This article originally appeared in the 2012, No.
1, issue of
The journal of high-performance business
Catching the ASEAN wave
By Teo Lay Lim, Grant D. Powell and Amy Chng
Bordered by powerhouses China and India, Southeast Asia is sometimes overlooked by multinational companies. But ignoring the transformation now under way could blind leaders to this increasingly attractive market—and to the arrival of some bold new innovators on the global stage.
Ready for the ASEAN surge? The pace of change in Southeast Asia is accelerating, driven by powerful economic, political and demographic trends. While something of an afterthought on many multinational company agendas, those enterprises that do focus on the ASEAN region often view it opportunistically—just another pool of low-cost labor, or Asian markets they can sample on their way to China and India. However, recent economic performance shows that the region is becoming an attractive place to do business in its own right. What’s more, multinationals need to take note of its competitive potential. The region—which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam—is currently incubating a group of innovative companies that will compete against them in Asian markets and beyond.
supported by Southeast Asia’s expected strong future economic performance. This growing potential for regional integration has important implications for multinationals based outside Southeast Asia. Chemicals giant BASF, for one, anticipates deeper involvement in the ASEAN region because of the emerging AEC. The company considers the region the third pole in its Asia Pacific strategy—next to China and India. Already established in Singapore, Thailand, Indonesia, Malaysia, the Philippines and Vietnam, BASF is planning a new €1 billion complex, in cooperation with its longstanding partner Petronas of Malaysia, to produce specialized chemicals. Likewise, sensing the need for action regarding the AEC, the US-ASEAN Business Council—which represents more than 100 US heavyweight players from industries including food and beverages, energy, electronics, software, pharmaceuticals, household goods and technology—formed its first official ASEAN Working Committee in 2011. The committee focuses on providing market-entry insights and identifying opportunities for members. Economic and demographic fundamentals portray a region on the verge of robust growth and change. Collectively, the region’s GDP totals $1.9 trillion, roughly the size of India or Brazil today. Home to nearly 600 million people, more than 245 million of them in Indonesia, by 2020 it may rank behind only China and India in population. At 5 percent real annual GDP growth over the past decade, it trails only the “Big Six”—Brazil, China, India, Mexico, Russia and South Korea— among emerging markets in terms of growth. Looking forward, the regional economy should grow by an additional $735 billion by 2020—the equivalent of adding another Indonesia, Thailand and Malaysia. The region is home to more than 10 percent of the emerging
Stronger than ever
During the past decade, the nations of Southeast Asia have worked through the economic turbulence of the late 1990s to emerge stronger than ever. Located virtually in the backyards of India and China and a stone’s throw from Asia’s two other economic heavyweights, Japan and South Korea, these countries are positioned to serve the needs of multinational firms in search of profitable growth. Once a loose confederation of nations, the region is becoming increasingly unified as it moves toward a more cooperative and integrated ASEAN Economic Community (AEC) by 2015. Some independent observers have expressed doubts about how quickly the region—with its diverse mix of cultures, governments that range from democracies to communist dictatorships, and economies that span a wide spectrum of development—will be able to achieve economic integration. Nonetheless, most admit real progress is being made, especially among the larger, freer economies—a contention
world’s 2,000 largest companies, more than South Korea, India or Brazil. Based on these trends, we expect the Southeast Asian market to emerge as a prime business destination for multinational companies in the next three to five years. DuPont, for example, forecast 2011 sales of about $1 billion in the region, and expects to triple that figure over the next decade. One large Japanese manufacturer, which already has factories throughout the region, announced plans in 2011 to build plants in Vietnam and Malaysia and to expand an existing facility in the Philippines.
grows, consumer demand for education opportunities, household goods and services, and communi-cations and dining options will increase. Bypassing outmoded fixed-line infrastructure, mobile technology has become the preferred source of connectivity. In 2009, an estimated 88 percent of the region’s population had cell phones, compared with 56 percent for China. The countries in the ASEAN 6 have more Facebook users than the United Kingdom, Germany, France and Italy combined. Broadband, smartphones and readily available mobile apps will accelerate the already high levels of social media adoption across the region, particularly in capital cities. In acknowledgment of the region’s rising online importance, Google set up a new office in Kuala Lumpur and announced plans to open another in Bangkok, in addition to its presence in Singapore.
