices and he waits for the capital cycle to go up and he sells it off. The most famous example of this was that he bought the Plaza Hotel from a bankrupt Trump in '97, I think it was, or '90s, in the '90s. I can't remember when exactly with a group of buyers from Saudi Arabia, I think it was. That was great. That was amazing. To this day, both men don't like each other. I'm sure Trump doesn't really think much about Kwek Leng Beng, but both men don't like each other. But he has done this again and again, you know?
35:22 Kwek Leng Beng's Business Acumen
So here is a man who, because of his background and his expertise in capital and the market, he's able to sort of look at various assets. He buys most of the bread and butter hotels of his chain. They generate cash, not a lot of cash, but enough to make a decent profit. But the real killing that he makes from the hotel business and the way he's chosen to play it as befitting his skillset, his advantage, is to buy hotels that are landmark hotels that people want, irrationally, almost like, I don't know, like a collectible card game. He buys the great cards when the market, and then he waits, he waits 10 years for the capital cycle to turn. Then he sells it off to the highest bidder. He's done this with the Seoul Hilton. He's done this with, I think one or two hotels in the UK, which were really old. Story, he does it with the Plaza Hotel. That's a great example of here is somebody who is skilled. His biography actually does a pretty good job of if you have the right lens, you have the triad. You can read it and go, oh, I see how this guy got good.
Keith 36:46 If you look at the triad, he's almost like top 1% in the capital.
Cedric 36:50 Yes, and market. And there's another throwaway paragraph in the essay on hotels in his biography where it says actually the management turnover in his hotel company is horrible. He cannot hold on to, they hate working for him. It's very badly run in that sense, the leadership keeps turning over. But it doesn't matter, because the game he's chosen to play is this game of buying cheap hotels at the bottom of the capital cycle, setting it up. In the meantime, everything, all the hotels, the rest of the hotels, the properties are just eking out a decent profit so that it doesn't go bankrupt.
Keith 37:20 But why was the operations bad in that case? I'm just curious.
Cedric 37:24 It's specifically the hotel management company that he runs. I don't actually have details. It's just literally a throwaway paragraph. So, okay, operations, not very important in this game, but he chose the game. The game selection is itself a way of expressing business skill. He knew what he was good at and what he was bad at. He chose the shape of the game that he played that benefited his advantages. Anyway, you can sort of see this kind of discussion doesn't really get talked about when we're talking about startups, because startups are like, it's a different game.
Keith 37:52 So why is the startup game something that most of us are enamored by?
39:08 The Allure of Startups
Cedric 37:57 I have a hot take. This is not accurate. This is maybe not 100% accurate, but who can say with such things? I believe that Silicon Valley's startup phenomenon revolution was very attractive to a lot of people and was bolstered by the fact that VCs in order to get deal flow had to produce a lot of content. So what do you call it? A16Z was what you could jokingly called a not a VC firm, but a content house with a VC arm attached. A media company with a VC arm attached. So a lot of the predominant business narratives are pushed by the incentives of tech media and VCs, which were designed to attract attention to me as the VC so that I can get better deal flow. So that's my glib hot take. I think maybe the more calibrated assessment would be that everybody wanted in on this because it was value creation of the highest order. The companies that came out of the digital age are often much better companies than companies in the industrial age. So, what's a good business? A good business is something that throws off a lot of cash, doesn't take a lot of money to create, very low capital expense, has great lock-in effects, which a lot of business, Internet businesses have network effects, which is incredible, lock-in effects. So people fell in love because here is a new generation of companies that are really high quality and they seem to be able to materialize just like that from nothing. But I mean, this was your work. Singapore itself believed and you were on the front lines of seeing this. Does this seem correct to you? You probably have a more calibrated assessment.
Keith 39:45 The structure of the market informs the kind of game that one should play. I think within Southeast Asia, as you've alluded to previously, and Bilal Hari did point this out to me before, which is that we like to market ourselves as a big market, but the realities were a bunch of fragmented markets and very small markets. That's fine to market yourself as such, as long as you don't drink your own Kool-Aid. I wanted to ask you a little bit more on the other tycoons that you study in the region. You pointed Kwek Leng Beng as a very good capital operator. What are the other tycoons good at? What are the skill sets that they have using that triad where they're different but they're equally successful?
