A Synergy of Strength
Practicing some borrowed principles from the Sun Tzu’s Art of War which says: “The control of a large force is the same as the control of a few men: it is merely a question of dividing up their number.” The same principle is applied by Lucio Tan.
Lucio Tan presides over the mega conglomerate – from cigarette production to steel fabrication to chemical manufacturing to hog-raising to food to banking to airlines to education – that extends beyond Philippine shores. His companies employ more than 50,000 workers, and are a source of income for another 200,000 of our countrymen.
So huge are the accounts of his companies that not even the biggest of domestic banks can service all their needs exclusively. It goes without saying, however, that the bulk of the business is lodged with Allied Bank.
But according to Yolly Albano, senior vice president with the Account Management division, Allied Bank has to compete with other banks also bidding for these accounts, which often go to whoever offers the best terms. And the other Tan company “handled their accounts very well,” she says.
That the rest of the Group provides Allied Bank with a very substantial base bolsters its strong and stable image. Clients feel that “Mr. Tan will take care of Allied Bank because the money of his other companies is there.”
Bidding for limitless possibilities
The failure of his first venture, Royal Corn Starch where he was merely a minority stockholder, gave the young Lucio invaluable lessons in business. For his next venture, the chemical engineering graduate went back to what he knew best – chemicals. In 1960 was born the first of the geese that would lay the golden eggs.
It was Mariano Khoo, a physics professor who later became the company’s plant manager, who suggested naming the company “Himmel,” derived from a German word meaning “sky” or “heaven.” For Lucio Tan, the word connoted “limitless possibilities.” And the pursuit for those possibilities would lead him everywhere indeed.
Starting with second-hand machines from the United States, Mariano Khoo designed and operated the plant while Lucio Tan, the hands-on businessman, took charge of sales, finance and overall management of the company.
Himmel’s first plant arose by the Pasig River in Barrio Santolan, then just a rural community. The new company specialized in industrial compounds, starting out with glycerin, an ingredient in many processed products.
As the business grew, so did its products, among them sorbitol, industrial honey, menthol as well as fragrances and flavouring mixes. Later Himmel would trade in pure and unadulterated chemical compounds used in the production of food, pharmaceuticals, tobacco, beer, paints, ink, textiles, cosmetics, paper, glue, plastic, rubber, PVC, and cement.
To handle the every increasing volumes of chemicals, in the Eighties the company decided to build a private wharf in Pinamucan, Batangas, capable of servicing large cargo vessels and equipped with 15 shore tanks with combined capacity of 11.5 million liters. Today Himmel maintains similar tank terminals in Tokyo and key Southeast Asian cities.
A fortune built on Hope
Himmel gave Lucio Tan and his group the template for his succeeding entrepreneurial endeavours. Tan’s second venture was in a field he was only too familiar with – cigarette making.
Organized in 1965, Fortune Tobacco Corporation, just like Himmel started out with second-hand equipment bought from another cigarette maker. Every frugal and practical, the now-flourishing businessman housed the machinery and commenced rolling the cigarettes in a small Quonset hut in Parang, Marikina.
It was not an easy start but persistence prevailed, and soon Fortune’s brands – Evercool, Boss, Champion and Jaguar – gained acceptance, necessitating expansion of the plant and upgrading of its equipment. By 1968, Fortune had taken over the Northern Tobacco Redrying Corporation in Vigan, Ilocos Sur, and started introducing more affordable local brands such as Mark, More, Westpoint, Every Green and Peak to consumers in the provinces.
In 1974, Fortune went on to acquire Sylvanna Tobacco Corporation, which produced licensed R.J. Reynolds brands, namely Salem, Winston and Camel. By then it had also launched Hope, which would subsequently become the country’s largest selling cigarette. With Champion and Hope, Fortune has come to control a 60 percent share of the domestic market.
From the Quonset hut that typhoon Welming blew away in 1967, Fortune Tobacco now has four giant factories in Marikina engaged in direct buying of tobacco from farmers, redrying operations, warehousing, printing, security, transport as well as power generation. In 1979 it was awarded three gold medals and a silver medal in the 13th Monde Selection, a worldwide quality competition for tobacco products held in Paris. Fortune was the sole tobacco company from the entire Far East to be given that recognition.
Besides contributing over P90 billion in taxes to government coffers from 1990 to 2000 alone, Fortune employs over 5,000 workers and supports thousands of tobacco farmers producing Virginia tobacco in the Ilocos and Burley in Pangasinan and other areas in the North.
Foremost in agribusiness
With a whole decade of successful entrepreneurial experience behind him, Lucio Tan was ready to make his mark on an even more vital sector of the country’s socio-economic life by demonstrating how state-of-the-art technology and integration can boost agricultural productivity.
