In the shadow of the elephant and the dragon

Doing business in Asia has always been important to Australian businesses with seemingly endless opportunity awaiting those who get it right. Adaire Fox-Martin addressed the GAP Productivity Summit about succeeding in the region.

From the start of the Industrial Revolution, Great Britain required 150 years to double its economic output. The United States took 50 years. A century later China and India did the same in just 12 and 16 years respectively.

The purchasing power of Asia has increased along with GDP, heralding prosperity locally and opportunity globally. In the past 20 years, emerging markets have swelled the ranks of the world’s consumer class from a little over 1 billion to 2.4 billion. By 2025 this figure will stand at more than 4 billion. In the same timeframe, annual consumption from emerging markets will grow from USD 12 trillion dollars to 30 trillion.

Asia’s emerging markets are fuelling the majority of this growth, and for the past decade, China and India have been the economies to bet on. Demonstrating the heftiest growth rates, these two countries have attracted a frenzy of investment. But they by far have not been the only contributors to Asia’s boom.

China still shows long-term promise, but both the Middle Kingdom and India have recently begun to feel the restraints of economic sophistication. Costs of commodities and labour are increasing in these markets and margins are thinning. Indeed, many analysts argue against categorizing these economies as emerging at all.

Businesses and governments would be well advised to adjust their strategies to reflect the increasing maturity of these economies, while looking to the new emerging economies in Asia for that S-curve growth. Australia need only take a closer look at some of its closest neighbours for opportunity.

For most of the past decade, while China and India were grabbing the headlines, Southeast Asia was enjoying a quieter boom of its own. And in the past six months, Thailand’s key securities index has risen 14%, Malaysia’s 9%; and Indonesia’s 6.5%. Over the same period of time, shares in both China’s and India’s indices have fallen.

Five of the ASEAN countries – Indonesia, Malaysia, Singapore, the Philippines, Thailand and Vietnam – make up 97% of Southeast Asia’s GDP and are growing at 6 – 9 % annually. This rate ranks right with India’s and higher than those of Russia and Brazil. At USD 3 trillion in GDP, the combined ASEAN economy is also larger than that of Russia or Brazil.

The structural improvements in the banking system, implemented following the Asian Financial crisis in 1997, have helped Southeast Asia buffer the impact of the recent global financial crisis better than most. Strong domestic demand provided economic resilience in the face of lower performing economies in the U.S., Japan and the Eurozone.

From my perspective, there are four key elements sustaining the growth of Southeast Asia. Frist of all, the growing consumer class: By 2015, the region will be home to more than 100 million with significant levels of discretionary income. Yet the cost of labour is still very competitive in several of the economies, lower than that of China and India.

Secondly the region still hosts numerous opportunities for off-shoring specialisation. We have seen the diversification of manufacturing in the region in countries such as Thailand. The Philippines are home to over 800 call centres. Malaysia hosts many back-office facilities and corporate functions for multinational organisations.

Furthermore, the region is very rich in resources. For example, it is responsible for 85% of the world’s palm oil and rubber supply, while Indonesia represents the largest global exporter of thermal coal.

Finally, government policy in most ASEAN member nations is aimed at lifting trade barriers and encouraging foreign investment. Other ASEAN countries meanwhile have taken measures to facilitate stronger business practices.

The resultant economic climate is one with promise for ASEAN itself and for regions and nations seeking growth opportunities.

Opportunity 1: Southeast Asia’s promising family business
There is a group of conglomerates in the Southeast Asia that account for a substantial amount of the business transacted there. Family group Wilmar International, which still operates its multibillion dollar business from its original shop house in Chinatown, has a turnover that is 21.4% of Singapore’s GDP. Hong Leong Group, 14% of Malaysia’s. In Thailand the Charoen Pokphand Group accounts for over 10% of the Thai GDP.

Few of these names are unknown outside of Southeast Asia, but that is about to change: Many of these organisations have global ambitions. These conglomerates are growing twice as fast at their global peers, yet they are not sacrificing profit or shareholder return to do this.

These companies have a uniquely Southeast Asian persona. Collectively they are very strongly focused commodity industries such as agri-business and food and beverage, and many of them are family owned.

Indeed, family businesses account for one third of total regional market capitalisation in Southeast Asia. In Indonesia around three quarters of the listed firms by market capitalisation are owned by ethnic Chinese family groups. In Singapore, family businesses account for 63% of listed companies.