41:41 How Robert Kuok Succeeded
Cedric 40:25 I think Robert Kuok is a remarkable example. Blessed so, he's 100 years old, he's still alive. It's not just him. I think in Asian Godfathers, which is this book by Joe Studwell, I have problems with, but it's still the best book that we have with all the behind the scenes gossip around the tycoons. He interviewed a tycoon who said that, you know, Robert Kuok basically modernized the tycoon playbook because Robert Kuok was reflective. You can see over the course of his career that he was taking bets and expanding into different markets with some intelligence. He wasn't just throwing shit at the wall and then it failed and it's like, okay, business hard, which some Asian business people do. So he's remarkable because he's able to expand into Hong Kong and he straddled Malaysia, Singapore, Hong Kong, Indonesia. He's also remarkable because Wilmar, which was actually run by his nephew, is an international player in, again, in commodity markets. You know, what else has he done? He's done Shangri-La hotels. He's done shipping, although I think there's divested. Now the Kerry Group is actually also into data centers. So here is a man who has, he's shrewd and by all accounts, I believe that he was a good counterparty to his business people, I mean to his partners. He was smart enough to recognize the shape of the game that he was playing. Then he played it according to the realities that he saw in front of him. He was schoolmates with Lee Kuan Yew and Lee Kuan Yew would sometimes tap him to ask like, hey, what do you think about this business environment? So Robert Kuok is really worth studying. If nothing else for the meta point of being very clear on the shape of the game that you're playing, which is bad capital markets, no debt markets when he started out. He had to borrow from banks, but there was no way he could issue bonds initially. Then as times, you know, progress, he learned parts of the capital triad are maybe not as well as Kwek Leng Beng, but decently enough. Always, always hunting down demand, always, always thinking can I make money here and can it be a sustainable business protected from competitive arbitrage?
I think Robert Kuok is a good example. Who you should not look at. It is very, so the two flaws of looking Asian tycoons is that A is they're all useless, there's no skill. But B is they're so rich, therefore they're good. I would put it to you that Li Ka-shing is not that worthwhile to study. It doesn't matter. He would not care because he's rich and he's successful. But if you look at the stuff that he does, he's played an easier game because once he had gained control of the port assets of Hong Kong, and he could basically have, he basically could siphon off a portion of the trade passing through Hong Kong. A lot of the other businesses that he did actually are not that successful or remarkable every time he tried to expand to something where he was not protected. So he's again, remarkably rich, much richer than pretty much a lot of the tycoons that I've seen, but maybe not worth studying so much apart from as an example of here's how you can win without being very skilled. But that requires being a bit lucky. Robert Kuok did something much harder. Kwek Leng Beng definitely did something much harder. You can listen to me say this and conclude two things. One is that business skill doesn't matter, which is actually legitimately true. Business is a game where you can get lucky and skill doesn't matter. You just have to get lucky once. Also another side of things is that you can walk away from what I'm telling you with a better evaluation criteria of who to study beyond. He's very rich, therefore he must be good.
Keith 44:35 There's a side joke that when I read Robert Kuok's biography, he jokes about the fact that because Lee Kuan Yew and him are classmates, they're born in the year of pigs. Robert Kuok is a pig for money and Lee Kuan Yew is a pig for power.
Cedric 44:49 He was very skilled. He was very skilled. Yes.
Keith 44:51 Yes, when you were talking about the rise of these Asian tycoons is how much of it is actually replicable in today's modern, like business economic environment? Because I think a lot of people would say, you know, a lot of these people, they got started when trading was the main way you could, for example, get a foot in and like what you said, the capital markets were so much more immature back then. Now, could there be another Asian tycoon that could emerge?
46:07 Will There Be More Asian Tycoons?
Cedric 45:21 So I need to be more precise on this. It is true that all these first generation Asian tycoons built their businesses off government intervention in markets because there was this predominant paradigm of economic development called import substitution industrialization. This created lots of opportunities for them to create businesses that were more protected because of governments. Let me just explain a little. Import substitution industrialization was this belief that if you replace industries for domestic consumption, like say, in the past, we exported out to colonial power centers, we export our cotton and whatever, and then the colonial power centers would create t-shirts and send back to us, we can never become rich. So therefore, the belief at the time was that you can take the cotton or import the cotton or have the cotton there and instead of importing the t-shirts, make the t-shirts there and then the people can get rich because they can buy t-shirts from local producers. This didn't work, turned out to be true because all the tycoons came in and it was not great for equality or development. But that opportunity did exist and it was a huge part of the path dependence of the way how they became rich. That is in Joe Studwell's Asian Godfathers book and it is a valid argument, it is a true argument I think.