Young, dynamic, affluent
While Southeast Asia’s promise remains less well known to many Western businesses than China’s or India’s, increasing numbers of multinationals are targeting the region. In 2010, FDI inflows to the region’s six largest economies—Indonesia, Thailand, Malaysia, Singapore, the Philippines and Vietnam (the “ASEAN 6”)—exceeded $79 billion. In comparison, Brazil attracted $30 billion in FDI the same year, according to the United Nations, while India received less than $24 billion. ASEAN provides access to consumer markets that are predominantly young, dynamic and increasingly affluent. Situated on the right side of the demographic curve, by 2020 the region’s under-30 population will account for nearly half of the total population. Contrast that with aging China, where this segment will make up just 36 percent of the country in 2020. Increasing urbanization will make the region even more attractive to many multinational companies. Southeast Asia’s expected 81 million city dwellers in 2020, for example, will exceed the combined populations of Boston, London, Madrid, New York and Tokyo for that same year.
Beyond having increasingly attractive markets in its own right, the region serves as a ready entry point to the rest of Asia and beyond. That’s one reason global automakers have made Thailand the hub for the production of one-ton pickup trucks. The country is the world’s largest producer of these trucks, and the second-largest market for them. Exports go to 130 markets, both across Asia and worldwide. In fact, the proximity to India and China combined with the free trade areas recently established between Southeast Asia and the two countries make it an increasingly attractive launching pad to these major markets. In one effort to capitalize on this advantage, Thailand and China are planning a high-speed rail system that will link Laos, Malaysia, Singapore and Thailand to China. Singapore plays an especially important role in this regional constellation, serving as a free trade model. Having
These markets already have an outsized appetite for new technology and social media. As purchasing power
historically facilitated trade across the entire Asia Pacific region, it is globally connected, with an educated and sophisticated workforce. Singapore’s transparent business rules and regulations, strong intellectual property protection and nearly ideal shipping location helped make it the world’s easiest place to do business once again in 2011, according to The World Bank’s annual Doing Business study, coauthored with the International Finance Corporation. The appeal has not been lost on RollsRoyce. The aerospace player recently opened a state-of-the-art training center in Singapore, and completed construction of a fan-blade manufacturing facility and an engine assembly plant. The operation, which will serve the needs of the rapidly expanding Asian aerospace market, is expected to be ready for full production by the end of 2012. One example of Singapore’s catalyzing role as a center of Asian trade can be seen at the airport. In 2010, Singapore Airport Terminal Services opened the Coolport@Changi center, a $12.7 million refrigerated facility. Coolport will handle up to 200,000 tons of perishable cargo a year, including flowers, fresh produce, live seafood, ornamental fish, meat and medical supplies. Other ASEAN nations are also investing in the future. Malaysia, for example, has established the Iskandar Malaysia development corridor on the southern part of the Western Peninsula. Designed to attract investors by providing incentives that include tax breaks and import and sales duty enticements, the program focuses on supporting nine economic clusters. Six concentrate on services—financial advisory and consulting, creative industries, logistics, tourism, education and healthcare—and the remaining three focus on electrical and electronics manufacturing, petrochemical and oleochemical production, and food and agro processing.
