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PwC 10 Minutes on Expanding Business in Asia Pacific

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If you want to take advantage of growth in the Asia-Pacific region, what’s the best course of action? As economies become much more interconnected, multinational companies that set up regional hubs …

If you want to take advantage of growth in the Asia-Pacific region, what’s the best course of action? As economies become much more interconnected, multinational companies that set up regional hubs and lay down intra-regional distribution and services networks are getting a head start. To be successful, you’ll need to forge local partnerships and make sure your business aims are in line with regional priorities. More info: http://www.pwc.com/us/en/10minutes/expanding-business-asia-pacific.jhtml

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  • 1.  Menu 10Minutes on expanding business in Asia Pacific January 2012 Businesses strive to new levels of regional integration Highlights Multinationals are deeply integrating in the region, setting up regional hubs and laying down intraregional distribution and services networks. Expanding trade, more numerous and efficient supply chains, low labor costs and high GDP growth help enable this. The US has re-engaged in the region, with the finalization of a trade pact (Trans-Pacific Partnership) a possibility in 2012. Multinationals are tapping innovation in the region for new products and services fitting the needs and wants of the region’s rising middle-class. Companies are forging partnerships with governments, state-owned enterprises and consumers in booming sectors such as infrastructure, financial services, and healthcare. Asia-Pacific economies have crossed into a new kind of growth, a new era of interconnectedness. They are also shifting from mercantilist to consumption-based. China’s private consumption alone is forecast to hit US$9 trillion by 2020, from US$2 trillion in 2010.14As the region matures—amid economic turmoil in the EU and sluggish US growth— global companies cast eyes eastward to become integral, long-term players. Asia-Pacific business and government leaders opined on what’s needed to sustain the region’s growth at the 2011 Asia Pacific Economic Cooperation (APEC) CEO Summit and through PwC’s survey of APEC CEOs. Top priorities call for more sustainable energy and natural resources and redoubled efforts to lift healthcare, transportation and labor forces into the 21st century. The message from both ministries and boardrooms was clear: such advancement will occur only at an intersection of the private and public sectors. Successful companies integrate more deeply by investing in talent, forging relationships with governments, building regional distribution and services networks and, most important, pursuing business aims that twin with regional priorities. 1 PwC analysis based on various historical and forecast sources, including Oxford Economics. Businesses take a fresh look at entering Asia-Pacific markets 1. Spread to new corners, beyond China. A new wave of investment is now flowing into the other corners of the region—including Indonesia, Vietnam, Malaysia and the Philippines—fast becoming new hubs and springboards in their own right. 2. Take part in the world’s innovation lab. As Asia-Pacific economies build next-generation infrastructures—from smart grids to cloud computing—opportunities open up for global companies to commercialize innovations on a bigger scale and more swiftly than in their home markets. 3. Hold a stake in the region. Companies are taking stakes in government-funded initiatives through public-private partnerships— from advancing healthcare to modernizing transportation systems—by incorporating high-end, Western technology. Private equity firms are investing directly in local firms in growth hot spots.
  • 2.  Menu At a glance Looking forward 3–5 years, APEC business leaders share their outlook and perspectives2 Growth will be driven by new consumers and their spending power Private consumption at current market exchange rates3 44% 94% 57% See increased spending power as the main growth opportunity Are making changes to their strategy around innovation, with nearly half making significant changes Plan to work with government to build innovation centers or hubs Top three barriers to growth, to some or to a great extent 89% 91% 29% Inconsistent regulations and standards Plan to change how they connect employees via technologies for increased innovation Say difficulty in forecasting available talent in emerging markets will be a key challenge Corruption 86% 85% Talent shortages 2 PwC’s 2011 APEC CEO Survey, released at the APEC CEO Summit in Honolulu, Hawaii, in November 2011. 3 PwC analysis based on various historical and forecast sources, including Oxford Economics.