Foremost Farms, Incorporated, organized in April 1970, was envisioned to provide a more constant supply of cheaper meat products for the Filipino table. It immediately assumed the lead in scientific sow propagation and livestock management in the country.
The first two years were spent meticulously planning for the feedmill, the head office and the pilot farm that were to be located in “Dagat-dagatan,’ a 100-hectare property in the valley 30 kilometers east of Manila. The name graphically described the site, which half of the year was submerged.
But hog-raising requires plenty of water and how to harness that abundant resource in the area was for Tan simply an engineering problem. A more pressing concern was the peace and order situation, which normalized after the declaration of martial law. From 1972 onward, wells were dug and roads constructed in Barangay Pinugay, Baras, Rizal.
From an initial 650 sows, Foremost went on to expand its herd by as much as 700 to a thousand head each year. As the count reached 12,000, an additional 40 hectares of land were added to the Pinugay complex. Subsequently, a 68-hectare extension was also set up in nearby Barangay Pantay, able to house as many as 90,000 hogs at a time. At the two plants, the staff number some 1,000.
Equipped with modern water treatment and recycling facilities, Foremost’s environment-friendly systems also boast of a bio-gas facility and a fertilizer plant that process manure.
In 1975, Foremost undertook the first successful artificial insemination in the country. Then, in 1981, it pioneered in pig embryo transplant in Pinugay. In 1997, a fully computerized liquid feeding system was installed in Pantay.
The role these farms play in the Philippine economy goes beyond the hogs they raise. Consuming about 200 tons of feeds a day, Foremost buys as much as 50,000 tons of corn a year, thereby providing steady income to tens of thousands of farmers.
In 1984, Progressive Farms Inc., another piggery project, was founded in Tupi, South Cotabato. This was followed in the early Nineties by Grains Handlers Philippines, a model plant for feed making. And until now, Lucio Tan’s agribusiness ventures continue to spearhead the livestock and feeds industry, bringing it to a higher level at every turn.
Connecting the dots
The late Seventies witnessed the Lucio Tan Group reaching out even further. By then Tan had moved on from starting businesses on his own to training his sight on others already existing, aiming to turn these around.
In 1977, he bought Manufacturing Services and Trade Corporation or Manserv, a manufacturer of soap and perfume products under its own brands, Persona and Nova. The company likewise supplies materials to other makers, both local and multinational, of well-known dermatological products.
That same year he also won the bid for the assets and liabilities of insolvent Genbank, resurrecting it as Allied Bank. That entry into the world of finance spawned several subsidiary or affiliated firms in succession: Pan Asia Securities, Allied Savings Bank, Allied Forex Corporation, Allied Bankers Insurance Corporation and Allied Leasing and Finance Corporation.
While the entry of Lucio Tan into the prestigious and exclusive world of banking may have earned him a secure niche in business community, it was the gutsy challenge he posed to a well-entrenched monopoly in 1981 that pushed him into the limelight. In setting up Asia Brewery, Incorporated in Cabuyao, Laguna, he assumed the role of a David pitted against the Goliath that was San Miguel Corporation, long synonymous with beer in the country.
In launching Manila Beer in 1984, ABI sought to offer a more affordable alternative to local drinkers at the mass end of the scale. Later it further broadened consumer choice and made larger inroads into the market by tying up with Denmark’s leading brewer and introducing more upscale Carlsberg.
The segmentation of the market continued with the arrival on the scene in 1988 of a product with a generic sounding name, Beer na Beer. This was followed in 1991 by Stag Pale Pilsen that targeted a new and younger breed of beer drinkers.
After a decade in the highly competitive market, reinforced by the remarkable market acceptance of its beer products, ABI expanded to Mindanao and opened its second brewery in El Salvador, Misamis Oriental, 20 kilometers from Cagayan de Oro City.
Towards greater product diversification, ABI next went into licensing agreements with other international breweries: with G. Heilman Brewing Company for Colt 45 Malt Liquor in 1995; with the world’s largest brewer, Anheuser-Busch of Missouri, for Budweiser, the “King of Beer,” in 1996; and with Lone Star, the “national beer of Texas,” in 1999.
These partnerships fortified the company’s reputation as a world-class company with products that could match the best in the world. Its flagship product, Beer na Beer, was awarded a gold medal for three consecutive years, 1999 to 2001, in the Monde Selection, one of the world’s most competitive tests of product quality.
Asia Brewery’s main complex in Laguna can process 4 million hectolitres of beer. The complex also has facilities for manufacturing glass bottles, plastic crates, and corrugated cartons.
