Monday, September 3, 2012

An Open Letter to Anonymous


I received this comment on my previous post. It shows both truth and despair but does not indicate a balanced view of the circumstances and the special situation in which Cambodia finds itself. I thought it worthy of a reply outlining my thoughts.

The comment:

“Don't look back but to learn from mistakes and always look both ways before you proceed. How can a young professional Cambodian work for 300 USD a month and get ahead? How can we ever save to buy a house as houses here cost as much as they do anywhere else in the world? How could we ever afford anything more than a motorbike? When we work for another, our time is not our own, and so there are all sorts of demands and expectations, along with demands and expectations from family, there is now way we will ever get ahead. You explain it to me. You explain what needs to happen for poor Cambodians to own a home, and a nice boat like you have, and what makes you any better than the rest of us? Why is it that you deserve what you have and we have our lot? Yes, post this or don't post it, but aswer it.”

The reply:

Dear Anonymous,

I sense a great frustration in your comment, perhaps even bitterness. First let me explain how I got where I am now; not that my situation in life is such that one would count me among the rich. I would say I am well-to-do. But now I am in my last third, possibly even last quarter, of my life, so everything I have now has been earned over a lifetime, and it was acquired abroad, not in Cambodia, and, most importantly, it was acquired legally, not by theft, fraud, or corruption. It was not earned by speculating or gambling either. I am a very conservative businessman when it comes to these things. I don’t like high risks. These only rob you of your sleep and give you headaches, nightmares, and make for a bad family and social life, possibly lead to high alcohol consumption, or even drug use.

I got a decent education in several fields, both business and technical. After working at several well-paying jobs I opened my own business on a shoestring. According to opinion polls, being independent is more important to young entrepreneurs than making a great deal of money. This applied to me too.

Subsequently, I owned companies in several countries, among them Thailand and Cambodia in SE Asia in the early 1990ies. I do have to say though that my endeavors in Cambodia at that time weren’t overly successful. Although I did well, I left without any profit because of high expenses (guess why?) and shrinking profits as my solitary position as a foreign trading company slowly disappeared with the lifting of the U. S. trade embargo. I resettled in the West and joined another business.

I finally cashed out when I sold that business at a very good price after running and growing it for 14 years. One overriding principle in my life was that I did want to enjoy life while I was still able to – in the years when one is not yet frail and shriveled. My ambitions were, therefore, not  the driving force behind my business activities. A friend of mine proved my point only too well. He started out at the same time as I and worked his butt off his entire life because his career was paramount to him. He is dead already. He made a lot more money than I did. But I am still around to enjoy life. In the end, however, I fall into the same category as most somewhat successful businessmen; I made most of my money after I was 50.

Those stories of the billionaire wunderkinder, such as Mark Zuckerberg, are one in millions. Altogether, the U. S. only has around 3 million millionaires, that is less than one percent of the total population. At the same time the U. S. has about 15% of the population living below the poverty line, in other words, more than 50,000 Americans are poor. And don’t think poverty in the West is any different from poverty here.

Wealth is distributed very unevenly everywhere in the world. A lot people say it is getting ever worse. I personally believe the distribution is clearly out of balance tilting towards the super rich, ever since someone came up with the term ‘shareholder value’. This is just to put things into perspective. Don’t deplore your lot. Recognize what’s available and try to make it work for you.

I only came back to Cambodia to live here as I have a Cambodian wife. I used part of my money to invest  here and to build a nice house, and buy a boat – my major hobby. I don’t see why I should not enjoy the same lifestyle that I had and would have had if I had stayed in the West. I had all these things before I came here. Do I deserve them? You bet I do. I worked hard enough for them. Am I better than you? I think not. I just had better opportunities, grew up in a better economy and generally better era – at least in my mind. It helps if you are halfway intelligent and smart too.

So what can a young Cambodian professional do? First, and I guess you have that, he/she needs to get a good education. That’s easier said than done seeing as the educational system leaves much to be desired, to put it mildly. Nevertheless, there are chances even in the public educational system. If young people make an effort and study hard they can get a head-start on those who just watch videos on You-tube or play mindless video games. Choosing the right course of study at the right school is extremely significant too.

The big difference comes with the vast disparity between the economies of the Western countries and Cambodia. One must not forget the last 40 years in Cambodia’s history to understand why Cambodia is still so much behind Thailand. But despite its many negatives, the Cambodian economy is catching up. What took Thailand 30 years to accomplish, namely to grow from an underdeveloped country into a threshold country, will take Cambodia only 15 years – on account of the more modern technology available today and the fact that changes happen must faster now. In my opinion, the first 5 years of those 15 have happened already.