  • 3.  Menu 01 Businesses are expanding locally, reflecting Asia Pacific’s intraregional growth “There’s tremendous opportunity for growth intra-Asia. These countries now have more capabilities and skills, more resources and more raw materials to trade with each other, and that is driving growth in intra-Asia very strongly.” — oger Crook, CEO R DHL Global Forwarding, Freight Intra-regional trade sharply rising in Asia Pacific As Asia Pacific builds a stronger—and more intricate—trade web… Asia-Pacific economies are not only growing. They are growing more integrated. Exports among APEC economies are forecast to make up 71% of global APEC exports in 2020, up from 67% in 2010.4 The accelerated trade within the region is creating a bigger and more complex matrix of trading channels. And it’s not just China. Vietnam—fast becoming a destination for retail and technology manufacturing—is adding its threads to the web: its exports to APEC countries are forecast to rise more than twelvefold from 2000 to 2020 to US$120 billion, with the biggest flows to Korea, China, the Philippines and the US.5 …multinationals spin their own Global companies likewise are integrating in places that make easy jumping-off points. One example: Asia Pacific’s cloud computing hubs of Japan, Singapore and Hong Kong. Last year, the US telco giant, Verizon, opened a new 3,000-square meter Hong Kong-based data center as a hub to roll out IT cloud services to multinationals and local companies in China and India, for example.6 Global firms are also following the region’s new urban shoots, such as China’s third-tier cities. Take DHL Global Forwarding’s plans to open branches and sales offices in cities in central and western China, where industries are moving. By 2015, it plans for 90 branches and sales offices in China, up from at least 65.7 A push for freer trade With expansion come calls for an improved regionwide trade climate. Business leaders cite corruption and regulatory inconsistencies as barriers to growth in Asia Pacific. In a recent PwC survey, 64% of APEC CEOs said that realizing a free trade area in the Asia Pacific region is “critical” to their organization’s success.8 The region is pursuing progress. For instance, the Trans-Pacific Partnership (TPP)—a trade pact under negotiation between the US and at least nine other economies9—aims to address nontariff issues such as government procurement, intellectual property protection and regulatory convergence. President Obama underscored the importance of the plan, which could be finalized by end of 2012, at the 2011 APEC CEO summit. $12.9 $4.6 $2.1 2000 2010 2020 Intra-APEC exports, in US$ trillions Source: PwC analysis based on various historical and forecast sources, including Oxford Economics 4 PwC, 2011 APEC CEO Survey, November 2011. 5 Based on PwC analysis of various historical and forecast sources, including Oxford Economics. 6 Carol Ko, “Verizon paves path to cloud with new HK data center,” Computer World, October 10, 2011. 7 Wang Ying, “DHL expands service in West, Central China,” China Daily, September 21, 2011. 8 PwC, 2011 APEC CEO Survey, November 2011. 9 Other countries involved in TPP talks include Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Japan and Vietnam.
  • 4.  Menu 02 Jumping in: Asia Pacific’s new hubs, springboards APEC investing in APEC: a peek at interAPEC investment in the next 3–5 years Percentage of CEOs identifying in which economies their companies will be making the biggest investment Australia 5.7% Indonesia Singapore 4.1% China 5.7% Other 43.6% 21.4% Philippines United States 3% 9.8% Source: PwC 2011 APEC CEO Survey, November 2011 Total APEC foreign direct investment (2000-2020) $1,089 $577 2000 $644 2010 2020 US$ billions Source: PwC analysis based on various historical and forecast sources, including Oxford Economics A more integrated and diverse Asia Pacific is allowing companies already in the region to increase scale and penetration. Businesses have an opportunity to select mature, stable bases from which to expand into larger, less-developed, but fast-growing markets. Choosing the right entry point or path to expansion is crucial—both in reaching new regional consumer markets and in developing more efficient and resilient supply chains in the region. Global companies are producing in Asia Pacific to access the region’s markets. In 2009, for instance, 93% of goods and services produced by Asia-Pacific foreign affilates of US multinationals were sold to foreign customers.10 New springboards for diving into new markets This trend is clearly visible in Asia’s burgeoning financial services industry. Singapore, for example, offers limited potential for domestic market expansion but is well positioned to be the gateway to markets nearby. UK insurer Prudential has set up a bancassurance partnership with United Overseas Bank (UOB) of Singapore that includes an agreement to distribute Prudential’s products through UOB’s branches in Singapore, Indonesia, and Thailand. Japan’s Dai-Ichi Life Insurance spent US$1.2 billion on Australian insurer Tower Group in 2010 to increase its exposure to foreign growth markets and provide a platform for further expansion across Asia Pacific.11 10 Kevin B. Barefoot and, Raymond J. Mataloni, Jr., Operation of US Multinational Companies in the United States and Abroad: Survey of Current Business, US Department of Commerce, November 2011. 11 PwC, “Emerging Opportunities: Financial Services MA in Asia 2011,” 2011. New hubs to boost efficiency Global businesses are organizing operations into “hubs” that serve as regional headquarters for both operational and tax savings. The regional headquarter centralizes high-value functions, taking on trading, procurement and IP protection for all the parent company’s businesses in the region. Often, it is also based in the most favorable tax jurisdiction. Automakers have already embraced this approach. Consider Toyota’s strategy in Southeast Asia. The company has developed select locations as specialized centers for producing and exporting different types of vehicles to the entire region. Thailand is the base for its medium-size passenger cars, while family vehicle models are produced and exported out of Indonesia. The Ford and Mazda network has set up similar specialized centers in Thailand and the Philippines. Gone are the days when companies set up assembly facilities in individual countries to sell in their small, highly protected domestic markets. The current strategy provides scale and cost competitiveness while encompassing specialized functions like product development and product engineering.12 12 Archanun Kohpaiboon and Nipon Poapongsakorn, “Industrial Upgrading and Global Recession: Evidence of Hard Disk Drive and Automotive Industries in Thailand,” ADB Institute, May 2011.