It has also become a leader in the bottled water market after it started producing Summit Natural Spring Water in 1992 and later, Absolute Distilled Drinking Water. And it has gone on to penetrate residential urban communities and provincial towns with the highly successful purified water refilling stations franchised by Agua Vida Systems, Inc.
In a related move in 1988, the Lucio Tan Group pulled off a historic coup by acquiring Tanduay Distillery from the Elizalde family. Established in 1854 by Ynchausti y Cia, Tanduay is the oldest and largest producer of alcoholic beverages in the country, most famously Tanduay Rhum.
Subsequently, the Lucio Tan Group’s successes in the liquor and bottled water markets emboldened it to venture into the food business. Organized in 1995, Lotte Philippines partners the Group with one of Japan’s leading manufacturer of quality biscuits, chocolates, chewing gum and other confectioneries.
Growth in diversity
As the Group’s interests continued to grow in both size and scope, and its founder’s network of contacts and alliances expanded apace, other investment opportunities beckoned and were pursued at a rate that soon made the name Lucio Tan a byword for daring in business environment where hedging was the order of the day.
Clearly the man was in a hurry. But so sure was his footwork, sharp his instinct, and steady his nerve that even in fields where risks and pitfalls abounded and many far more experienced had failed, haste did not make for waste.
From boom in the Seventies the tourism industry had started sliding badly to bust in the Eighties owning to political uncertainties and economic reversals. For the same reason, the real estate market was down as could be, with prices for even the best properties bottoming out as never before. By then however Lucio Tan was on a roll. And for one as far-sighted it was time not to merely sit tight and wait, but to cast around and buy.
In 1983, primarily to service his own far- and farther-flung organization’s needs, Tan incorporated Lucky Travel. It was just one agency in an overcrowded field, but there were assuredly enough savings and profits to be made from consolidating the transport arrangements of Group executives and foreign visitors on business trips and inspection tours.
Two years later, he upped the Group’s tourism stakes many notches higher by picking up the five-star deluxe Century Park Hotel at the boundary of Manila and Pasay Cities. To many, the move appeared foolish since occupancy levels were dismal and price competition was cutthroat. But the demand for food and beverage outlets and function rooms remained strong. And owing to its central location, the hotel did considerably better than expected.
Down the road, Tan likewise bought Charter House, an apartelle in the heart of Legaspi Village in Makati dating back to 1980, transforming it into a three-star residential hotel and meetings and conferences facility. This, another hotel in Makati and one in Hong Kong make up the Charter House Hotels.
Today, Landcom Realty Corporation is the Lucio Tan Group’s arm for acquiring and managing hard assets that form part of its ever-growing portfolio. Among these are not a few whose use only Tan himself initially appreciated, but whose values have since multiplied and which have well served his purposes.
Doubtless, it was with the developer’s hat on that Tan organized Grandspan Development Corporation in Binangonan, Rizal, one of the largest steel fabricators in Southeast Asia. On top of many other prominent clients and major projects, Grandspan supplied the Metro Rail Transport with railway tracks that run the whole stretch of EDSA.
Three more companies, Lapu-lapu Packaging Corporation, Grand Cargo and Warehousing Services and Rapid Movers and Forwarders, are obviously meant to boost the efficiency of the group’s manufacturing and marketing operations.
Investing in national development
In the Nineties, having accumulated the most valuable assets and huge cash hoard while pole-vaulting from entrepreneur to leading industrialist and capitalist, Lucio Tan took the biggest steps in his entire business career.
Breaking away from the mold of the Filipino-Chinese moneyed class which has always preferred to be discreet about his holdings and dealings, he went public in a way none of his compatriots and peers had ever done.
Courting controversy and ignoring the advice even of his closest friends and associates, Tan put both fortune and reputation on the line for two government corporations whose profiles were as impressive as their financial prospects were depressed.
He’s just throwing good money after bad, experts pronounced. The fellow would lose his pants, critics and cynics predicted, when Lucio Tan pitched for Philippine Airlines first, and for the Philippine National Bank a few years later.
But in Tan’s own hardnosed assessment, the timing and the arithmetic were apparently right. More important, as one who had been vocal about what ailed the nation, he now felt compelled to put his money where his mouth was. And so he did.
How he ended up owning Philippine Airlines is a rather convoluted story. In 1992, a company named PR Holdings headed by Antonio “Tonyboy” Cojuangco of the Philippine Long Distance Telephone Company, President Cory Aquino’s nephew, gained control of the majority stock of the national flag carrier. Unknown to most, it was Tan who provided the funds for the $385 million transaction.