Even with the best education it is still hard to find a job that would pay well enough so that people can afford the things that commercials on TV make them believe they need and want.  A good used car easily runs into the $20,000 range, a house in Phnom Penh is even more expensive than in most places in the U. S.; I would say they have reached European standards, where real estate is prohibitively expensive in most places. I would venture to say that most of the real estate, such as condos, duplexes, and villas, are owned by very few people who bought them for speculation or to rent them. Nevertheless, there is a growing middle class in Phnom Penh that can buy into those mush-rooming ‘ ‘Borei New World’ developments.

There is a very simple explanation why comparitive wealth spread to a large part of the population in the West and Japan – it is debt. Banks original purpose was to lend money to businesses and people to acquire things they needed to invest in growth and for individuals to fulfill their needs and other desires. This way they made more money available to average people so they could consume more. More consumption meant more production, more production meant more jobs, more jobs meant higher pay, and so on, and so forth. Almost the entire U. S. economy is based on home consumption.

This economic cycle is in its infancy in Cambodia. But banks do extend loans for purchases of motorcycles, cars, and homes. The collateral  of at least 40% is still rather steep but it is a start.

Another difference to the West is that when people get married there they don’t have kids right away so they can both work and save money for larger items, e.g. cars, homes, etc. In some countries they sometimes hold off having kids for 15 years just so they can afford all the things they believe they need.  Here in most cases the new couple promptly has the first baby almost exactly 9 months after their wedding. So traditional culture is an obstacle to material well-being. This, of course, does not take into account social implications.

But here, even young people can sometimes make it happen. When did most people make most of their money in Cambodia? Right, during the real-estate bubble. I know an at the time rather dumb young man without education. But he grasped the opportunity when it presented itself. He bought a small lot of land that appreciated quickly, so he flipped it and bought another larger one, flipped it, and so on. You didn’t need a lot of money to start with then, prices were so low. He is now in his early 40ies and lives very comfortably in his own house with a wife and two kids.

Another young man acted as a guide to Korean businessmen who came looking for real estate. He watched how they did it and imitated them on a very small scale and then traded his way up. He now owns 3 villas and a night club. Sure enough he also drives a new big Lexus SUV.

That’s all nice and fine, but what how do these examples help you? Keep working hard, look out for opportunities, and grab them if they promise a good return. But don’t make any stupid moves by borrowing money at high interest rates from people in the market, e. g. 120% per year. Don’t play those traditional money lending games like ‘tontin’. There is always a loser in a game. Look for niche products that would be a novelty and where you would be very competitive. The important thing is to get an exclusive because if you don’t others will follow doing exactly the same thing. Cambodians have a way of always doing the same as everybody else. That happened to me several times back in the early days. Look for a field that is a growth sector. How many phone shops, hair and nail salons, restaurants, computer shops, or even car dealers does Cambodia need? Investing in those you will probably be able to make a living, but just barely so. Another tuk-tuk on the streets might not be greatest idea either.

An individual many times does not have enough seed money to start up his/her own business. They way out is a partnership.

A nice mid-range guesthouse is still a good business despite their abundance all over the place. Most of them are run poorly and earn equally poor money. I know a string a very successful mid-range boutique guesthouse which turn a nice profit – but they are all run by foreigners. Because of their business background abroad foreigners have more experience and knowledge so they know how to run things in an efficient way. This knowledge is largely absent in many Cambodian businesses, as is the attention to detail, customer service, or reliability.

But then there is this seemingly insurmountable problem of family or traditional expectations a young man needs to fulfill unless he does not want to risk being estranged from his family. This is an area where I can’t really give advice nor do I want to. It is too tricky and too individual. One thing is for sure, tradition and conservatism hold back development. Just look at the definition of the word ‘conserve’ – to keep it the way it is. Too much progress too fast has not proved to be the right way either, as the recent examples in Arab countries demonstrate. This issue you must address and resolve for yourself.

And finally, this blog is not meant to arouse envy or jealousy in Cambodian readers. It is supposed to provide some insights and experience for other foreigners, overseas Khmer, and whoever is interested in things Cambodian.

16 comments:

phnompenhpast said...
This comment has been removed by the author.
phnompenhpast said...

"At the same time the U. S. has about 15% of the population living below the poverty line, in other words, more than 50,000 Americans are poor.""

Good article, but didn't you mean to say 50 million Americans are poor?

KJE said...

Absolutely; do the math and you know it's actually 50 million. Thanks.

Anonymous said...

So, as I understand from your post
there is money to be made with boutique hotels. would it be good business practice to cash in on real estate assets and open up a hotel business like the one you are opening at otres beach?

KJE said...

