Beyond Asia - Strategies to support the quest for growth

Beyond Asia Strategies to support the quest for growth

June 2012

Growing Beyond

Beyond Asia: strategies to support the quest for growth

Page 1 1206-1366958

Introduction

► Asian companies are on the move. Once viewed by Western multinationals primarily as

a source of low-cost labor and manufacturing, Asian companies are now international

players in their own right. This new report explores Asian companies’ expansion

patterns, specifically:

► The differences between global and regional companies’ market expansion patterns

► Why Asian companies are focused on building foundations and acquiring new technology

► How these companies are going about expanding their paths from direct exporting to local sales

and distribution desks and then to joint ventures or acquisitions

► The report identifies four key challenges facing Asian companies that are on a high

growth trajectory and offers Ernst & Young’s recommendations for both globally focused

and regionally focused companies.


Page 2 1206-1366958

About this report

Analysis of the survey identified marked

differences in the challenges and approaches

to international expansion between two

groups of respondents:

► Globally focused (global) companies:

177 companies with operations in two or

more of the following markets: Australia

and New Zealand, Brazil, Eastern Europe,

India, Japan, Latin America, Middle East

and North Africa, Russia, Sub-Saharan

Africa, US or Canada, Western Europe

► Regionally focused (regional)

companies: 316 companies within East

and Southeast Asia, operating

internationally

Beyond Asia: strategies to support the quest for

growth is part of Growing Beyond, our flagship

program that explores how companies can grow

faster by expanding into new markets, finding

new ways to innovate and implementing new

approaches to talent management. It is based

on:

► A survey of 617 business executives from

East and Southeast Asia, conducted by the

Economist Intelligence Unit in March and

April 2012. All companies had significant

operations, revenues or profits outside of their

home market.

► Qualitative interviews conducted with

Ernst & Young sector and country leaders and

senior executives from companies across the

region.

► Analysis of current and projected trade flows

among individual Asian markets and between

Asia and the rest of the world, conducted by

Oxford Economics.


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Setting the scene Where, why and how Asian companies are expanding


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Key facts

► Rapid-growth markets from Asia represent the fastest-growing economic region in

the world, with annual growth forecast at more than 6% a year.

► The IMF expects advanced economies to grow by just 1.4% in 2012 and 2% in

2013. The corresponding figure for East and Southeast Asia in 2013 is 7.9%.

► Since 2000, Asia has been the fastest growing source of foreign direct investment

(FDI). Its businesses currently produce a quarter of the world’s exports (US$3.77

trillion in 2010) and form 87 of the Fortune Global 500 largest firms.

► FDI outflows from East and Southeast Asia recorded a compound annual growth

rate of 22.9% in 2005–2011, jumping from US$70 billion to US$242 billion.

► Investors from East and Southeast Asia are major drivers of growth in global FDI

outflows, making up 16% of the world’s total FDI (up from just 7% in 2005) and

driven by increased outflows from mainland China, Hong Kong, Malaysia, South

Korea, Singapore and Taiwan.

► Inter-regional trade is expanding rapidly, reflecting the shift toward higher

consumption in Asia. China leads the way in terms of outflows and destination, with

growth for Indonesia, South Korea, Thailand and Vietnam close behind.

► Trade flows from Asia to the US and Canada, the Middle East, Latin America, and

Africa are expected to increase by over 10% a year up to 2020.

► Cross-border M&A purchases are consuming an ever-larger slice of FDI flows, with

purchases from Asia reaching a record US$94 billion in 2010.

► The China–US trade route is forecast to see the biggest increase in the world,

predicted to rise by almost US$700 billion by 2020.

Sources: UNCTAD, IMF, Oxford Economics.


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Where are Asian companies expanding?

Some markets stand out as more attractive than others because of proximity,

lower barriers to entry or favorable business conditions.

32

28

20

18

15

14

8

8

7

7

For regionally focused companies For globally focused companies

42

33

29

25

24

24

23

18

18

15

Mainland China

India

Indonesia

Vietnam

Middle East and North Africa

Brazil

Western Europe

Russia

US or Canada

Australia and New Zealand

Western Europe

Middle East and North Africa

Brazil

Russia

Eastern Europe

(excluding Russia)

US or Canada

Mainland China

Sub-Saharan Africa

Singapore

Hong Kong


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Why are Asian companies looking to expand internationally?

In general, regional companies are focused on building their foundation, including

capabilities and resources, while global companies are concentrating on

acquiring new customers and technology.

