Modernizing Family Legacy Through The Times with Richard Eu
Endeavor Malaysia continues Season 2 of the Thought Inspire Series with Richard Eu, Group Chairman of the 143 year-old family business, Eu Yan Sang on the topic of Modernizing An Industry Ahead of Time. Founded in 1879, Richard Eu is credited for modernizing the traditional Chinese medicine (TCM) company founded by his great-grandfather, having served as the General Manager in 1989 and overseeing the company’s development until retiring as Group CEO in 2017. Today, Eu Yan Sang has over 200 retail stores spanning markets such as China, Hong Kong, Macau and Malaysia. In this session, Richard illustrates the complex interplay of preserving family values, managing personal egos, reviving a 100-year-old business using modern management techniques, and meeting the expectations of a modern day corporation.
The family holding structure is very common in Asia with a large portion of SME businesses being family owned. Here, there is an often quoted notion of the three generation curse which down line the business would have been sold off. You are the fourth generation in a 143 year old business, a testament to your family's longevity.
Could you touch on how the Eu family managed to break the curse, Richard?
From tin mining to breaking opium dependency
“I think the three generation curse almost hit us”. Having been a family of tin miners in Gopeng, Malaya, Richard’s great-grandfather started Eu Yan Sang as a form of healthcare for miners. Back then, medical care was scarce in the mining fields and workers had to depend on opium as it was the most common form of medical treatment for pain. With traditional Chinese medicine, Eu Yan Sang presented itself as an alternative to the incumbent opium.
The business later expanded to Singapore, Hong Kong and even China by Richard’s grandfather. Besides bringing herbs for workers, a substantial part of the business back then was remittances back to China as a way to serve the needs of the workers, who did not have access to a formal banking system.
Taxes and family
Richard’s grandfather passed away at the outbreak of the Second World War, in which the family had to regroup coming back from it. The government at the time imposed death duties on large estates, with the maximum rate of income tax at 55%. “So they imposed the highest rate of 55% on the value of the estate based on the day that my grandfather passed away, and added interest on top of that for the years that it had not been paid, which could not have been because of the war. So by the end of the 1940s, my father’s generation was basically presented with a huge tax bill”.
The family had to sell off most of their assets just to pay off the tax bill. Some assets such as shophouses had to be sold at very low prices amongst other assets. To some extent, this led to the decline of the family businesses but they managed to keep some of it. “We had the tin mines with rubber estates, we had a bank and the only thing that was left was Eu Yan Sang. So that’s my starting point, to see what we could do with what the family left us”.
The historical common reason for family structures to disintegrate would be to have squabbles between cousins and family members. In your case, it was because of draconian taxes by the government, but the net result is the same.
So according to history, the Eu family’s holding of the business has been uninterrupted except for one period in the nineties when you and your cousins got together to buy back the shares. Your case is quite unique, can you talk us through that period?
Family factions and succession
Richard’s grandfather had 13 sons that came from different mothers, which created factions in the family. Nevertheless, the state was divided fairly equally amongst them meaning nobody had a major share. Richard remarked that it would be up to the different factions to try and group together, and “that’s why it was the easiest thing to sell everything off rather than to try and cooperate”.
As his uncle wanted to retire at the age of 70, a 40-year old Richard raised his hand to be his successor. “Some uncles got very jealous and organized a sellout. They sold us out to a company called Lum Chang in Singapore”. However, all was not lost – Richard shared that Lum Chang did not want Eu Yan Sang’s business, they only wanted the listed shell of it and that once Lum Chang were ready, they would sell the company back to the Eu family. Lum Chang eventually kept to their promise and sold the company back to Richard and his cousins in Singapore.
Here's a conundrum: if you want to grow far and get big fast, the fastest way is through acquisition. Acquisition requires ammunition in the form of equity capital i.e. selling shares which then dilutes the family structure and a lot of family members would not do.
How do you address this situation and advise the plethora of family structures around Asia today?
A family with business
Besides looking at the intention to grow, Richard’s general advice would be to remind his family that; “we are not a family business, we are a business family. Because the business might change but the family stays”. There may come a time where the business is sold, but you can continue creating businesses with the family that you have.
