“Many people think the ‘prize’ is China.”Bob Partridge,
Greater China Transaction Advisory Services Leader,
Ernst & Young
Like the planes their executives come to live on, new entrants to Asia are at their most vulnerable during take-off. What are the key success factors when developing and executing your entry strategy?
Location, location, location
The first hurdle for a company assessing the potential of the Asian market can often be how to choose the location that will best deliver your business objectives.
After all, Asia is not a country. Collectively, it presents a world of opportunity. Breaking it down to identify the most favourable locations can be daunting. There are 32 countries and territories in Asia, commonly divided into four regions:
- Central Asia, including Kazakhstan and Turkmenistan
- North East Asia, including mainland China, Hong Kong, Japan and South Korea
- South East Asia, including Malaysia, Singapore, Thailand, Vietnam and Cambodia
- Southern Asia, including India and Bangladesh.
Some would argue this leaves out ‘Northern Asia’, which is Russia, ‘Western Asia’, which contains Turkey, Israel, Saudi Arabia, Iran and Iraq.
Keeping to the regions closest to Australia, how do you choose from 32 potential target markets? Each presents hundreds of different opportunities due to the extraordinary range and wildly different operating environments.
“Many people think the ‘prize’ is China,” says Bob Partridge, Greater China Transaction Advisory Services Leader, Ernst & Young. “Certainly, China has risen to be both a significant trading partner with Australia and a country with huge transaction potential across these borders — both from and into Australia.”
“But what about Singapore, with its strategic location, a pro-business environment, attractive tax regime, liberal immigration policies, English as its first language, a skilled and talented labour force, world-class infrastructure, an efficient legal system, high quality of living and a stable government?”
“Do you look at the developed markets of Hong Kong, South Korea or Japan, or the emerging affluent populations in South East Asia, or the astonishing middle class growth in India?”
He says the trade-off is usually market potential versus ease of doing business. “The less developed and less business-friendly the market, the better the growth prospects and the lower the competition.”
“At one level, it’s just like any other business decision: you weigh the risks against the opportunities. But the issue for many Australian companies is that Asia is an unknown and the pace of change is extraordinary. Reports are out of date before they’re printed; a lot of advice is subjective, or biased to what the ‘expert’ knows. Often, you can’t get an accurate idea of the risks or opportunities until you’re actually there. People get into a chicken and egg situation and put it in the ‘too hard’ basket.”
He emphasises the need to keep checking in with Asia: “People think because they assessed an Asian market in 2009 and didn’t find a big enough customer base, or decided there wasn’t sufficient infrastructure, that Asia doesn’t need to be on their radar.”
“In two years, that customer base could have grown by tens of millions and the government may have built a railroad. What you need is a ‘tipping point’ strategy: when these metrics get to this point, we’ll reassess Asia.”
As Harsha Basnayake, ASEAN Transaction Advisory Services Leader, Ernst & Young, explains, throughout South East Asia, especially Singapore, most sectors now have a relatively open door policy.
“Some sectors are more regulated, such as financial services, capital markets, insurance, advisory, telecommunications. Entry to these industries can be more difficult, as you have to obtain operating licences from the government, which can be a lengthy and complicated process.”
He notes that China has also recently set up a panel with the power to terminate deals if Beijing finds they threaten its very broad definition of ‘national security’.
“However, sectors such as real estate and manufacturing — in fact any area where state-owned companies don’t compete — hold many opportunities for foreign companies. South East Asia, in particular, has an incredible appetite for infrastructure building and services, including transport, water and waste management.”
He adds that many governments have recently identified priority sectors where they actively encourage and reward foreign investment to fill expertise and resource gaps.
“These sectors include: biotech, fund management, wealth equity management, high end manufacturing, chemicals, and oil and gas (processing and trading rather than production).”
He emphasises that companies successfully entering South East Asia are not just large scale corporates: “I’ve seen many small to medium sized corporates enter South East Asia and develop a very effective platform to generate revenue. Then they’ve started moving up the food chain in terms of size, power and reputation in the industry.”
Which strategy is right for you?
Of course, choosing the right countries is one thing, but choosing the right entry strategy is another complex challenge.
“Depending on the funds at your disposal, the control you require and your appetite for risk, your first decision in terms of mode of entry is equity or non-equity,” says Simon Moore, Oceania Transaction Integration Leader, Ernst & Young.
“You can test the water with exports without exposing yourself to too much risk. However, it doesn’t really give you a good feel for the operating conditions within specific regions.”
He says the lesson for new exporters is the importance of taking a long-term outlook.
“Short-term exporters get discouraged by their limited success in the early days. You have to remember, the most effective exporters are those who are committed to building lasting relationships with agents, distributors and other strategic partners in the region.”
“Economic downturns in previous decades sent many exporters to Asia scurrying to other countries. Those who stayed strengthened their alliances and reputations within Asia and subsequently reaped the rewards when the Asian economies rebounded.”
He says licensing can be another useful ‘toe in the water’ non-equity strategy.
“An international licensing agreement is a great way for Australian companies to obtain extra income for technical know-how and services. You can quickly expand without political risk or large capital investment.”
The downside is the lack of control.
“Some Australian companies have had their trademark and reputation ruined by an incompetent partner. In a country with a high degree of corruption, licensing leaves you open to brand damage or intellectual property (IP) theft. This is the other risk of choosing a foreign partner — you are potentially enabling them to become a competitor.”
He says, compared to licensing, franchising can be a less risky strategy.
“While a licensing agreement usually involves IP, franchising is limited to trademarks and the operating knowhow of the business.”
But, the only way to gain total control is ownership, either through Greenfield investment or acquisition.
“Greenfield investment is often complex and potentially costly,” says Moore.
“On the upside, you have total control and the most potential to provide above average returns. This strategy is attractive if there are no competitors to buy or you can transfer highly competitive advantages, such as embedded competencies, skills or culture.”
However, he cautions careful consideration of the risks, time and cost involved in establishing a new business in a new country, unless the government or your customers have specifically invited you.
“Don’t use the set-up time required for Australian expansion as a benchmark. The learning curve is unbelievably steep. You need to learn and implement appropriate marketing strategies to compete with rivals in a new, and very different, market. Even with the local knowledge and expertise of your consultants, local hires and business partners, this can take a long time.”
Claus Jensen, Oceania Supply Chain Leader, Ernst & Young, also emphasises the complexity of supply chain design: “you need to take many factors into consideration, like the impact of regulation, tax jurisdictions, proximity of transport hubs, availability of people, supplies etc. And you have to build strong, trusted supply chain relationships, a very time consuming process.”
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