The Next Asia: Managing Growth and Complexity
By Ben Simpfendorfer
Asian companies are not standing still amid the region’s remarkable economic transition, and are emerging as powerful competitors in their home markets, across the region, and even globally. Whereas the best-performing Asian-owned or operated companies might have once only sold for export to America and Europe, today they are increasingly selling to local consumers, many of whom are demanding a quality that matches, or at times even surpasses, international standards.
The implication is that Australian and other foreign firms can no longer assume that global multinational corporations will be their only serious competitors when entering the Asia market. And
any long-term commercial strategy must consider how local and regional players might use their relationships, lower cost base, understanding of local consumer behaviour, or privileged access to land and capital in order to challenge foreign competitors.
Indeed, even for those not entering the region, leading Asian firms are already looking for opportunities abroad, such as Samsung in America or Hutchison Telecom in Europe.
A good indicator of the growing reach of Asian firms is the fact they account for over 60 of the emerging world’s Top 100 non-financial MNCs. With foreign sales worth US$750 billion, these firms are already strong local and regional competitors. For now, the region’s largest MNCs are focused mainly in the electronics, telecommunications, resource, and automotive sectors, but the scope of their activities is growing.
Take SF Express, a Chinese express-parcel firm that has enjoyed explosive growth servicing China’s booming e-commerce business; or Thai Beverage PCL, one of Southeast Asia’s largest beverage companies that is making aggressive regional acquisitions; or Chow Tai Fook, the Hong Kong jewellery chain, which now has more stores than does Tiffany & Co globally as a result of its early entry into the China market.
But the rise of local competitors offers opportunities, not just challenges. Australian firms might seek to partner with strong local partners who can provide access to mid-size cities, offer insights into local tastes, or produce goods more cheaply. Equally, some Asian firms are looking to buy brands and technologies from the rest of the world to bring home, and so offer opportunities for Australian firms seeking to sell.
For those Australian firms that do choose to expand in Asia, either organically or alongside local partners, they will be better prepared when the most successful Asian brands look for other markets in the developed world, exploiting their scale and cost base. Indeed, building an Asian business, or at least exploring the prospect, is not only a ‘growth strategy’ but also a ‘survival lesson’ in learning how to deal with future competitors at home.
The upshot is that no firm can afford to overlook Asia regardless of their growth strategy. Today, emerging Asia accounts for 29 per cent of the global economy and includes four of the world’s 20 largest economies. The region also accounts for over 50 per cent of the world’s population and its consumer demand is worth U$10 trillion annually, making it a similar-sized market as the United States. It is an economic giant that no firm can ignore.
The consumer adds even more opportunity, and complexity
It is the rise of increasingly powerful consumers that has turned the region into a place to sell to, not just buy from. Our estimates suggest the region’s rapidly rising middle-class ranges from between 153 million to 313 million households, depending on the income threshold. China of course accounts for the largest share, but rising consumer demand in economies such as Indonesia, Vietnam and the Philippines has also opened up new opportunities.
As wealth spreads more broadly across the region, greater opportunities are accompanied by greater complexities, and it is increasingly critical for companies to select their target countries and cities carefully, as conditions vary widely.
Commercial strategies are certainly influenced by location. Hong Kong, for instance, has nearly 300,000 households earning more than US$100,000 per year. The largest concentration of wealthy households are in the Central, Wan Chai, and Eastern districts on Hong Kong Island, as well as Kowloon City and Sai Kung on the mainland, meaning that word-of-mouth, street-signage and a limited number of outlets can achieve dramatic results.
Compare that to Shanghai, a city with nearly 1 million households earning more than US$30,000 per year, but spread over a number of geographically distant areas. Walk-in customers are less likely, and retail and consumers firms are more likely to rely on social media, public relations events, or working with a well-known local actor or singer to attract customers, much as they might in many developed countries.