Today, you have less of this, it is true and obviously the opportunities will be different but the reason I'm explicating this pattern of business is that it is a better fit for our ecosystem because of the way markets are set up and so on and so forth and it is more intelligent to reason from first principles about the ecosystem that we're in, if you're building a business here, then if you were to try to go after the startup outcome. That is less intelligent. It doesn't mean that the opportunities available to you will be the same. That's rubbish. It can't possibly be the same. But what is the core, what is the meta sort of pattern that is important to internalize? The meta pattern that's important to internalize is that there is a way to build a productive, good, competitive or healthy, maybe not competitive, it doesn't matter. Healthy business that provides jobs and creates value for the economy. That is not the go big or go home startup path.
Now you can look for modern versions of this and one modern version is Constellation Software. Again, you cannot copy Constellation Software today. The window of opportunity is closed. My point is that it is important to recognize this pattern exists and then go look for a unique window of opportunity that exists for your particular context. Just a quick word about what Constellation Software does. Constellation Software was started by a former VC called Mark Leonard. He, in the mid '90s, I think was '95, realized that as a Canadian VC, there was only so much he could do. Yes, he had some wins and he was the top VC firm, he was in the top VC firm in Canada, but it was Canada, not Silicon Valley. He wanted businesses that could compound and grow. He realized in the portfolios of his venture capital firm were several companies that provided software that could not be ripped out. So basically their cash flows were guaranteed for as long as their customers exist. These are businesses like nuclear power plant software or software that runs that MRT system in a city. Maybe can never grow, but you have a flow of cash flow that you can take out over decades. This sounds like an Asian conglomerate tycoon kind of thing. You've got some businesses that you can take cash out because it's protected from competition forever or for decades. So he said, okay, why don't I take some of these software companies and I take it out and I form a holding company around it and I draw the cash and then I just keep doing the same thing. I keep finding businesses that are similar and I just buy it and I harvest the cash. So what happened was that they compounded at, I think, 30% over 17 years. It went public three or five years after formation. They've taken on very little debt and they just compounded. The reason I say that you cannot copy him now is that the secret is out of the bag. There actually is a name for the kind of software companies that he buys called Vertical Market Software Companies. When there's a name, you know that everybody is going after this now. He himself is struggling a little because he has so much competition. But he clearly had good capital expertise to notice this opportunity. He set up the capital structure of the business to be able to grow in this very slow, but very guaranteed way. He was also actually very good on the operations side of the triad. If you go, by the way, to Constellation Software, you quickly realize that they have five or six operating units, and each of them combine, acquire 150 vertical market software companies per year, because he realized early on that he could not compete with large capital. Large pools of capital like private equity. So he said, okay, I will just acquire smaller companies, but at a far higher velocity. There are some vertical market software companies in Singapore that he owns. There's one called Tarantula that basically it's a software company that makes software for telephone, telecom towers. So telecom towers are not owned by, in most countries, telecom towers are not owned by one, like Singtel, it's owned by some other company. Then they rent out. The usage of the telecom towers to the various telco providers and they need software to track how much you have used of my telcos so I can charge you. They write that software. Again, software that cannot be ripped out, guaranteed a flow of cash flow. There's a company in Singapore that is owned by them called Tarantula that started in, I think the 2000s and basically has been sitting there throwing out cash for forever. No, ever since, not forever.
49:09 What We Can Learn from Constellation Software
So my point is that in the same way that Mark Leonard saw this opportunity, and he exploited a secret before it was clear to everyone else. You can do the same thing. The difference I would put it to you, why are startups attractive? Startups are attractive because you have a go big or go home outcome. You swing for the fences and you have a 1% or less than 1% probability then you become rich. I put it to you that the conglomerate model is, it takes longer and maybe you are not as rich, but you know, whatever. But there is higher certainty of success. Because every step of the way you're improvising and adapting to whatever you see, what opportunities you see in front of you. The core pattern is just find one or two or three businesses that are moat protected. There's a rich literature on moats now thanks to Warren Buffett, Hamilton Helmer, when Robert Kuok started here to figure it out by himself. But now you can go and find what does a moat protected business look like, study that and then look what are the unexploited secrets around me that I can go build one or two first. Cash-generated businesses that are more protected, harvest the cash and then expand. So the opportunity is not talked about, but I believe persists. I hope I made a convincing case for it.
Keith 52:43 There is one part that I've noticed throughout our conversation so far in your work is that it's something that you've alluded to earlier as well, which is that you need a form of intellectual dexterity. You need to be able to update the way you think about the world. You've pointed out again and again, be it through the tycoons or be it through the really excellent business operators and that's something I've observed as well. People are really at the top of their game are able to kind of revisit assumptions that don't hold true anymore. So a good example is when Ng Eng Hen was giving his exit interview as a Minister of Defense, he was talking about that. He was saying that when he wanted to modernize the military in the past say decade, there is a temptation to think that warfare is conventional. So you would assume that for example digital warfare should be something that another ministry handles but then when you realize that cyber security or cyber attacks is something that is becoming more and more prevalent in warfare then you need to update yourself as the Minister of Defense to build that capability and the countries that don't suffer greatly and you know it is an existential problem that they fail to solve and I want to go back to that how do you think about intellectual dexterity, how should people cultivate that in their lives?
