Old Families Rule Asia’s New Economy

Emboldened by the legend of Silicon Valley, Hong Kong is creating dot-coms, setting up venture capital funds and scouring the region for cash-hungry start-ups.

But unlike America, where unknown engineers and programmers transformed themselves into a new corporate elite in classic rags-to-riches fashion, Internet development here is being led by familiar faces--the same families that earned their billions turning this tiny rock outcropping into a wealthy gateway to modern China.

And it’s not just Hong Kong. The presumption that technology will inevitably empower the little guy is getting a stiff test across Asia. Here, the shift to an information-based economy has strengthened the hand of those with money and guanxi--connections.

There is the Kwok family in Hong Kong, the Koo family in Taiwan, the Riady family in Indonesia, the Kim entertainment group in South Korea. And occupying a class of its own is the Li clan of Hong Kong, an empire spawned by tycoon Li Ka-shing which, under his youngest son, Richard, has nearly overnight become Asia’s foremost Internet power outside Japan.

“Older families tend to rule in business in Asia; it’s the way business has been done for generations and generations,” said Matthew McGarvey, an IDC-Asia Pacific analyst in Hong Kong. “This is a classic case of how the Internet is being adapted to traditional Asian culture.”

It’s also a cautionary tale for those who say the Internet will inevitably democratize the way power is acquired, decisions are made and wealth is distributed around the globe.

To be sure, this notion is not all myth in Asia. The Internet is accelerating a move toward greater openness, efficiency and modernization in the region’s economies. And there are isolated examples of bootstrap billionaires such as Masayoshi Son, founder of Japan’s Softbank Corp.

Meanwhile, Singapore’s censors are losing their battle to control the Internet, rural Chinese factories are locating online buyers for their excess inventory, and South Koreans have taken to online stock trading like junkies.

But evolution, not revolution, is the modus operandi for a part of the world whose business dealings reflect centuries-old cultural traditions, strong familial ties and a Confucian respect for seniority.

And those with a ready-made network of personal ties can move quickly to create the regional alliances that form the backbone of these new Asian Internet conglomerates.

Take 33-year-old Richard Li.

In 1990, he used a $125-million investment from his father to launch Star TV, the Asian satellite television network, and sold it three years later for nearly $1 billion to Australian media magnate Rupert Murdoch.

That pile of money became seed capital for the fledgling Pacific Century CyberWorks Ltd., or PCCW, whose inflated stock value Li used to acquire Hong Kong Telecom, the territory’s venerable phone company, earlier this year in a deal valued at $38 billion. This month, he is hosting glitzy parties in Hong Kong and New York to launch his Asia-wide interactive television network, the immodestly named Network of the World.

Powerhouse in Hong Kong

Add up the Li family businesses, and they control 97% of Hong Kong’s fixed telephone lines and represent a staggering one-fourth of the value of Hong Kong’s benchmark Hang Seng stock market index.

For years, it has been a popular bar stool pastime in Hong Kong to imagine a day that didn’t somehow enrich the Lis, whose empire reaches deep into global real estate, retailing, port operations, telecommunications and more.

“Sometimes I feel as if I am just working to make that gentleman richer,” says Andrew Jarvis, a Hong Kong consultant whose personal rent, utility and phone payments all eventually wind up in the coffers of Li Ka-shing.

The Li family’s aggressive expansion into Asia’s “new economy” has intensified anxieties over the impact of these emerging high-tech oligopolies on competition in the increasingly digital world.

The Hong Kong government insists that it can protect competition in telecommunications by licensing new carriers and stepping up policing of predatory pricing and other areas of potential abuse.

But critics fear that the Li family’s clout in the Internet and telecommunications dealings will lead to higher prices and discourage high-tech entrepreneurship by making it tougher for small firms to get the attention of investors, partners or customers.

“We’ve got to get a big name investing in us, otherwise [PCCW will] move into our space and suffocate us,” frets one young Internet entrepreneur.

He is not necessarily imagining things.

Indeed, in its latest annual report on the best places to do business, the Economist Intelligence Unit, a London-based business research service, dropped Hong Kong from first to sixth place, in part because of concerns that the government had favored the Li family in several recent high-tech deals.

“What we now have are elements of favoritism gradually creeping into politics,” says Ken Davies, chief economist for EIU Asia in Hong Kong.

In 1998, to help kick-start its recession-battered economy, Hong Kong awarded Richard Li’s newly formed PCCW a contract to develop a cyber-port business park on government-owned land. There was no competitive bidding, and other developers were angry.

Eva Cheng, Hong Kong’s deputy secretary for information technology and broadcasting, insists that PCCW did not get a “sweetheart deal.” She says Li was the only developer who expressed a willingness to tackle such a risky project. He agreed to shoulder the $1.8 billion in development costs and turn the completed project over to the government.