Benefits of expansion into developed markets Benefits of expansion into rapid-growth markets

40

39

31

29

25

22

66

34

34

27

25

25

41

40

39

37

36

35

38

36

35

34

33

32

Globally focused Regionally focused

New customers and sales growth

Access to new technology or

innovations

Access to new distribution channels

Tap a gap in the market for products

and services

Spreading risk across different markets

Access to skilled workers

Access to skilled workers

Access to natural resources and

raw materials

Access to low-cost labor

Access to intellectual property


innovations


and services



and services


Access to low cost labor

Spreading risk across different markets

Access to natural resources and raw

materials


and services



Access to natural resources and

raw materials


innovations

Access to intellectual property


Page 7 1206-1366958

How are Asian companies expanding?

Companies typically follow an expansion path that progressively deepens their

involvement in new markets, going from direct exporting to local sales and

distribution desks and finally to joint ventures or acquisitions.

In East and Southeast Asia

46

38

36

28

24

23

21

19

18

18

42

26

40

26

4

24

29

19

36

27

35

35

24

24

23

21

20

12

12

8

24

46

2

10

19

6

34

9

6

5

40

37

36

28

25

24

23

18

16

15

47

45

8

6

12

24

7

5

2

5

In developed markets In other rapid-growth markets


Local sales/distribution/

sourcing desk

Direct exporting

Partnership/alliance

Joint venture

M&A

Outsourcing agreement

Franchise/licensing

Greenfield investment

Minority equity investment

Partnership with

gov't-owned enterprises

Direct exporting


sourcing desk

M&A



Joint venture

Franchise/licensing

Minority equity

investment


Partnership with gov't-

owned enterprises


sourcing desk

Direct exporting


Joint venture


Franchise/licensing

M&A


Partnership with gov't-

owned enterprises

Minority equity

investment


Page 8 1206-1366958

Achieving global growth A look at the key challenges and recommendations for global and regional companies


Page 9 1206-1366958

Four key challenges companies should be prepared for

1. Moving up the value chain could erode a critical advantage – low cost. Climbing

the value chain is an aspiration that all our respondents share. They highlight leading

technology and the quality of their products, services and workforce as their key

advantages. Having a low-cost business model comes toward the bottom of the list.

2. The nuances of local markets are difficult to understand or control. This includes

political instability, sudden regulatory shifts, varying consumer preferences and

questions of local autonomy versus global control.

3. Top management teams often lack an international outlook. Asian companies say

their leadership teams need a better understanding of global markets and a more

strategic approach to international hiring.

4. Expansion requires shoring up infrastructure and capabilities. This means

spending considerable time and resources on building such functions as strategic

planning, financial management, tax planning and risk and control frameworks, as well

as collaborative relationships with partners.


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Recommendations for globally focused companies

Put in place

robust risk

management

Make the

transition from

investment to

profitability

Take steps to

make the

corporate

culture more

international

Choose which

functions

should be global

or local

► A more diverse international footprint and the need for

greater autonomy at the local level emphasize the need

for a robust risk management framework.

► Our research has shown that companies with more

mature risk management frameworks can outperform

their peers financially.

► For many globally focused Asian companies, the priority

remains investment and growth.

► As these investments mature, they will require a greater

focus on process, a consideration of where economies of

scale can be derived, detailed tax planning and more

sophisticated finance functions.

► Companies need a management team and corporate

culture that reflect the diversity of their customer base

and operations.

► By recruiting managers with experience of different

markets, reducing reliance on expatriate workers and

putting in place global talent management programs that

enable the flow of key talent around the world, companies

can create a more international workforce.

► Autonomy for local managers helps to ensure that

products and services are relevant to the local customer

base, but not everything needs to be decentralized.

► Companies need to think about where they can derive

economies of scale without compromising local

relevance.

► Need for greater focus on due diligence

► Need for local knowledge to appropriately assess risks

► Political and regulatory risk can have material impact on valuations

► Need for effective risk management processes

► Partner due diligence is critical

► Robust dispute resolution processes

► Clear expectations regarding ROI

► How and where to introduce greater efficiency to benefit from increased

international scale

► Need for robust financial management and reporting systems to build

confidence

► Increased competition for assets in developed markets, potentially

driving up valuations

► Balance of local resources and expatriates

► Provide managers with experience in different markets

► Cultural awareness and sensitivity

► Building the right skills and capabilities

► How to combine local relevance with global scale

► Local versus central decision making

► Integration; what and how quickly

► Valuation and integration considerations

Recommendations Comments Business implications


Page 11 1206-1366958

Recommendations for regionally focused companies

Prepare for

greater

competition

Build the

capabilities for

international

expansion

Rethink

organizational

design to enable

greater local

autonomy

Leverage global

resources

► Over the next few years, Asia will remain a dominant

recipient of inbound foreign direct investment. This will

increase competition – for assets, talent, resources and

customers.

