Foxconn, family dynamics and globalisation

Image by Nadkachna Praca Własna/Wikipedia, CC BY 3.0

Image by Nadkachna Praca Własna/Wikipedia, CC BY 3.0

It seems that the attempt by family-owned Foxconn, the world’s biggest electronics manufacturer with over a million employees, to take over venerable Japanese company Sharp has failed, blocked by the Japanese government who will instead put the firm into state ownership.

But don’t expect Foxconn to give up on acquisitions. Like other Asian firms the Gou family who control it (Terry Gou, who founded the firm as a make of television knobs 40 years ago, is still chairman) are surely desperate to diversify away from their core business.

Like Tata, Samsung, Muragappa, Dalian Wanda, and Li Ka-Shing’s Hutchison Whampoa before it, Foxconn needs to diversify - or conglomeratise, to use an even uglier word - to grow. For conglomerates from the big emerging markets - which are usually family-owned - moving into new markets is a way of life, as this chart by McKinsey shows:

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Nearly half the new business entries were in totally new sectors of geographies for these firms. Why does this happen?

Largely because of country risk. In South Korea, the government is cracking down on the chaebols’ old way of doing business. In China the era of cheap labour is coming to an end and manufacturers have to adapt.

Also, the nature of government there means that many people feel that owning assets in places where the rule of law is more predictable makes sense. (This goes double for those in Hong Kong.)

Indian family firms see opportunities everywhere in their vast country, and they often have great links to English-speaking countries, so diversification makes sense.

This is sometimes painted as an Asian tendency, but it is not universal there. Plenty of family-owned businesses in Japan, such as industrial robot-maker Fanuc (which we wrote about here), concentrate on one line of business. And it is not uniquely Asian. Brazilian family firms such as beef giant JBS, controlled by the Batista family, are also moving outside their domestic markets. 

Family pressures

But to see conglomeratisation as driven solely by macro-economics and politics is not the whole story. It is also driven by family dynamics. In emerging markets there is a shortage of skilled, educated people.

If you are from a wealthy family it is likely that your family members are skilled and educated. So it makes sense to employ them. If not, they go elsewhere and compete against you, and you will struggle to fill your vacancies with people of equal ability.

This means that you have to keep ambitious young family members happy. If they want to move abroad, start their own business, or branch out into something different, it is sensible to let them do so.

If they are successful, then great. If not, at least they have learned from their failure. Either way, they can easily come back into the core businesses when they are ready.

It is similar to the way the Rothschilds satisfied the ambitions of their family members happy way back in the 1800s, by sending them to set up their own banks in the capitals of Europe, independent, under the family banner.

Will family dynamics continue to drive conglomeratisation? Perhaps not. With the one-child policy in China, and South Korea’s birth-rate the lowest in the OECD group of rich countries, sibling pressure is likely to be lower for business families from those countries.

Birth rates across the world are falling. Which raises an intriguing question: as people from business families have fewer children, will we see a slow-down of globalisation?

© Business Family