“The diversity across the region, not to mention the rapidly changing business landscape, market conditions and regulations, mean you have to be open-minded and adaptable.”Yew-Poh Mak, Partner,
Transaction Advisory Services for
Ernst & Young China Advisory Limited
To avoid cultural misunderstandings, Australian companies should hire senior local resources and seek local advisors to act as sounding boards.
Cultural sensitivity
Harsha Basnayake says that Greenfield investors without existing connections often struggle with cultural issues.
“When doing business with local companies it can be difficult to work out what is actually meant in meetings and in deals — many local executives can be hard to read and often don’t show their true feelings,” said Basnayake.
“You also need to understand the actual meaning of what they say. For example, an Australian might say, ‘it’s important we have control over the venture.’ The Chinese executive might reply, ‘yes, we understand this’. This doesn’t mean they agree, but simply they understood what the foreigner said.”
Basnayake points out that, while Greenfield strategies are encouraged in some parts of Asia, such as Singapore, other countries are less welcoming.
“In areas such as China, regulations prohibit total foreign ownership. Malaysia, Indonesia and Vietnam also have a ‘local partner preferred’ policy. In these situations, the challenge is to ensure you select a partner with good political and business connections and a strong customer base.”
“These joint ventures are popular because they give you instant market entry and an established customer base, political connections and distribution channel access. They’re also lower risk than Greenfield investment because you can estimate the outcomes of an acquisition more easily and accurately.”
He sees such alliances working best when:
- Partners’ strategic goals converge while their competitive goals diverge
- Partners’ size, market power and resources are small compared to those of industry leaders
- Partners are able to learn from one another while limiting access to their own proprietary skills
Yew-Poh Mak, Partner, Transaction Advisory Services for Ernst & Young China Advisory Limited, says Australian companies must accept that integration can be very challenging.
“You’re trying to meld together very different cultures, control systems, and business practices,” said Mak. “For example, most local partners do not have Western management practices that drive performance through cross-functional team consensus building and rigorous planning. These ‘one-man show’ operations limit the scalability and sustainability of Asian businesses.”
In his experience, potential integration issues include:
- Conflict over asymmetric new investments
- Mistrust over proprietary knowledge
- Performance ambiguity — how to split the pie
- Lack of parent firm support
- Cultural clashes
- If, how, and when to terminate the relationship
He suggests putting in place an “A” team to drive integration.
“Most companies neglect this and leave it to the local partner to make business decisions and drive business performance. You need an integration team with the capability to both manage headquarter expectations, as well as having enough local knowledge to understand the business environment,” he said.
“You also need very strong measures for controls and risk management. This usually requires improving awareness and monitoring through process re-design and training on key topics around cash management, capex and budgeting, Foreign Corrupt Practices Act (FCPA) (where relevant) and commercial practices.”
He says there are usually also less obvious, but hugely important, integration issues when it comes to cross cultural teaming.
“In many Asian businesses, decision-making is centred on one person: ‘The Leader’. In this situation, functional leaders lack real decision-making power. This clashes with the Western trend towards consensus decision-making. It takes time to empower local managers to make their own decisions.”
Multiple entry strategies, patience and ‘guanxi’
Faced with so many choices, each with their own attendant risks, Harsha Basnayake counsels companies to adopt multiple entry strategies.
“It’s important you don’t employ just one strategy and enter at just one point. Given the difference in demographics, maturing markets and economic prosperity between countries within Asia, you need to hedge your bets.”
He says successful companies often have a three tiered approach: “For example, tier 1 is targeted at countries that offer the most advantageous growth opportunities; tier 2, is targeted at countries who offer stable returns; and tier 3, is targeted at emerging countries, which, although more risky, hold a lot of potential.”
Partridge offers some overarching success factors required for any entry strategy.
“I’d say ‘patience’ would be numbers one, two and three. You have to manage head office expectations. Things happen very slowly in Asia while you’re entering the market,” said Partridge.
“After that, you can’t overemphasise the importance of ‘guanxi’ (Mandarin for ‘relationships’). The success of many foreign-invested enterprises hinges on their strong relationships with local government officials. Australians often misunderstand what this entails. Good relationships transcend business — they require the main stakeholders to develop strong personal relationships on both sides.”
His final success factor is flexibility.
“The diversity across the region, not to mention the rapidly changing business landscape, market conditions and regulations, mean you have to be open-minded and adaptable. What works in one country, or even one province, may not work in another. The best entry strategy last year may have been superseded.”
Despite the challenges, Partridge says that Australian companies that persist will eventually see massive benefits.
“The rewards are there for companies prepared to do the hard yards of breaking into the market. There are blue sky opportunities here for those bold enough to launch into the unknown.”
<< Previous | Next >>