The challenge is especially acute in China, where there are a large number of cities. We have calculated the number of Chinese households earning more than US$15,000 per year, and the results are stunning: eight cities have more than 1 million households and another 57 cities have at least 100,000 households. But does that mean establishing an office in Beijing or Shanghai, or opening up sales outlets in Chongqing or Zhengzhou?
Purchasing power also impacts strategy. Indonesia, for instance, has huge potential as a consumer market given the country’s vast population. But, for now, only three cities have more than 100,000 households earning greater than US$5,000 per year, and only Jakarta has more than 1 million households earning that amount. For this reason, the most successful firms are fast-moving consumer goods MNCs, such as Nestle or Kraft, who are targeting the mass market.
Still, firms that prefer to wait for Indonesia’s purchasing power to rise will miss opportunities. Indonesia’s auto sales soared from 400,000 in 2008 to 1,100,000 in 2012. By contrast, it took Australia nearly 20 years to make the same leap in numbers. Only those foreign auto makers that had invested ahead of the curve were prepared for the sudden change given the capital and marketing commitments involved.
As Asia’s middle-class grows, so will the opportunities and challenges for foreign companies. The list of possible countries and cities in which to open stores, market products or survey consumers is steadily lengthening. And the next wave of middle-class consumers is also more likely to emerge from secondary and tertiary cities such as Hefei, Surabaya or Bangalore, and so have more local rather than global tastes.
What is the right business model?
The rise of Asia’s consumers and the strengthening of local competition means that firms wanting to enter the market must put more consideration into the appropriate business model. Unfortunately, there is no simple answer and the decision will differ by country, by sector, and by firm. It is a critical issue for mid-size firms with only limited capital to invest in an Asia business, as even some of the world’s best-known brands, from Mattel to B&Q, have made mistakes.
There are, however, some common themes. Firms looking to replicate their business model are more likely to be selling to high-end consumers in major cities with robust market institutions, from consumer credit to distribution. Over time, the number of high-end consumers will grow and market institutions will strengthen, making it easier for some foreign companies to replicate their business model when entering Asia.
However, opportunities in the region’s more remote cities are simultaneously expanding—such as those in secondary and tertiary cities in China, India and Indonesia. These cities are likely to be less developed, less globalised and more price-sensitive, meaning foreign companies are more likely to rely on local partners in order to understand local tastes, manufacture at suitable prices, or distribute to remote markets.
In our conversations, firms will often only identify the right business model through trial and error. For multinationals, this is less of a concern as local sales may be a small part of global sales. But studying the examples of other firms and surveying customer and competitor behaviour can provide a shortcut for mid-sized firms for which creating the wrong business structure from the start can result in a costly burden for the overall business.
What next?
In short, as the opportunities of selling to Asia continue their remarkable expansion, so do the complexities. Tapping into Asian consumer demand, for instance, means designing strategies to sell into multiple countries and, increasingly, second- and third-tier cities. It also means choosing local partners, adapting to local consumer preferences, and identifying competitors.
A good first step for any company is to establish an ‘Asian leadership group’, whose members are decision-makers and able to meet monthly, even fortnightly. Such a group can sustain what is ultimately a long-term effort, because too often an Asia strategy stalls when overwhelmed by everyday business concerns or when delegated to junior staff who lack authority.
Firms must also be prepared to undertake market studies as well as customer and competitor surveys before committing to an investment or partnership. It is critical for companies to understand their full, and growing, range of options, rather than tying a business strategy to the wrong country or wrong partner and so reducing the potential for future growth.
It is also important to recognise the role that relationships play in the region, either as a source of business intelligence or future partnerships. But as relationships take time to develop, it is never too early to join commercial associations, as well as take time to visit trade shows in the region and call on existing contacts for introductions.
The upshot is Australia’s commercial engagement with Asia is at an inflexion point. No longer is the region simply a cheap place to buy goods from. Instead, those leading firms ready to sell to Asia are likely to outperform over the coming decade, even as the sight of Asian companies setting up in Australia and competing with local companies becomes more common.