Beyond Asia - Strategies to support the quest for growth

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Asian companies are on the move. Once viewed by Western multinationals primarily as a source of low-cost labor and manufacturing, Asian players are now international players in their own right. They are expanding into new markets for a variety of reasons.
http://www.ey.com/GL/en/Issues/Driving-growth/Beyond-Asia---Playing-for-high-stakes---the-strategic-challenges
Our Growing Beyond program explores opportunities across expanding into new markets, finding new ways to innovate & implementing new approaches to talent.
www.ey.com/growingbeyond

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Beyond Asia - Strategies to support the quest for growth

  1. 1. Beyond Asia Growing BeyondStrategies to supportthe quest for growthJune 2012
  2. 2. 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 1 Beyond Asia: strategies to support the quest for growth1206-1366958
  3. 3. About this report Analysis of the survey identified markedBeyond Asia: strategies to support the quest for differences in the challenges and approachesgrowth is part of Growing Beyond, our flagshipprogram that explores how companies can grow to international expansion between twofaster by expanding into new markets, finding groups of respondents:new ways to innovate and implementing newapproaches to talent management. It is based ► Globally focused (global) companies:on: 177 companies with operations in two or► A survey of 617 business executives from more of the following markets: Australia East and Southeast Asia, conducted by the Economist Intelligence Unit in March and and New Zealand, Brazil, Eastern Europe, April 2012. All companies had significant India, Japan, Latin America, Middle East operations, revenues or profits outside of their home market. and North Africa, Russia, Sub-Saharan► Qualitative interviews conducted with Africa, US or Canada, Western Europe Ernst & Young sector and country leaders and senior executives from companies across the ► Regionally focused (regional) region. companies: 316 companies within East► Analysis of current and projected trade flows and Southeast Asia, operating among individual Asian markets and between Asia and the rest of the world, conducted by internationally Oxford Economics.Page 2 Beyond Asia: strategies to support the quest for growth1206-1366958
  4. 4. Setting the sceneWhere, why and how Asian companies are expandingPage 3 Beyond Asia: strategies to support the quest for growth1206-1366958
  5. 5. 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.Page 4 Beyond Asia: strategies to support the quest for growth1206-1366958
  6. 6. 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.For globally focused companies For regionally focused companies Mainland China 42 Western Europe 32 India 33 Middle East and North Africa 28 Indonesia 29 Brazil 20 Vietnam 25 Russia 18 Eastern Europe Middle East and North Africa 24 15 (excluding Russia) Brazil 24 US or Canada 14 Western Europe 23 Mainland China 8 Russia 18 Sub-Saharan Africa 8 US or Canada 18 Singapore 7 Australia and New Zealand 15 Hong Kong 7Page 5 Beyond Asia: strategies to support the quest for growth1206-1366958
  7. 7. Why are Asian companies looking to expandinternationally?In general, regional companies are focused on building their foundation, includingcapabilities and resources, while global companies are concentrating onacquiring new customers and technology.Benefits of expansion into developed markets Benefits of expansion into rapid-growth markets New customers and sales growth 40 New customers and sales growth 66 Access to new technology or Tap a gap in the market for products innovations 39 and services 34 Access to new distribution channels 31 Access to new distribution channels 34 Tap a gap in the market for products 29 Access to low cost labor 27 and servicesSpreading risk across different markets 25 Spreading risk across different markets 25 Access to natural resources and raw Access to skilled workers 22 materials 25 Access to skilled workers 41 Tap a gap in the market for products 38 and services Access to natural resources and raw materials 40 Access to new distribution channels 36 Access to low-cost labor 39 New customers and sales growth 35 Access to intellectual property Access to natural resources and 37 34 raw materials Access to new technology or Access to new technology or 36 33 innovations innovations Tap a gap in the market for products Access to intellectual property 35 32 and services Globally focused Regionally focusedPage 6 Beyond Asia: strategies to support the quest for growth1206-1366958
  8. 8. How are Asian companies expanding?Companies typically follow an expansion path that progressively deepens theirinvolvement in new markets, going from direct exporting to local sales anddistribution desks and finally to joint ventures or acquisitions.In East and Southeast Asia In developed markets In other rapid-growth markets Local sales/distribution/ 46 35 Local sales/distribution/ 40 42 Direct exporting 24 sourcing desk sourcing desk 47 38 Local sales/distribution/ 35 37 Direct exporting Direct exporting 26 sourcing desk 46 45 36 24 Partnership/alliance 36 Partnership/alliance M&A 40 2 8 28 24 Joint venture 28 Joint venture Partnership/alliance 10 6 26 24 Outsourcing agreement 23 25 M&A 19 Outsourcing agreement 12 4 23 Joint venture 21 24 Outsourcing agreement 6 Franchise/licensing 24 24 Franchise/licensing 20 23 Franchise/licensing 21 M&A 34 7 29 Minority equity 12 18 19 Greenfield investment Greenfield investment investment 9 5 19 Greenfield investment 12 Partnership with govt- 16Minority equity investment 18 6 owned enterprises 2 36 Partnership with govt- 8 Minority equity 15 Partnership with 18 owned enterprises 5 investment 5 govt-owned enterprises 27 Globally focused Regionally focusedPage 7 Beyond Asia: strategies to support the quest for growth1206-1366958