The following year, after Cojuangco and his secret financier had a falling out over the purchase of new aircraft without the latter’s consent, Tan came out in the open to exercise his right to run PAL. Other shareholders in PR Holdings, various government investors, and politicians attempted to stop the takeover, but to no avail. Three years later, Tan was firmly in the saddle.
While the controversy raged, PAL’s hemorrhage due to mismanagement and inefficiency continued. It piled up staggering net losses of P4.35 billion. And as Tan, already chairman and CEO, poured billions more into rehabilitating the nearly moribund airline, a crippling, protracted strike by flight and ground crew unions in 1998 all but wrote finis to it.
However, Lucio Tan’s persistence in sorting out its problems, streamlining operations, rationalizing expenses, and regaining the confidence of creditors and customers alike have undeniably paid off. Though still far from being out of the woods, PAL is assuredly back on track, with 29 wide-bodied jets aged just six years on average flying to 21 foreign and 18 domestic destinations.
In 1999, its domestic and international operations were consolidated in one hub, the brand new and more passenger-friendly Centennial Terminal 2 of the Ninoy Aquino International Airport. And after six consecutive years of massive losses, by the end of its fiscal year in March 2000, the carrier was able to report a modest net income of P45.8 million.
The following year, it did much better yet, posting an income of P436 million. But in the aftermath of September 11, operation in fiscal year 2001-2002 saw a loss of P1.6 billion. For the first quarter of 2002-2003 alone, however, the airline registered a net income of P982.9 million, the highest for that duration in Philippine Airline’s entire 61 years.
Prior to these, Tan had created additional profit centers for the Group by spinning off PAL’s catering and ground handling services to a newly formed company, Macro Asia. Subsequently, MacroAsia entered into a joint venture with Lufthansa Technik to organize Lufthansa Technik Philippines or LTP, to which PAL’s maintenance and engineering unit was transferred.
In January 2003, the Board of Investments approved LTP’s application for incentives covering a P1.1 billion aircraft engine and components maintenance, repair, and overhaul project, as part of which Lufthansa Technik is shifting its A330 and A340 overhaul contract operations from Hamburg to Manila.
To handle a bigger volume of traffic on primary and secondary routes, the Lucio Tan Group has also acquired a smaller carrier, Air Philippines, whose tariffs are more competitive on account of its lower capital expenses and overhead costs. Additional economies have accrued from the sharing of equipment, systems and other resources, the coordination of schedules, and the dovetailing of marketing efforts by the sister companies.
If, in bidding for Philippine Airlines, Lucio Tan had to steer through rough waters and gale winds, his next deal would plunge him headlong into the eye of the storm, taxing his wits, energies, and coffers to the utmost. For at stake is nothing less than the jewel in the crown of the local banking system, the Philippine National Bank.
Although PNB was still the biggest of all the banks, public or private, when 30 percent of its outstanding shares of stock were unloaded by the Aquino government through an initial public offering or IPO in 1989, its glory days were past. While accounting for some 10 percent of the sector’s total assets, it also carried more non-performing loans in its books than any other financial institution, and was slow to implement badly needed policy changes and structural reforms.
In 1992, PNB issued its second public offering. By 1996, when the Securities and Exchange Commission approved its amended Articles of Incorporation and By-Laws, it had in effect been privatized, with government-held stock in the minority of 46 percent. That was further diluted to only 30 percent towards the end of the decade, even as the Asian crisis led to many more delinquent accounts that aggravated its financial straits.
In 1999, PNB posted losses of P13.85 billion. At that juncture, the value of its shares had dropped to a mere fraction of what it had been ten years earlier, which by common consensus was artificially bloated to begin with. Most of those acquired at the public offerings were ripe of the picking but there were no takers apart from the Tan Group, which started buying and eventually ended up owning 46 percent of the whole pie.
As was the case with Philippine Airlines, certain quarters immediately posed objections and obstacles to Tan’s entry into PNB. Although other would-be investors went through the motions of beating him to the draw, at the end of the day nobody else could satisfy government’s terms and match his offer.
It took him three years to make his position at PNB unassailable. But all the issues were finally resolved with the inking of a memorandum of agreement between the Lucio Tan Group and the government in May 2002, paving the way for PNB’s rehabilitation under Tan’s stewardship as chairman and chief executive officer.
For the first quarter of 2003, PNB posted a net income of P53 million, a sharp contrast to the previous P738 million loss for the same period.
Today, guided by Tan’s vision of making PNB a more marketing oriented, customer-centered sales organization, PNB’s staff are undergoing re-training and higher service quality standards have been introduced.
Now led by a man whose drive and capacity for work have no equal, PNB is a sleeping giant no more.
(Note: This piece is part of Chapter 6 of Banking on the Nation’s Progress, Allied Banks 25th anniversary commemorative book.)