Playing to win
For its part, the Philippines has become a preferred global business process outsourcing destination, while Vietnam is actively nurturing a high-tech presence. The country has invested in Quang Trung Software City, for example, which employs nearly 24,000 people at more than 100 companies. The region’s large Indian and Chinese expatriate populations also make it the perfect test bed for products and services ultimately targeted for India and China. In 2006, for example, one Western confectionery giant invested approximately $3.5 million to set up a regional center to create new flavors that appeal to the unique tastes and palates of the Asia Pacific market. The facility had a winner even before the center was officially opened: a hardshell caramel candy made especially for China’s consumer market. Multinational companies will not have these markets to themselves, of course. One important component of the change sweeping the region is the rapid pace of innovation among local firms, resulting in a group of local winners that could be real competitors to their global peers. Many of these companies are using the region as a testing ground of their own—but in this case, for their anticipated expansions into other markets around the world, particularly other emerging markets. And they often use the knowledge they gain to create startling new value positions. Beyond having to deal with often limited market knowledge and indigenous competitors, multinationals must also grapple with the challenges of operating in an emerging-market environment. These include inconsistent regulatory frameworks; corruption and counterfeiting, which remain significant business challenges in some markets; potentially unexpected costs associated with infrastructure, resources and labor; the lack of evenly distributed talent; and often tricky logistics. Unlike operating in China
and India, companies need to learn how to take advantage of the complex mosaic that emerges when a group of distinct countries become integrated. With this in mind, companies interested in exploring the region’s market potential should follow a few basic guidelines.
laws and regulations of the local government before entering any market. But this is especially important in this region, with its welter of different tax breaks, subsidies and other incentives designed to help companies meet their goals. Conversely, ignoring these policies could quickly scuttle the best-laid plans.
Build a strong business case and entry plan
Accurate consumer research will either be hard to get or nonexistent for some of these markets, so prepare to develop your own market insights. Diversity is a distinct feature of the ASEAN region, and understanding regional and country-specific idiosyncrasies can help your company use these differences to build a flexible, targeted value proposition. Keep in mind as well that global brands participating in these markets often enjoy high levels of name recognition and hence prestige among consumers. Importers, for instance, dominate the perfume industry in Thailand because consumers consider local products inferior. In fact, across the region, the leading cosmetic and toiletries brands are from Europe or the United States. In this case, high-quality levels themselves boost a brand’s attractiveness among diverse consumer segments. Choosing the right entry plan, whether through acquisition, greenfield or joint venture, will be as important as selecting which markets to sell to first. In most ASEAN nations, establishing strong local business and government contacts and relationships will be a priority for newcomers.
Understand realities on the ground
While the region continues to make progress, new entrants might be unprepared for some day-to-day business realities. In Indonesia, for example, roads and highways often can’t handle the daily crush of cars, trucks and motorcycles. One estimate reveals that traffic congestion costs Jakarta alone roughly $1.5 billion annually in lost economic activity. Counterfeiting also remains a serious concern in many markets. In Vietnam, for instance, bogus cosmetic brands constitute as much as 60 percent of the market.
Seek talent early
Although a market like Singapore is likely to have plenty of talent available, competition for that talent might make hiring key people much more expensive than anticipated. On the other hand, finding the right people in rural areas could be extremely difficult at any price. As a result, companies need to work with educational groups, local agencies, governments and other entities to secure a strong cadre of on-theground managers and workers. In some cases, firms establish their own academies to train employees. One large Singapore-based real estate player created a business management institute in 2006. Featuring a dedicated campus, the award-winning facility offers a variety of real estate courses and serves the company’s 10,000strong global staff.
Familiarize yourself with government policy
As a matter of course, every multinational familiarizes itself with the
Choosing the best business model
To determine how to configure the appropriate business model for the ASEAN region (see below), companies must consider two factors: regional market importance (How essential are local markets to a company’s overall growth agenda, as defined by the perceived potential of markets, current footprint and commitment to future expansion?) and market positioning (Which approach is better suited to the company: a localized adaptation to target markets, or a more universal adaptation that relies on proven practices that may or may not have originated from the region?).