  9. 9. Achieving global growthA look at the key challenges and recommendations for global and regionalcompaniesPage 8 Beyond Asia: strategies to support the quest for growth1206-1366958
  10. 10. Four key challenges companies should be prepared for1. 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.Page 9 Beyond Asia: strategies to support the quest for growth1206-1366958
  11. 11. Recommendations for globally focused companies Recommendations Comments Business implications ► Need for greater focus on due diligence ► A more diverse international footprint and the need for Put in place ► Need for local knowledge to appropriately assess risks greater autonomy at the local level emphasize the need robust risk for a robust risk management framework. ► Political and regulatory risk can have material impact on valuations management ► Our research has shown that companies with more ► Need for effective risk management processes mature risk management frameworks can outperform ► Partner due diligence is critical their peers financially. ► Robust dispute resolution processes ► Clear expectations regarding ROI ► For many globally focused Asian companies, the priority How and where to introduce greater efficiency to benefit from increased Make the remains investment and growth. ► transition from international scale ► As these investments mature, they will require a greater investment to ► Need for robust financial management and reporting systems to build focus on process, a consideration of where economies of scale can be derived, detailed tax planning and more confidence profitability sophisticated finance functions. ► Increased competition for assets in developed markets, potentially driving up valuations ► Companies need a management team and corporate Take steps to culture that reflect the diversity of their customer base ► Balance of local resources and expatriates and operations. make the ► Provide managers with experience in different markets ► By recruiting managers with experience of different corporate markets, reducing reliance on expatriate workers and ► Cultural awareness and sensitivity culture more putting in place global talent management programs that ► Building the right skills and capabilities international enable the flow of key talent around the world, companies can create a more international workforce. ► Autonomy for local managers helps to ensure that ► How to combine local relevance with global scale products and services are relevant to the local customer Choose which base, but not everything needs to be decentralized. ► Local versus central decision making functions ► Companies need to think about where they can derive ► Integration; what and how quickly should be global economies of scale without compromising local ► Valuation and integration considerations or local relevance.Page 10 Beyond Asia: strategies to support the quest for growth1206-1366958
  12. 12. Recommendations for regionally focused companies Recommendations Comments Business implications ► Over the next few years, Asia will remain a dominant ► Increased market competition from non-traditional players Prepare for recipient of inbound foreign direct investment. This will ► Formation of new Asian MNCs increase competition – for assets, talent, resources and greater customers. ► Competition is changing; focus on product and service quality, competition ► Regional companies need to consider whether they need not low cost to join other regional companies in looking outside Asia ► Companies need to re-think how and where to compete giving rising for new opportunities. wages and input costs ► Regional companies seeking to build a global footprint ► Access to management skills a key driver of overseas expansion Build the must make sure that they get the basic capabilities in capabilities for ► Building brands a key area of focus place before making bold moves. international ► Need for relationships with regulators and government officials ► They will need managers who have an understanding of expansion international markets, as well as core functions, like ► Ability to transfer acquired capabilities, brand and IP back to Asian finance, HR and IT, that can support multiple markets. markets ► Greater geographic scale makes it more difficult to control ► Local versus central decision-making Rethink from the center. Regional companies should therefore ► Integration; what and how quickly organizational consider devolving greater autonomy to regions, but do ► Taxation and compliance seen as a strategic issue so within a set of parameters and risk frameworks. design to enable ► This devolution, with its consequent upswing in local ► Clear governance and controls frameworks in place to identify and greater local empowerment, is particularly crucial for establishing an resolve issues autonomy effective and optimized supply chain. ► Valuation and integration considerations ► Increased competition means that regional companies will be under pressure to ramp up their innovation, product ► How to combine local relevance with global scale and service mix and talent pipelines. ► By building partnerships with companies outside Asia, or ► New opportunities for partnerships and strategic alliances Leverage global acquiring companies with the right resources and ► Partners with the same values and objectives resources expertise, regional companies can leverage global ► Diverse international experience to understand these issues resources to make sure that they remain globally competitive.Page 11 Beyond Asia: strategies to support the quest for growth1206-1366958