► Regional companies need to consider whether they need

to join other regional companies in looking outside Asia

for new opportunities.

► Regional companies seeking to build a global footprint

must make sure that they get the basic capabilities in

place before making bold moves.

► They will need managers who have an understanding of

international markets, as well as core functions, like

finance, HR and IT, that can support multiple markets.

► Greater geographic scale makes it more difficult to control

from the center. Regional companies should therefore

consider devolving greater autonomy to regions, but do

so within a set of parameters and risk frameworks.

► This devolution, with its consequent upswing in local

empowerment, is particularly crucial for establishing an

effective and optimized supply chain.

► Increased competition means that regional companies will

be under pressure to ramp up their innovation, product

and service mix and talent pipelines.

► By building partnerships with companies outside Asia, or

acquiring companies with the right resources and

expertise, regional companies can leverage global

resources to make sure that they remain globally

competitive.

► Increased market competition from non-traditional players

► Formation of new Asian MNCs

► Competition is changing; focus on product and service quality,

not low cost

► Companies need to re-think how and where to compete giving rising

wages and input costs

► Access to management skills a key driver of overseas expansion

► Building brands a key area of focus

► Need for relationships with regulators and government officials

► Ability to transfer acquired capabilities, brand and IP back to Asian

markets

► Local versus central decision-making

► Integration; what and how quickly

► Taxation and compliance seen as a strategic issue

► Clear governance and controls frameworks in place to identify and

resolve issues

► Valuation and integration considerations

► How to combine local relevance with global scale

► New opportunities for partnerships and strategic alliances

► Partners with the same values and objectives

► Diverse international experience to understand these issues

Recommendations Comments Business implications


Page 12 1206-1366958

Appendix Supporting survey results


Page 13 1206-1366958

Challenge 1 Moving up the value chain could erode a critical advantage – low cost

What are your company’s most relevant strengths and advantages as it

targets international markets for sales or investment?

44

44

31

30

28

25

20

20

12

8

7

41

39

39

33

32

31

25

22

19

7

3


Quality of your workforce

Product or service quality

Leading technology

The cost competitiveness of

your workforce

Brand strength and reputation

Global supply chain

Ability to innovate

Speed of execution

Low-cost business model

Value of intellectual property

Access to low-cost

capital/ funding

Leading technology

Product or service quality

Global supply chain

Speed of execution

Ability to innovate

Value of intellectual property

Brand strength and reputation

Quality of your workforce

The cost competitiveness of

your workforce

Access to low-cost

capital/ funding

Low-cost business model


Page 14 1206-1366958

Challenge 2 The nuances of local markets are difficult to understand or control

How effective do you consider your company to be at the following

aspects of international business?

27

20

16

15

11

10

46

31

4

27

7

9 Globally focused

Regionally focused

Understanding the political and

regulatory environment

Building a rationale for investment

Choosing the right mode of market entry

Tailoring strategy to specific markets

Implementing product/service innovation for

individual markets

Empowering local decision-making


Page 15 1206-1366958

Challenge 3 Top management teams often lack an international outlook

Where does your organization’s top management team need more

knowledge or insight to be successful in today’s global marketplace?

49

42

41

41

41

39

14

10

Understanding of global markets

Strategic hiring process for international markets

Local culture and ways of doing business

Global supply chain issues

International taxation and compliance

Ways to incentivize employees in different markets

International accounting and reporting standards

Regulatory compliance in global markets

Note: Scores shown = percentage of respondents


Page 16 1206-1366958

Challenge 4 Expansion requires shoring up infrastructure and capabilities

Which of the following functional areas will require the most significant

changes to help ensure the success of your company’s international

expansion plans?

47

44

34

34

27

23

22

16

11

7

3

2

42

41

35

33

29

29

27

22

17

10

4

0


Sales and marketing

Strategic planning

Risk management/ERM

Financial management

Supply chain (including demand

planning and distribution)

Internal communications

IT

Financial reporting

Regulatory compliance

Public relations

Global tax compliance and reporting

Tax planning

Strategic planning

Financial management

Internal communications

Financial reporting

Sales and marketing

Public relations

Risk management/ERM

Supply chain (including demand

planning and distribution)

IT

Regulatory compliance

Global tax compliance and reporting

Tax planning

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All Rights Reserved.

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Growing Beyond

In these challenging economic times,

opportunities still exist for growth. In

Growing Beyond, we’re exploring how

companies can best exploit these

opportunities – by expanding into new

markets, finding new ways to innovate and

taking new approaches to talent. You’ll

gain practical insights into what you need

to do to grow. Join the debate at

www.ey.com/growingbeyond.