1:26
That depends. The hotels I referred to are all in very good locations from a tourist perspective. There is an increasing number of them in Phnom Penh. I am afraid a saturation point will soon be reached. So the location must be right, the interior should be somewhat unusual, a tropical garden and a swimming pool is a must, and excellent service and maintenance are paramount. The latter two are the factors where most Khmer-run hotels fail. Friendly staff does not compensate for lack of service or maintenance.

Without knowing the details of your real estate holdings one cannot really give advice. If you derive income from it already you need to weigh the factors. Running a hotel will incur expenses anywhere from about $7,000 for 10 rooms to $15,000 for 20 rooms with a restaurant per month. Now figure out how many room nights at what price you need to sell in order to make a good profit. It is possible, notwithstanding all the naysayers on some boards.

Anonymous said...

My asset is just across the Japanese friendship bridge.
1.The reasons I am thinking of moving out from real estate assets are:
-Prices in Phnom penh today are expensive compared to other local countries
-And with a miniscule middle class this means that these assets are not very liquid.
-I don’t see prices moving significantly within the next five years to ten years and taking into account inflation, the gains could be negative.
-Rental returns are very low even excluding taxes
-A very weak judicial system.
In short, I think there are better and more secure ways of investing available cash in real estate in asia like Malaysia ,Indonesia and Thailand.
I had already thought of going into the hotel business and restaurant business but
haven’t made the leap yet.
See any flaws in my logic?
2. By the way, I noticed a good 1.5 km of backpackers bungalows along Otres beach were razed to the ground. What’s the guarantee against some corporation coming along and making an offer to your landlord and razing all the the hotels along the remaining strip of land?
3. Lastly you mentioned 7000 dollars per month expenses, for my knowledge I’d like a breakdown please.
4. I thought of building a guesthouse on the road between Sokha beach and Independence beach. Is this a good location?
Thanks . Its always good to have a second opinion from an experienced business man.
Good luck on your boutique hotel project. Go for it KJE.

KJE said...

5:23
1. Correct
2. To make way for a beach park - called 'Long Beach' by the government. The land across the road is owned by one or two large corporations that will eventually develop it into a megaplex. When? The ways in Cambodia are mysterious.
3. I can, but only to your email address.
4. If it is beach front (let me know, I wouldn't know where though), great location. If it is across the road, forget about it as Sokha Beach is too small, and Independence beach will turn into a second Ochoeuteal, lots of locals, panhandlers, and hawksters. Western tourists don't like the way the Khmer treat their environment.

KJE said...

5:23
1. Correct
2. To make way for a beach park - called 'Long Beach' by the government. The land across the road is owned by one or two large corporations that will eventually develop it into a megaplex. When? The ways in Cambodia are mysterious.
3. I can, but only to your email address.
4. If it is beach front (let me know, I wouldn't know where though), great location. If it is across the road, forget about it as Sokha Beach is too small, and Independence beach will turn into a second Ochoeuteal, lots of locals, panhandlers, and hawksters. Western tourists don't like the way the Khmer treat their environment.

Anonymous said...

Thanks but I would prefer to remain anonymous for the moment.
You have taken a load off my shoulder, I have decided to sell my assets. A 50% drop in prices would mean that prices would have to up 100% to get to the orinal level. I don't see that happening in the next 5 years, and that drop happened in 2008!
You can open up all the factories you want but how many workers can afford a 200+k house?
Tough to sell and tough on your peace of mind.
They say the economy is averaging 7% a year increase for the last 15 years but 7% from nothing , and if you do the compounding, equates to a small amount.Nothing to salivate about.
The bigger the initial capital, the bigger the profits. Just look at China, India and Brazil.
Well I guess I am trying to justify myself.
The plot I was looking at to build a guesthouse is just in front of the "borei" Pearl City. One of those mega chinese boxes buildings.
So what other opportunities do you see in Sihanoukville?
Cheers.

KJE said...

2:13
Probably a smart decision. The current renewed building boom is going to end in a bust. As you say, who will be able to afford all those houses with 95%, if not more, living from hand to mouth. The so-called flat houses are in the $45,000 range. For someone making $500 a month how can you pay the mortgage of at least $300. And how many are there who make that $500?
That Pearl City is a project for the distant future. Once it's finished it will be sitting there empty and dead, just like the Hawaii Beach development (Russians). I guess what all these developers forget is that Cambodia is a nation of 15 million of mostly poor people. And there are only so many expats who choose Cambodia as their retreat.

So your lot is across the road, I take it. If you can afford it hold onto it for at least 5 more years.

There are no great opportunities in SHV besides Otres, and that area might be premature. I had to drop my project there - health problems in the family back home.