Regional market importance
Low Localized Market positioning
Source: Accenture analysis
Determine the right business model
One effective way to think about potential opportunities in Southeast Asia is to plot your company’s preferred market positioning (should you be local or adopt a more regional stance?) against how strategically important the region is in your overall growth agenda. Arrayed on such a matrix, four possible business models emerge—each of which has already been successfully used by various ASEAN companies (see chart, above). Opportunist. These businesses currently view the region as a whole as having less upside potential or insufficient scale for them. As a result, they tend to focus on fewer markets, and they position them-
selves as the best-in-class provider in those markets. To be successful, the Opportunist business model requires the availability of local talent and local partners, and the endorsement of the local government. Conglomerates, data management companies and automotive retail groups have used the Opportunist business model across ASEAN. Malaysia’s Sime Darby is a multinational conglomerate focused on palm oil plantations, property development, heavy equipment, energy, utilities and healthcare. Since many local ASEAN economies currently lack the scale Sime Darby seeks, the company participates where it makes financial sense in the region while pursuing international growth opportunities elsewhere—such as in China. It focuses on quickly
For further reading
”Can Chinese companies win in the global big leagues?” Outlook 2011, No. 3 For this and other articles, please visit www.accenture.com.
grooming local managers for key positions in growing markets. Incubator. Players in this segment seek growth pockets on a country-bycountry basis because they are looking for either local demand or the availability of natural resources. Conservative by nature, these companies tend to adopt proven approaches in a select number of strategic markets, importing established practices as necessary. They typically take a wait-and-see attitude, and they make major investments only after they are convinced of a market’s growth potential. This business model attracts chemical companies, electronics manufacturers and agribusiness players. Thailand’s PTT Global Chemical Public Company is the country’s largest integrated petrochemical and refining company. In addition to carefully expanding its core petrochemical business to the rest of Southeast Asia, the company is slowly venturing into downstream products, like bioplastics, that align with its main olefin products. Chameleon. Projecting a wider footprint, Chameleons recognize the strong potential for growth in the region. They take a moderate approach to risk and tend to focus on increasing their sales penetration within existing markets. They also adopt distinct strategies for different markets, where they rely on an intimate understanding of both the culture and the particular needs of consumers.
These players tailor their value propositions to specific target markets, leveraging the independence of their local businesses or working in close collaboration with local partners. Telecommunications companies and distilleries are known to adopt Chameleon business models. Axiata Group Berhad, a Malaysian telecommunications company, has a wide footprint in multiple high-growth markets: Malaysia, Thailand, Singapore, Cambodia and Indonesia. The company establishes a strong local presence in each market and is a technology innovator. Assimilator. These businesses are attracted to the region by its strong consumer demand, pro-business policies, legal transparency and market sophistication. Assimilators use consumer market diversity to their advantage, and apply proven approaches to meet regional market demand. They focus on building a diverse portfolio in order to manage risk and reduce their reliance on a single market. Assimilators often include banks, financial services companies and fast-food chains. CIMB Group, Malaysia’s second-biggest financial services player, is a classic Assimilator. It reaches more than 80 percent of the ASEAN population through M&A as well as universal banking services and offerings. CIMB has also taken a leadership role in creating the ASEAN Economic Community.
The newest hot spot in today’s global business world is Southeast Asia. But many leading companies risk missing the real opportunities to establish themselves in these markets. While the region promises strong growth and a dynamic future, companies need to understand intimately the potentially significant competitive, cultural, regulatory and business-level challenges at hand, and how to overcome them.
About the authors
Teo Lay Lim leads Accenture’s operations across the ASEAN region; she is also the managing director of Accenture Singapore and the head of the company’s Management Consulting Innovation Center in that country. Ms. Teo serves on the board of the Singapore Land Authority and the Council for the Third Age, and she is a member of the Women’s Steering Committee of the American Chamber of Commerce in Singapore. firstname.lastname@example.org Grant D. Powell heads financial services in the Accenture Talent & Organization business domain throughout the Asia Pacific region. In addition, he is the lead facilitator at Accenture’s Management Consulting Innovation Center in Singapore. For nearly 25 years, Mr. Powell has worked with clients in the banking, insurance and retail investment industries in Australia, New Zealand, Europe and Asia. He is based in Melbourne. email@example.com Amy Chng, a communications and high-tech research manager in Accenture Research, is part of the research team at the company’s Management Consulting Innovation Center. Ms. Chng has more than 15 years of research experience in IT and technology through numerous markets in Singapore, China, India, Southeast Asia, the Middle East and Africa. She is based in Singapore. firstname.lastname@example.org
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