  • 5.  Menu 03 Cultivating innovation and talent in Asia— for regional and global markets Asia Pacific’s cash-rich firms invest heavily in technology and innovation to tailor products and services for fast-growing domestic markets, where consumers have different tastes, demands and purchasing power than those in mature markets. Regional innovation hubs to develop talent and customers locally have long been set up by multinational corporations. A noticeable reversal “The current business environment is really going to force business leaders and political leaders to rethink the way we are innovating and the way we are developing talent in the region. From an innovation standpoint, I think we’re going to have to think more in terms of collaboration and co-creation whereby people will join together with various different areas of expertise in order to solve the very complex problems that we’re facing in the future.” — eborah Henretta, Group President D Asia Global Specialty Channel, Procter Gamble What’s new is how some Western-based companies are setting up programs and structures to innovate for local populations, leveraging those discoveries, and bringing them back to home markets, thereby creating new revenue streams. These don’t have to be high-tech or transformational breakthroughs. For instance, one of Coca-Cola’s top revenue-earners, the fruit beverage Pulpy—developed by its Minute Maid unit in China—is the company’s first international product to be created in an emerging economy and marketed successfully across Asia and Latin America.13 Procter Gamble has an enviable track record in sourcing innovations from outside its corporate walls and rolling them out globally. Its Swiffer Duster was designed by a Japanese company that lacked the wherewithal to market it outside the country. PG’s “Connect Develop” open innovation program built a partnership that enabled PG to take the Japanese firm’s innovation global. 13 Stefan Wagstyl, “Innovation: Replicators no more,” Financial Times, January 05, 2011. PG’s newest Asian innovation center—adding to ones in Japan, China and India—will be in based in Singapore by 2013.14 Local talent for the long haul Businesses are spearheading programs to fill talent gaps, particularly in managerial and higherskilled technical talent. In the last five years, as labor costs in China rose, Vietnam’s low-cost and relatively strong high-tech skills drew foreign technology firms, but, soon thereafter, talent shortages emerged. Foreign companies, especially information and communication technology firms are now setting up RD hubs in spots such as Ho Chi Minh City’s Quang Trung software park and cultivating local talent through training programs and even offering university scholarships for Vietnamese engineering students to study in the US, for example.15, 16 Talent-building strategies also reveal companies’ regional focus and global ambition. Take Samsung Electronics, which selects employees for international assignments as part of its regional specialist system to “foster global experts” by gaining an understanding of cultures and economies of key foreign markets. As of 2010, the company had enlisted 161 people in the program, of whom 65 were deployed in China, India and Russia—up from 31 in 2008.17 14 ”Breaking Ground on Innovation,” PG press release, January 27, 2011. 15 Nils Olaya Fonstad and Bruno Lanvin, Economic Tigers: Sustaining the Roar: The 2010 INSEAD eLab Skills Report, INSEAD, 2011. 16 “Nation to become RD hub,” Telecom IT website, March 28, 2011. 17 Samsung Electronics, 2011 Sustainability Report, 2011.