Anonymous said...

Sorry to hear your family’s health problems. Hope it’s not too serious.
The last time I was in Otres , I got bogged down in a massive pothole along that main trunk road.
Luckily some good Samaritans passed by and towed me out.
Unless there’s some huge infrastructure improvements along with sanitation and sewage disposal, lots of of tourists are going to be put off by this. At the end of the khmer new year, the whole beach
(ocheateal) stank to high heavens. I didn’t dare put my toes in the water. And every year the town looks more discrepit and run down.
I also noticed less and less of the cruise liners are putting anchor in Sihanoukville.
The Queencos, the Sokha casino and golf complex are not na├»ve, these are hard headed businessmen, they won’t invest unless they see a potential profit.
You are right it might be premature.
You’re probably right, all those mega projects might go bust.
The elite rich have all they want and need and then maybe more. The speculators have their heads in the sand and the poor are getting poorer.
I took a risk investing in Cambodia but I am not foolhardy. Take your profits or loss and move on.
Peace of mind is priceless.
Thanks anyway KJE for letting me use your blog as a sounding board.

Anonymous said...

This is super stuff, written by somebody with a high level of practical experience.

Understanding the real mentality of the buyer and realising the true extent to which one must go to in order to precisely exceed their expectations are factors that in my experience can only be gained from a lengthy and expensive process of trial and error.

If being successful in business was easy then everybody would be doing it... fortunately it isn't and so they aren't... therein lies the opportunity!

weiht said...

I'm one of the hopefuls who dream of having a boutique hotel on Otres.

Villa/real estate developments isnt the right direction because not many can afford them!! Developers are being screwed up their arses by Govt, and most likely many developments will go burst and unsold. Another reason is the small mortgage market and HIGH rates!!!

Well, sure Otres aint developed yet, but everything in is the price yeah? When it is developed, then it wont available anymore.

Opportunities unfortunately always comes at other people expense. I prefer not to chase escalating prices, but wait out for value to present itself. The big profits are in the long term, so foresight and patience is a key. Quick speculation is always great at the start, and we know its the thrill we that we get addicted to, BUT the house always wins...

Sure property aint as liquid, BUT its hard to beat real estate as an asset class if you invest at a good price in a good location.

If you know ppl who know any plans to develop the area or if they are building roads then GREAT. All roads lead to Rome, so if they are building roads then its a good indication.

I'm pretty new still to Cambodia, but I would love to visit and feel the mkt myself. The problem is getting a realiable guy, and not waste my time playing games...

I dont mind spending some $, but i hate wasting my time.

Emerging markets have a much higher RISK, but the price and returns justify it. Have a sound expectation and duration to see it happen, 1-3 yrs epectation is just plain stupid because even though you make $, you wont fully reap the big profits.

weiht said...

I'm one of the hopefuls who dream of having a boutique hotel on Otres.

Villa/real estate developments isnt the right direction because not many can afford them!! Developers are being screwed up their arses by Govt, and most likely many developments will go burst and unsold. Another reason is the small mortgage market and HIGH rates!!!

Well, sure Otres aint developed yet, but everything in is the price yeah? When it is developed, then it wont available anymore.

Opportunities unfortunately always comes at other people expense. I prefer not to chase escalating prices, but wait out for value to present itself. The big profits are in the long term, so foresight and patience is a key. Quick speculation is always great at the start, and we know its the thrill we that we get addicted to, BUT the house always wins...

Sure property aint as liquid, BUT its hard to beat real estate as an asset class if you invest at a good price in a good location.

If you know ppl who know any plans to develop the area or if they are building roads then GREAT. All roads lead to Rome, so if they are building roads then its a good indication.

I'm pretty new still to Cambodia, but I would love to visit and feel the mkt myself. The problem is getting a realiable guy, and not waste my time playing games...

I dont mind spending some $, but i hate wasting my time.

Emerging markets have a much higher RISK, but the price and returns justify it. Have a sound expectation and duration to see it happen, 1-3 yrs epectation is just plain stupid because even though you make $, you wont fully reap the big profits.

Anonymous said...

Great article! I can sense by your writing that we are probably of different political leanings. But I really appreciate your honest!
However, this statement is plain ignorant (I have lived in rural Cambodia for 7 years and am married to a Khmer woman): "And don’t think poverty in the West is any different from poverty here." That is so stupid that I won't get too into it; think about the rural Cambodian poor and say your quote with a straight face

KJE said...

1:07
Ever heard of abstract thinking? Poverty has different faces and characteristics; being destitute is nevertheless the same no matter what form and shape it takes. You might think a little before you leave disparaging comments.

Visitors