ancient chinese secret of wealth creation

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    August 31, 2005

    THE BLAST: The Ancient Chinese Secret of Wealth Creation
    By David Lashmet

    Today, I'm going to share with you an ancient Chinese secret of wealth creation. Being old, and Chinese, it's almost like a magic spell.
    So, I'm going to give you the material component first. It's called black bamboo. Yet how black bamboo has made one family $15,000,000,000 over the last 450 years is the real magic for investors.

    The secret: keeping the engine of growth in the family. In this case, we're talking black bamboo. That's how the Moji family has been the dominant player in soy sauce for over 450 years -- since the first Buddhist missionaries came back to Japan from China.

    See, along with their prayer beads and statues of Buddha, these priests carried a mold -- a starter mold, like for making sourdough bread. Living inside this starter mold is a mutant form of a fungus, a bug called Aspergillus parasiticus. And in China and Japan, this fungus is found on black bamboo. In Greece and Italy, the same mold is found on black olives. But you can't eat it: Aspergillus parasiticus is poisonous. Plus, exposure causes cancer.

    The Moji family's mutant is missing a key gene, though -- so it can't make its toxins. Yet the rest of the bug is great at digesting soy beans. That's how the Moji family's Kikkoman recipe has defined the taste for Soy Sauce since the 1660s. And the Moji family has always kept the starter mold in the family, jealously guarding its monopoly. That's why they named their family business "Kikkoman:" it means 10,000 turtles. Turtles are the Japanese symbol for longevity.

    Longevity, as you know, is highly profitable. It lets you accumulate interest. And that's what makes enormous wealth possible, so long as you control the engine of growth. These engines define business excellence -- just like Kikkoman and soy sauce.

    Sounds simple, I know. But soy sauce is now a $5 billion worldwide business. In the U.S. alone, it's worth almost $1 billion. Kikkoman's global take is 344 trillion yen, or roughly $3 billion. That's 60% market share, with 30% profit margins. That's why the Moji family business is worth $15 billion today.

    Again, it's done this by keeping the engine of growth in the family.

    I'm not just talking bamboo mold. Kikkoman has built two manufacturing plants here: one in California, the other in Illinois. And Kikkoman's leveraged this soy sauce monopoly to buy out Japan Pacific Food Corporation (JFC). Today, Kikkoman sells 8,400 products in grocery stores around the Pacific Rim. It's also an important maker of ketchup in Europe.

    So, the ancient Chinese secret isn't so simple after all. Japanese firms like Toyota have known about this for generations. All you have to do is control an engine technology. And finally, American companies are starting to come around...


    At Toyota, you see the secret of black bamboo in how it builds car and truck engines. Toyota has consistently gained market share both in the U.S. and around the world, because it makes a lighter and more fuel efficient engine. And it's been doing this since the 1970s. That's when it first broke into the American market -- during the last oil crisis.

    Of course, it's not just about oil. The practical reason Toyota's kept up the lead is that it spends more on research and development for engines than any of the big three automakers: General Motors (NYSE: GM), Ford (NYSE: F), or Daimler-Chrysler (NYSE: DCX).

    Don't believe me? Just take a look at the hybrid engine in the Toyota Prius. Granted it's only got 75 horsepower. But it gets 60 miles to the gallon, even in the city. That's why the Toyota Prius is widely considered the best economic value, now that gas prices are hitting $2.65 per gallon. Toyota literally can't make enough of them to meet demand.

    Meanwhile, GM is selling cars at employee invoice price, just to get them off the lot. And according to the New York Times, GM's losing $1,200 per car. Toyota is making $1,200 per car, because it builds a better engine.

    Fortunately, GM's finally figured this out. And GM's new hybrid engine is a major advance over the Japanese competition.

    See, Toyota uses a separate, 67 horsepower motor to run its hybrid car on battery power. That means, separate gears to the drive train. This costs power efficiency, and ultimately, dollars.

    GM's new hybrid design has the gas-powered engine and the electric motor in-line. That means you only need a single drive train. So it's a blockbuster for the company, eventually -- if it can gain one other economic advantage... in battery power.

    It just so happens that our next Diligence company makes next-generation rechargeable batteries. They're as safe as NiCads, but as powerful as the lithium cells that power your cell phone.

    The ugly truth is, lithium ion batteries explode if you puncture them, or even if they short circuit. That's why you seldom use a cluster of lithium cells together -- especially in something as accident-prone as a small car.

    So, our next Diligence company could save GM. If you control the engine, you control the market. That's been true since 1660, and the dawn of capitalism. And that's the ancient Chinese secret that serious investors should know.

    Until next week,

    Good Investing!

    Dave Lashmet


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