  • 6.  Menu 04 Partner—and profit—in Asia Pacific’s progress Surely, companies contend with obstacles in Asia Pacific such as red-tape barriers in regulations and land use and murky government procurement policies. But partnering with the region’s stakeholders in a local economy’s progress helps navigate business and establish a presence. Enter the market through public private partnerships “…I want to emphasize that the Asia Pacific region is absolutely critical to America’s economic growth. We consider it a top priority.” — resident Barack Obama, at the APEC CEO P Summit, November 13, 2011, Hawaii18 Across Asia Pacific, PPPs are helping to create sustainable growth in sectors as diverse as health-care and transportation. And they are presenting new market entry and expansion opportunities. Take Australia’s Victoria Government, which, through its “Partnerships Victoria” policy, has helped carry out at least 21 PPPs since it was introduced in 2000— including the A$700 million Peninsula Link, a 25-kilometer freeway in the Melbourne area, a desalination plant and a mobile data network for emergency services.19 Let domestic priorities be your friend Diversifying sources of capital available to domestic entrepreneurs is important to China, which is fast localizing its private equity industry through renminbi-denominated funds.20 Foreign funds can participate. In 2011, Beijing created its Qualified Foreign Limited Partner (QLFP) program, which allows qualified non-Chinese institutions such as pension funds, endowment funds and private 18 “Opening Remarks by President Obama at APEC Session One,” The White House press release, November 13, 2011. 19 State Government of Victoria, Partnerships Victoria website, www.partnerships.vic.gov.au. 20 PwC, 10Minutes on doing deals in China, May 2011. equity firms to establish RMB-denominated funds for onshore investments in China without foreign exchange approvals such as those from China’s State Administration of Foreign Exchange. RMBdenominated funds have greater access than foreign-denominated funds to certain restricted industries such as financial leasing.21 Prove new technologies, launch on commercial scale Countries throughout Asia Pacific—most notably China—are requiring large build-outs of modern infrastructures. And global firms are finding ways they can roll out new technologies in vast markets on a commercial scale. One key area, for instance, is a drive for “green-growth” development as the region seeks energy security, efficiencies and a cleaner environment. In 2011, General Electric, for example—which has had a foothold in China for two decades—signed a memorandum of understanding with a Chinese maker of electric motors to sell four GE-built Frame 9FB gas turbines by 2013 as the country expands into gas-fired power generation. The turbines incorporate GE’s new FlexEfficiency technology. China is one of the first four countries to apply it, reflecting China’s need to incorporate high-end Western industrial technology, as it meets its longterm energy infrastructure goals.22 21 “Shanghai allows foreign institutions to make China PE Investments,” Reuters, January 12, 2011. 22 General Electric company press release, June 3, 2011.
  • 7.  Menu Upcoming 10Minutes topics Despite uncertainties—whether economic, regulatory or other—CEOs are taking deliberate steps to stretch in markets they believe are most important for their future. 10Minutes distills the findings from PwC’s survey of more than 1,250 CEOs around the world as the CEOs’ agenda for 2012. customers behave can steer companies off-track; flawed intelligence can lead to ineffective marketing decisions and missed growth opportunities. This 10Minutes focuses on opportunities to use emerging tools and disciplines to better understand customers—particularly relevant now, when companies are making big bets on customer-centric growth strategies. Managing water risks Next generation business intelligence CEO Agenda 2012 Businesses have to compete for fresh water with a burgeoning global population that is consuming more food and energy; both are inextricably linked to water. Missteps in managing water can lead to political and legal snafus that halt production in farflung global operations. 10Minutes discusses how companies can find creative solutions to managing water risks by taking the long view. Growing by understanding your customer better Is your organization using the new and emerging tools to understand your customers better? While markets reward companies that understand their customers best, long-held assumptions about how The business information companies collect has changed radically in recent years, with more unstructured data available through the Web, email, blogs and other multimedia sources. Tried and true methods for managing traditional data are no longer up to the task. 10Minutes explores how leading companies are treating different types of data differently, to gain greater insight into their operations, customers, and performance.
  • 8.  Menu How PwC can help To have a deeper discussion about Asia Pacific, please contact: Dennis Nally Chairman PricewaterhouseCoopers International Phone: 646 471 2865 Email: dennis.nally@us.pwc.com Gautam Banerjee Executive Chairman PricewaterhouseCoopers Singapore Phone: +[65] 6236 3198 Email: gautam.banerjee@sg.pwc.com Tell us how you like 10Minutes and what topics you would like to hear more about. Just send an email to: 10Minutes@us.pwc.com. Download and experience the 10Minutes series with enhanced multimedia on your iPad. Look for “PwC 10Minutes” in the iTunes App store. Frank Lyn China Markets Leader PricewaterhouseCoopers China and Hong Kong Phone: +[86] (10) 6533 2388 Email: frank.lyn@cn.pwc.com © 2012 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 10Minutes® is a trademark of PwC US. NY-12-0433-B

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