54:59 Cultivating Intellectual Dexterity
Cedric 54:15 There's this line that I like from Edward Deming, who was this statistician that was partially responsible for the Japan economic miracle and the methods that he taught eventually led to lean manufacturing. He liked to say that there is no truth in business. There is only knowledge. He defined knowledge as theories or models that you have in your head that allow you to better predict the results of your business actions. I can't speak about defense because I don't know anything about defense, but I think there's something very deeply true about this. What catches people in business is that they believe that something is true about the world and they believe that truths don't change. But if you believe that there is no such thing as truth, there is only knowledge and knowledge must be predictive. It doesn't need to make sense. It just needs to be predictive. I'm taking this action, this business action, I'm hiring a marketing manager because I believe I predict that the marketing manager will help increase the sales of my company. That's a prediction. How do I know it's correct? How do I know it's true? That's a very conservative stance to take towards business where you accept that there is no static truths. There are only things that I believe and the quality of whether that belief is useful or not is whether or not it is predictive of future outcomes.
I think that's a very good stance to take. It's the stance that I don't think, I think this is a highfalutin way of putting it, but I believe that all good business people that I've talked to and that I try to model myself after have this belief of so what? You got this new piece of information, how is it useful? How can I test this against reality to see whether or not it is true? Then I am very conservative with the conclusions that I make when I run the experiment and reality is messy and noisy. So maybe they don't jump to conclusions first, or they're very willing to update and say that maybe my conclusion is wrong because of whatever unique factors of that particular situation. So that stance is the stance that Lia DiBello was trying to get at when she was talking about cognitive agility. It's the stance that sort of I look out for. I can't really work with people who don't have this stance, which is actually we don't know. What we know to be true may not be true. So the only thing that matters is does it still have predictive validity? Do my beliefs result in actions that achieve the outcomes that I want? If cannot, then I need to update.
Keith 56:41 What was one example that you saw that really stood out for you?
Cedric 56:44 When we were running the point of sale company in Singapore, my boss hit on this insight that if we hired software engineers from Taiwan, it would be less competitive and it would be cheaper. I think both the insight was true. So we hired an initial phase where you do you test it, you go hire someone from Taiwan, you see whether it works. The guy didn't like the setup in our organization. The guy we hired was a remarkable programmer, but he did not like the setup in our organisation. So he quit after a couple of months for a much better job, much higher pay. My boss, I remember this because I had a disagreement with him on this, my boss concluded that you cannot hire people from Taiwan who's too good because then they will leave too quickly. I was like, I don't think that's the right conclusion. Maybe there is a more conservative conclusion that we have to run, which is that you need to have a better model of why people leave. If they leave early, it could be one of a variety of reasons. Maybe if you construct an organization, a company in a way that people want to work at. They don't have some of the experiences that this guy had in those early months that he got him to leave. Then we will be able to hire good people from Taiwan and keep them. It was just a thought, but I iterated on it.
When I left the company, I told my boss, my model of what I came up with on how to get people to stick around. Because after I left, I think the team, 70% of the team was still intact more than two years after I left. The model that I gave him was basically people, why do people leave or stay? There are six, there are actually six factors. The first one is are they paid enough? But it's actually not the biggest factor. There are other factors that can dominate whether people stay. They're not, people are not. Very few people are true mercenaries who would jump for salary increment. There are other factors. Do they have autonomy? Can they decide and make decisions on what they want to work on? Do they have the opportunity for mastery? Are they given a path that they can see that it's improving and they are getting better at their job? Then the other three factors is what is the relationship with their immediate peers and their boss? If their immediate manager is horrible or there's somebody horrible in their peers, it's going to be like a thing that causes friction that eventually might result in them leaving. In particular, the bad managers cause a high churn. Then the fifth one was purpose, which is actually also oversold in Silicon Valley circles. In the vast majority of cases, people will actually stick with a job where they enjoy the work, they can grow, but they don't have purpose. It's fine. The proof of that is that obviously there are people making software for nuclear power plant companies or rubbish truck companies. They're fine. They're happy if the other factors are in play. Then the final thing is that does the job fit into their life? This one you have no control over. The only way you need to, the only way that you can do is you do regular one-on-ones and check, have their life situation change. So an example of this might be they get married and then they move to their wife's home or they move to a new home, which is an hour out from your office. They're going to quit eventually. There's nothing you can do about that. So with this six factor model, and I gave it to my boss, I was like, this is what I figured out. You can actually just rank it qualitatively on each employee and have a calculated flight risk for each person based on what they want and who they are. Then you have a better model to hire from Taiwan, exploiting your original insight, but actually getting it to work. You're like, okay, this actually makes more sense. So that's an example. My boss is much smarter than me. He graduated summa cum laude in two years from Ivy League University. He is brilliant, but business is this weird thing where a lot of the feedback you get is messy. So what dominates actually is you need to draw the right conclusions and not draw them too quickly. You need to conduct experiments that can sort of, or reason by hearing stories from other business people about is this factor true? How do I know it's true? Then you get a better model of reality, which then allows you to achieve your goals better.