Typically started with little wealth, these companies have been built from the ground up by their original founders. Commonly, the group itself is private (with the founder’s family still owning the majority of the group’s business), but many of its subsidiaries are public.
Historically, these organisations have concentrated on productivity and efficiency, with less focus on innovation. Their business models are attuned to the environment that they operate in, with many of them controlling the entirety of the supply chain for the goods and services they offer.

Their business strategies are largely predicated on their collective access to natural resources and low cost of labour, as well as on their inherent understanding of emerging markets. Their ownership structure facilitates in many instances timely decision making, while their networks enable them to access and channel funds into new businesses and ideas.

However, for all their success, very few of the leading Southeast Asian enterprises today are executing on a global scale. Approximately 80% of their collective revenues are derived from Asia. These family-held businesses have strong local networks and connections in addition to political influence, which has traditionally made it easier to stay local as opposed to driving for global presence and position.
These businesses have not sufficiently invested in the skills needed to thrive in increasingly competitive, international markets. Few of these organisations have the needed expertise in technology, training, systems, and customer service to improve their competitive edge. There is a distinct opportunity for Australia’s businesses to fill this gap and aid these organisations in modernising and globalising.
Southeast Asia’s enterprises face similar challenges to those we see in Australia today, such as the war for talent. Other challenges are uniquely Southeast Asian, such as limited focus on innovation and maturity of infrastructure, which in addition to out-dated bureaucratic processes severely hampers the movement of goods internally and externally.

Opportunity 2: International Financial Institutions
An adequate infrastructure to support the growth aspirations of the region is a key focus for many ASEAN governments. The Asian Development Bank Institute estimates that ASEAN nations will need to spend USD 1 trillion on infrastructure between 2010 and 2020. Many of these projects – targeting primarily Vietnam, Indonesia, and the Philippines – will be funded by international financial institutions (IFIs).

The two major international financial institutions providing loans to Southeast Asia’s emerging countries are the World Bank and the Asian Development Bank. In 2011, total annual lending from the two banks reached USD 56.5 billion. These institutions have been particularly active in the areas of infrastructure, utilities, transportation, and natural resources. Additionally, IFIs have focused on process transformation in government, particularly in the areas of revenue collection and in management functions such as taxation, finance, treasury and customs.

Loans and investments from IFIs have helped emerging markets in ASEAN make great strides in improving citizens’ standard of living. In investing, these institutions aim to steer the benefits of growth across demographics so as to stem the swell of income disparities.
My experience with IFIs in Southeast Asia has focused on the information, communication and technology (ICT) portfolio, so I will restrict my comments to this sector.

The ICT sector has contributed significantly to reducing poverty, increasing productivity, boosting economic growth and improving accountability and governance. For example, where banks and utilities have failed to make the last mile, the ubiquitous mobile phone has made bridged the gap. People do much more than chat and play. They can learn where best to fish and what markets to sell their produce in. They can pay bills, send money back home and receive cash transfers.

The impact of market reforms on the ICT sector has been considerable, much greater than in any other infrastructure sector. To speed up rollout of broadband, for example, governments are updating regulatory frameworks, auctioning scare radio spectrum, and structuring public private partnerships to rapidly expand backbone infrastructure.

Success in winning IFI projects requires a collective and proactive approach. Whilst there are a number of different bid types issued by IFIs, the key form is international competitive bidding (ICB), which typically entails large contracts open to all qualified local and foreign firms.

A set of procedures and guidelines apply to ensure transparency in the process. Payment terms are clear and are managed through the procuring agency by the appropriate IFI.

In all the time that I have been working in Asia, often in close alignment with the recipient agency or the IFI manager for a particular project, I have seen only a handful of bids from Australian organisations.

Compare this with South Korean organisations, which are present in almost every major bid. The Korean International Cooperation Agency (KOICA), part of South Korea’s Ministry of Foreign Affairs and Trade, has focused intently on the developing economies of Southeast Asia.

Not all projects need to be large: KOICA in 2010 allocated over USD 5 million to Korean development NGOs for 79 projects. These smaller projects have helped create ties and relationships with local organisations and government representatives, which can be the key when responding to larger opportunities.

Additionally there appears to be comprehensive government support program for South Korean companies bidding for IFI projects in Southeast Asia, including but not limited to collaboration with the network of embassies and attachés in the region.
In addition to the obvious financial benefit to Australian companies that these projects represent, there is significant social and political return on investment to the recipient organization and indeed, I would argue, to the Australian nation as a whole.

Australia is in a prime position to offer its technology, best practices, and expertise in helping to realize these projects. Perhaps there is a role for government to more proactively help Australian companies firstly understand the immense opportunities that exist within the context of IFI-funded initiatives in Southeast Asia and secondly to assist them to navigate the complex procurement processes that are typical of these bids.