  13. 13. AppendixSupporting survey resultsPage 12 Beyond Asia: strategies to support the quest for growth1206-1366958
  14. 14. Challenge 1Moving up the value chain could erode a critical advantage – low costWhat are your company’s most relevant strengths and advantages as ittargets international markets for sales or investment?Globally focused Regionally focused Quality of your workforce 44 Leading technology 41 Product or service quality 44 Product or service quality 39 Leading technology 31 Global supply chain 39 The cost competitiveness of 30 Speed of execution 33 your workforceBrand strength and reputation 28 Ability to innovate 32 Global supply chain 25 Value of intellectual property 31 Ability to innovate 20 Brand strength and reputation 25 Speed of execution 20 Quality of your workforce 22 The cost competitiveness of Low-cost business model 12 19 your workforce Access to low-cost Value of intellectual property 8 7 capital/ funding Access to low-cost 7 Low-cost business model 3 capital/ fundingPage 13 Beyond Asia: strategies to support the quest for growth1206-1366958
  15. 15. Challenge 2The nuances of local markets are difficult to understand or controlHow effective do you consider your company to be at the followingaspects of international business? Understanding the political and 27 regulatory environment 46 20 Building a rationale for investment 31 16 Choosing the right mode of market entry 4 Tailoring strategy to specific markets 15 27 Implementing product/service innovation for 11 individual markets 7 Empowering local decision-making 10 Globally focused 9 Regionally focusedPage 14 Beyond Asia: strategies to support the quest for growth1206-1366958
  16. 16. Challenge 3Top management teams often lack an international outlookWhere does your organization’s top management team need moreknowledge or insight to be successful in today’s global marketplace? Understanding of global markets 49 Strategic hiring process for international markets 42 Local culture and ways of doing business 41 Global supply chain issues 41 International taxation and compliance 41 Ways to incentivize employees in different markets 39 International accounting and reporting standards 14 Regulatory compliance in global markets 10 Note: Scores shown = percentage of respondentsPage 15 Beyond Asia: strategies to support the quest for growth1206-1366958
  17. 17. Challenge 4Expansion requires shoring up infrastructure and capabilitiesWhich of the following functional areas will require the most significantchanges to help ensure the success of your company’s internationalexpansion plans?Globally focused Regionally focused Sales and marketing 47 Strategic planning 42 Strategic planning 44 Financial management 41 Risk management/ERM 34 Internal communications 35 Financial management 34 Financial reporting 33 Supply chain (including demand 27 Sales and marketing 29 planning and distribution) Internal communications 23 Public relations 29 IT 22 Risk management/ERM 27 Supply chain (including demand Financial reporting 16 planning and distribution) 22 Regulatory compliance 11 IT 17 Public relations 7 Regulatory compliance 10Global tax compliance and reporting 3 Global tax compliance and reporting 4 Tax planning 2 Tax planning 0Page 16 Beyond Asia: strategies to support the quest for growth1206-1366958
  18. 18. Ernst & YoungAssurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide, our152,000 people are united by our shared values andan unwavering commitment to quality. We make adifference by helping our people, our clients and ourwider communities achieve their potential.Ernst & Young refers to the global organizationof member firms of Ernst & Young Global Limited,each of which is a separate legal entity.Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide servicesto clients. For more information about ourorganization, please visit www.ey.com.© 2012 EYGM Limited.All Rights Reserved.EYG no. EX0104BSC no.1206-1366958ED noneThis publication contains information in summary form andis therefore intended for general guidance only. It is not intendedto be a substitute for detailed research or the exercise of professionaljudgment. Neither EYGM Limited nor any other member of the globalErnst & Young organization can accept any responsibility for lossoccasioned to any person acting or refraining from action as a result ofany material in this publication. On any specific matter, reference shouldbe made to the appropriate advisor.Growing BeyondIn these challenging economic times,opportunities still exist for growth. InGrowing Beyond, we’re exploring howcompanies can best exploit theseopportunities – by expanding into newmarkets, finding new ways to innovate andtaking new approaches to talent. You’llgain practical insights into what you needto do to grow. Join the debate atwww.ey.com/growingbeyond.

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