Passing on to the next generation
“There's no single solution, so every family has a unique situation”, Richard says, as passing down to the second generation from the first is the easiest because there is a very small number of beneficiaries. As the family gets bigger with cousins and second cousins, passing on becomes more difficult, with people putting together certain structures to own their share of the pie. This includes using holding companies and trusts that intend on finding a way to own the assets without having them broken into pieces.
A different approach mentioned by Richard would be the European family model, which includes situations where none of the family works in the business or no one takes any dividends as the business is run. Another model is that in each generation, only one member of the family gets to own the entire business. Here, the owner would have to pay his predecessor from the earnings generated, and then sell it to the next generation.
Eu Yan Sang had been listed in Hong Kong and your last foray was in Singapore's SGX in 1990. Institutionalizing might give liquidity and structure, but it also means the entry of unwanted third parties and hostile takeovers. You have told me that you'll never, ever count another public listing again in the future.
Talk about the whole listing process – what are your pros and cons?
Listing for liquidity
“The listing was actually done in order to provide some kind of liquidity. Liquidity is good if you need it, and if you really do want to sell, it's a way of indicating the market value of the company. But as you know, markets here are not that fantastic”. On selling shares, should someone want to sell their shares as a block, Richard mentioned that it would be much harder as buyers would have orders at a cheaper price. In contrast, having shares that are liquid for trading is a more ideal situation.
Nevertheless, Richard says that share price may not benefit the family if the intention is not to sell. In relation to that, share price can be a bit of an ego trip as it can always be used to measure one’s wealth by the value of the shares they hold. Reflecting on his experience, “if we want to sell, I would say actually for most businesses, a trade sale is better than a listing, as a trade buyer will pay more”. In most cases, trade sales often occur above market price which indicates the value of the company.
During the height of Covid-19, you actually saw a huge spike in demand for your traditional Chinese medicine products – and this is on the back of companies like Pfizer and AstraZeneca making a ton of cash, highest in history by some margin.
With traditional Chinese medicine (TCM) and Western medicine seen as a binary decision by people, why do you think that happened?
Complementary than binary
Eu Yan Sang were in a unique position in Malaysia during the height of Covid-19, in which vaccine supply was inadequate at the beginning and consumers were looking for an alternative to help with effects from contracting Covid. “So at that time, people were looking for our herbs to moderate the effects of Covid, and we did have this particular product which we had created a few years back for SARS. That product became very popular and got sold out straight away. We didn't even market it, it was all viral”.
“We see ourselves as complementary and not alternative.” When Richard first contracted Covid, the doctor advised him to take some Panadol, which he also took some herbs as well. “In western medicine, there was very little that people could take to moderate the effects and symptoms of Covid.” So the moral of the story is take both. You should get vaccinated as vaccination will help all our life as from young, we've been vaccinated”.
Why should a non-family member join your family business? There is always a risk that a family member will get promoted ahead of them despite their best efforts. How would you respond?
Rising within the business
“It depends a lot on the business. It doesn't happen in our company”. Previously, Richard’s grandfather had depended on professional managers to run the various parts of his businesses. With his uncle retiring and no one else able to make the step up, Richard replaced him as managing director, having had experience as an alternative director to his father before. “So I said, look, I'll do it. You don't have to pay me any high salary. I just take whatever is given and let me try and give it a go. And that was how I got into the company”. Ever since then, Richard was the only one from the family in the business, with the rest being non-family professional managers.
In 143 years and across four generations, there must have been some down days. Was there at any point in time you felt that you should fold the cards or close the business down because things were too tough? What were those down days like?
“The phone rang at eight-thirty in the morning. It was a call from the merchant bank: “We have just received a notice of takeover from Lum Chang.” So they had a majority of over 50%. It was the initial shock and what's gonna happen is the uncertainty”. Nevertheless, Richard describes Lum Chang as “very decent people” and that they were clear in what they wanted: not the TCM business, but in the business’ other assets and the company listing. However, the new owners would give the family the first right to buy the shares back once they were ready to sell – the “best thing that happened” throughout the traumatic experience.
What appears to be quite a simple question, which is actually quite profou