How to be successful in Southeast Asia
In the shadow of the elephant and the dragon, Southeast Asia is on the move. Companies outside of Southeast Asia have an opportunity to secure new markets and new revenue streams by focusing on this region.

To be successful in the region, products, business models and distribution strategies need to be adapted for local market conditions and opportunities. Australian companies should be actively exploring ways to partner with, sell and buy from the region’s leading and emerging enterprises.

The good news for businesses that have already invested in markets such as China and India is that they can often replicate similar best practices to other markets. For example, with the appropriate adjustments, a company can apply its tried strategies for redeploying resources to India or China to countries such as Vietnam and Indonesia.

There is no secret formula for succeeding in emerging markets. Multinationals have had mixed success. But there are some general practices that can act as guidelines for most industries.

SAP, for example, entered China 20 years ago, where much of the organization there was focused on shared services to customers across the globe. Although this initially boosted efficiencies, it was not enough to establish the trust we wanted with customers in China.
We altered our strategy there – especially at our R&D location – to focus on developing in China for China. This means getting closer to local customers to understand their needs and tailoring products and services accordingly.

As the China economy matures and its growth rates were adjusted down slightly to 7.5% this year, IT spending continues at a much higher rate of 18% as businesses there seek higher productivity. To meet this demand, we invested in new locations around the country’s growth clusters and organized ourselves with the right talent and coverage to build local trust in our brand. This long-term strategy has recently led to SAP’s strongest quarter ever in the country.

Other companies have tallied success with this approach – notably, China’s globally minded Haier organization. The appliance and electronics manufacturer discovered that its customers in China were using their washing machines not only to clean their clothes, but also their fruits and vegetables. Instead of ignoring this use of their product, Haier embraced it and developed extra-durable washing machines that can wash vegetables as well as clothes equally well.

Innovating specifically to local needs, talent acquisition and retention, establishing a presence and trust, and segmenting your customers in a local context; These are practices businesses have learned in the first wave of emerging markets, and ones they should consider honing and implementing in the next wave. Such location, production, and recruiting strategies – if executed intelligently – will set businesses up for the next surge of growth.

Particularly relevant to Australia: It can position its expert knowledge and technological innovations within Southeast Asian markets. The innovation gap in ASEAN persists: Despite a much higher combined GDP, member countries spent only 12 billion dollars on R&D in 2010, compared to Australia’s 16 billion.

Government has a significant role to play in addressing issues that cannot be addressed by a single company. Expanding into emerging markets is challenging enough. For Australian companies to compete, the government must continue its insistence on other countries’ compliance with global and industry standards and risk-management practices.

From way station to destination
In 1974 Australia became ASEAN’s first dialogue partner, seven years after the association’s founding. Just last year Australia and New Zealand reached a milestone with ASEAN, with all member nations ratifying the ASEAN-Australia-New Zealand Free Trade Agreement.
Through the agreement, the partners vowed to eliminate tariffs on 90% of their tariff line, providing greater market access for exporter manufacturers on both sides. Such measures are necessary to trigger increased trade, but they need buy-in from the business community to yield long-term growth.

Despite the lowering of trade barriers between Australia and its Asian partners, investment and trade – though consistently on the rise – have not kept pace with Asia’s growth rates. In 2011 Australia’s investment in ASEAN was AUD 41.8 billion while ASEAN’s investment in Australia was AUD 79.4 Billion. This trade surplus with ASEAN contrasts with Australia’s largely persistent trade deficit with the rest of the world.

Also, Australia’s outward foreign direct investment in Southeast Asia is modest when compared to that in the rest of the world, particularly North America, Europe, and New Zealand.

If Australia is to continue to grow in the “new Asian century,” then the country must let go of this apparent reluctance to invest in some of its closest neighbours and reap what the Australian Prime Minister has called the “advantage of adjacency.”

For centuries, these countries have acted as pit stops along the trade routes to India and China. Now they are primed as ever to go from way station to destination for the production, distribution, and consumption of the world’s goods and services. The proof of potential is there; it is up to Australia’s government and business networks to fully unlock it.
 

Adaire Fox-Martin is the Senior Vice President Industries Business Solutions for SAP APJ. She oversees the strategic direction and activities, including executive relationships with customers and partners in the vertical industries spanning government, education, healthcare, defense, retail, telecommunications, utilities, and manufacturing sectors across the region. She is a key member of the SAP executive leadership team and plays a lead role in delivering SAP’s offering to the various industry customers.