Masayoshi Son is a Japanese citizen of Korean descent, but he's making big bucks in China. That's particularly impressive given the historical animosity between Japan and China. The edge that Son, who controls Internet and telecommunications company Softbank, has is how he adapts to what I call the "entrepreneurial ecosystem" (EE) in China.
Son's net worth hit a whopping $5.6 billion in January 2010 according to Forbes magazine -- making him Japan's fourth-richest person. Son's Softbank has a mobile phone unit that sells iPhones in Japan, and the parent company owns 50% of Yahoo Japan (valued at $10.5 billion) and 34% of Chinese e-commerce site Alibaba.com (worth $3.4 billion). Softbank is also collaborating with China's Shanghai Media to develop digital content, according to Forbes.
To understand how Son makes money in China, it's important to understand a concept that he seems to get implicitly. As explained in my new book, Capital Rising, co-authored with Srini Rangan, different countries have different EEs -- e.g., their policies toward human capital, financial markets, corporate governance and intellectual property protection.
Capital providers, like Son, seek the highest return on their money by investing in fast-growing markets where potential profits are high. China's economy has been expanding at about 10% annually, which is plenty fast, but the capital provider's challenge is to profit from that growth.
Adapting Rather Than Complaining
That's where China's unattractive EE enters the picture. Why unattractive? American Internet companies complain they can't compete in China because of its barriers to effective corporate governance (government interference and censorship) and financial market obstacles (ownership structure barriers, such as the need for foreign companies to operate through China-owned firms). Moreover, the American companies moan about strong domestic competition, while other critics say foreign companies lack an appreciation of the needs of local Internet users, according to the The New York Times.
The difference between Son and the American companies is that he adapts to China's EE rather than complaining about it. How so? According to the Times, Son avoided the pitfalls of Chinese censorship by investing in "e-commerce, local social networking sites and online games," thereby sidestepping the difficulties of government censorship. He has also gained respect by investing his capital but leaving local management in charge of his Chinese companies. For example, Alibaba CEO Jack Ma sits on Softbank's board, while Son is an Alibaba director, according to the Times.
Softbank also brings to the huge Chinese market a distinctive bundle of capabilities that lets it compete effectively. China is home to 800 million cell phone users and 400 million Internet users, so Softbank's combination of cell phone and Internet expertise gives it a big edge.
Softbank is the only company that can operate a cell phone network, create applications that run on many popular handsets and provide the content that draws in new users from the huge Chinese market. For example, Softbank offers cell phone buttons that link users to popular content or gaming sites. While an investment analyst told the Times that revenues from these Chinese services are mostly still in the future, Son's prior success suggests it would be imprudent to bet against him.
These capabilities are likely to continue to boost Softbank's financial results. For the year ending March 2010, Softbank net income "more than doubled to $1.04 billion, driven by strong performance in its mobile business," wrote the Times. And Softbank forecasts operating profit to rise 7% to $5.4 billion for the year ending March 2011.
Son's success in China proves that having the right strategy makes all the difference.
What is Short Selling?
Make a profit when stocks prices fall.View Course »