Keith 1:00:58 My last question for you is, if there's one piece of advice you have to give to a graduate entering into the workforce, what would that be?
01:02:14 Advice For Fresh Graduates
Cedric 1:01:12 Very early on when I started going down the startup path and I optimized for startups, unlike a lot of my friends, they optimized for big tech jobs. I realized that I needed a way to reason about job security that wasn't tied to large companies. The thing that I came up with was that job security in my context, and I think increasingly for many job contexts in this new age, is not your ability to stay in your job and not be laid off. Job security is the ability to get hired after you get laid off or you quit or whatever. If it is easy to hire you, then you have job security. You don't have to worry. You can quit anytime. You have the power in the employee-employer relationship. So the next question is how to reason about, I didn't really have the language for it when I was a fresh grad, but I do now. What causes this quality of you quit and then you can get hired easily.
The thing that I eventually, the language was actually taken from I think, Cal Newport. So Cal Newport, this book, So Good, They Can't Ignore You. He talks about rare and valuable skills. Rare and valuable skills is exactly the thing that I optimize for. When I left university, I went and worked for my boss because I could run the office in Vietnam and I could learn business. But it was also a calculated move because I knew that the people who were willing to travel back and forth between an uncomfortable third world country and Singapore is very small. You can hire engineers, software engineers, who are better than me and you can hire PMs better than me, but you cannot hire a person who is decent at PM, decent at software engineering at my level, willing to travel every month to Vietnam and have some capability in org design, which I already proven out because I built this and designed this club in university called NUS Hackers. Which was not unknown in the tech ecosystem at the time. So I thought that this, if I could prove this out, I will be of a small set of operators in the region where if you were going to hire someone to open an office, you will hire somebody like me. There was only a few people like me. That did pay off. I was very lucky. It turned out that my boss and I had a good relationship and I helped him build the business. Now he's basically retired. So he could be a good reference as well. But the core idea of building rare and valuable skills is I think a very good first goal if you're in university.
The difficult thing actually is not the valuable part. You graduate from university with valuable skills. By definition, universities here are quite pragmatic in that way. But the rare part is difficult. So the question is how can you find a skill that is rare? So there are a couple of patterns. Actually, there are just four patterns. The pattern that I chose was it was disgusting. So people didn't want to do it. Just grime. Yeah. Who wants to go and travel back and forth every month, to the point where I knew Changi like the back of my hand. Another one could be you are at the intersection of two domains that are not very common. So there are lots of good designers, but if say you're a really good designer and you are a good programmer. That's very rare because the brain patterns, the brain wiring required to be good in one, it makes it harder for you to be good in another. Another example would be really good marketing people. There are two styles of marketing. One is brand and then there is performance. One requires you to be very analytical, numbers minded, and the other one requires you to be more psychological, a psych major almost. Really, really good marketing people are good at both, but they're actually quite rare because the brain wiring needed to be good at one is very hard to find amongst people. So that's the second pattern.
The third pattern is that you're early to a few. This one requires luck. So there's no way to tell if your bets turn out to be right. I had a friend who wanted to be good at UX. She wanted to be there when the UX paradigms around VR and AR emerged. VR and AR have not panned out to be the next big computing thing, so that's not a career move. But it's possible if it became big that she would be one of the few people who were already there doing work very credibly, very legibly. Then the final thing is that you're just really, really good, top 0.1% in the thing. In that domain and that's really, really hard. But it's possible. I mean, this is a rare and valuable pattern. Anyway, so that's my advice. Go find a career moat and think a bit, think a bit carefully about how to satisfy the rare property, not just the valuable property. Then you have job security.
Keith 1:05:53 With that advice, Cedric, thank you for coming on.
Cedric 1:05:56 Yeah, thank you.