But accusations of favoritism surfaced again when Hong Kong stock market officials waived the listing rules for several newly formed companies, including Li Ka-shing’s Internet portal Tom.com. Barely more than a name and a concept, Tom.com reached a market value of $2.8 billion on the day its stock debuted this year.

The younger Li raised eyebrows again this year when he stepped in at the last minute to wrest Hong Kong Telecom away from would-be buyer Singapore Telecommunications Ltd., a state-linked firm, and Murdoch’s News Corp.

Li and his lieutenants sealed the cash-stock deal by wiring a $13-billion loan in less than 48 hours.

Few believe that Li could have raised that money so quickly without the backing of his powerful father and the government of China, which reportedly did not want HK Telecom to fall into foreign hands.

PCCW and Hong Kong officials adamantly deny that governments in Hong Kong or Beijing have interfered on PCCW’s behalf in any deal, including the telecom transaction. That deal is awaiting court approval, having been backed overwhelmingly by shareholders in recent weeks.

Richard Li’s defenders argue that the allegations of special treatment or family collusion are unfair, given his efforts to forge his own path. Li declined to be interviewed for this article, citing restrictions imposed by market regulators while the telecom deal is pending.

“Richard is his own man and does business his own way,” says Kin Yu, a former Hong Kong Telecom executive who works for PCCW. “He will fight tooth and nail, even his father.”

But others point out that the Li family enterprises are linked through an elaborate network of shared business relationships. They note that in the mid-1990s, the elder Li bailed his youngest son out of a costly real estate deal in Japan.

The Li family firms “are unlikely to really compete with each other,” says David Webb, whose online financial report, the Webb Report, is one of the few places offering detailed criticism of the Li family’s operations. “You have a real danger here of an anti-competitive situation.”

Amid the brickbats--and despite a steep plunge in the market value of PCCW’s major technology holdings due to the global retreat in tech stocks--the younger Li is forging ahead. Even after taking a substantial hit, PCCW is still valued at $20 billion.

Like his father, he is a matchmaker extraordinaire, forming alliances with some of the tech world’s biggest names. They include Intel; CMGI, the U.S. Internet giant; Japan’s Softbank; and Telstra, Australia’s leading telecommunications firm.

PCCW also partners with Germany’s DaimlerChrysler Aerospace AG in a $1.5-billion project to build the satellite and ground transmission network that will provide the backbone for Li’s broadband Internet venture.

And in just the last few months, Li has signed deals with Taiwan’s GigaMedia and China’s leading computer firm, Legend Computers.

Factoring In the ‘Li Quotient’

In partnership with these powerful allies, PCCW’s venture capital arm has invested $750 million in more than 50 companies, following the well-publicized path worn by Japan’s Softbank.

The breadth of these investments and the depth of the Li family pockets have forced others to factor the “Li quotient” into their business plans.

“Even if the Li family does not get actively involved in any kind of deal, you either have to make sure the Li family is not going to get into that area or you’d better cut them in for a piece,” says Michael DeGolyer, a professor at Hong Kong Baptist University.

Li’s newest and grandest bet--worth $1.5 billion over the next five years--is his Network of the World, which is being rolled out across Asia over the next 18 months via NOW.com and cable and satellite television.

Li is gambling that Asia’s youth will flock to an interactive broadband network that will eventually allow the audience to access television shows and surf the Web simultaneously, creating a multimedia viewing experience.

It promises a futuristic twist on fashion, entertainment and sports. Are you a fan of tennis star Michael Chang? Tune into the sports program that provides archival footage of Chang’s best matches, then click on a keypad and get his stats and order his best-loved videos or favorite food.

Care to smell that pasta? Stay tuned. PCCW has invested in Oakland-based DigiScents Inc., a developer of technology to deliver smells over the Internet.

“By the time other people figure it out, Richard’s already there,” says John Colmey, a former Time magazine reporter who heads up Li’s research operations.

Making money at this is another matter. PCCW, which will offer the programs at https://www.now.com and on cable television stations throughout Asia, plans initially to offer the service free and get its revenue from advertising and sales commissions. Then again, how much will advertisers pay to reach some of the poorest audiences on Earth?

“India’s a great example,” says consultant Gary Arlen, president of Arlen Communications. “It’s a huge market, but I’m not sure there’s an audience there who can afford this.”

Ironically, Li’s most formidable competitor could be his former brainchild, Star TV. The Asia-wide satellite network is being run by the scion of another Asia-based tycoon, the Australian Murdoch’s youngest son, James. It has yet to make a profit, but the network has carved out an audience of 300 million viewers across Asia and offers 30 channels in seven languages.

With Li breathing down his neck, the younger Murdoch has moved quickly to expand into the Internet world, promising to make this battle of Asia’s next-generation media moguls a heated one.

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Iritani is on leave at the Pacific Council on International Policy studying technology in Asia.