The importance of Asia to global trade will continue to increase steadily over the next decade with foreign direct outflows reaching $400 billion by 2020 for the nine rapid-growth markets within East and Southeast Asia, according to a recent Ernst & Young study.
``Beyond Asia: strategies to support the quest for growth,’’ which surveyed over 600 executives from companies based in Singapore, Malaysia, China and South Korea among others, looks into the current and future status of foreign direct outflow and identified challenges in the roads to global expansion by Asian companies.
The impact of the foreign direct outflows trend will be momentous, creating new spheres of competition, a new generation of global companies, and changing patterns of trade flows both within and outside the region, according to the report.
``Global expansion for Asian companies is not without its challenges,’’ says Ernst & Young’s Asia-Pacific Area Managing Partner Lou Pagnutti. ``It will require major shifts in organizational design, talent management and decision-making processes, as well as pose serious execution challenges. In addition, the rigors of different political, regulatory and cultural environments can challenge many ambitious growth plans.’’
The report highlighted that the most critical strategic differences between Asian companies were dependent on the level of internationalization that each had achieved: those that were already operating at a significant level in two or more markets outside of Asia (globally focused) were addressing growth challenges in a different way to those that were operating regionally (regionally focused, or within Asia).
Asian companies are looking to new markets not only to expand their customer base but also to acquire new technology and capabilities. This has dictated where activity occurs. Of the companies surveyed that are ``globally focused’’ 42 percent selected China as the best growth opportunity for their organization, followed by India with 33 percent, Indonesia with 29 percent, Vietnam with 25 percent, Middle East and North Africa with 24 percent and Brazil with 24 percent.
``Regionally focused’’ companies indicated that Western Europe’s 32 percent was the best growth opportunity, followed by Middle East and North Africa with 28 percent, Brazil with 20 percent, Russia with 18 percent and Eastern Europe with 15 percent. Investment into the rapid-growth markets in Asia and Southeast Asia for ``regionally focused’’ companies was extremely low.
When targeting developed markets, the rationale for investment for Asian companies is more complex and multi-faceted for both regional and global companies. Factors such as access to new technology and distribution channels figure prominently.
Of the business executives surveyed, those with ``globally focused’’ firms indicated that key benefits of expanding in a developing market were new customers/sales growth (40 percent), access to new technology or innovations (39 percent), access to new distribution channels (31 percent), tapping a gap in the market for products and services (29 percent) and spreading risk across different markets (25 percent).
Business executives surveyed with ``regionally focused’’ companies indicated that access to skilled workers (41 percent), access to natural resources/raw minerals (40 percent) and access to low cost labor (39 percent) were the top three benefits of expanding into developed markets.
As for the expansion into rapid-growth markets, in the meantime, a majority (66 percent) of the respondents with ``globally focused’’ companies explained that the primary benefit was to gain new customers/sales growth. Other benefits highlighted included tapping a gap in the market for products and services (34 percent), access to new distribution channels (34 percent), and access to low cost labor (25 percent).
For those companies that are ``regionally focused,’’ key benefits included tapping a gap in the market (38 percent), access to new distribution channels (36 percent) and new customers/sales growth (35 percent).
Companies typically follow an expansion path that progressively deepens their involvement in new markets, going from direct exporting to local sales and distribution desks and finally to joint ventures or acquisitions. Both the global and regional companies in the survey still rely heavily on local sales desks, direct exports and franchises or licensing to explore new markets. The global companies are more likely than their regional counterparts to try mergers and acquisitions, partnerships, alliances and joint ventures as a mode of entry into new markets, given their deeper knowledge of markets outside the region.
While Asian companies are on a high growth trajectory, they also face a host of dilemmas. The survey identified four key challenges: moving up the value chain could erode the critical advantage of low cost; the nuances of local markets are difficult to understand or control; top management teams often lack an international outlook and expanding internationally requires shoring up of infrastructure and capabilities.
``Fortunately there are ways to overcome the challenges that Asian companies face,’’ Pagnutti comments. ``For globally focused companies, putting in place robust risk management is essential.’’ He pointed out that the data indicates companies with more mature risk management frameworks can outperform their peers financially.
Also, he added, making the transition from investment to profitability through a greater focus on process is required. Management needs to step up and create a more international culture which reflects the diversity of its customer base as well deciding which decision-making functions should be global or local.
``Regionally focused companies, for their part, need to prepare for greater competition, as well as focus on building capabilities for international expansion,’’ Pagnutti says. ``Rethinking organizational design to enable greater local autonomy within a set of parameters and risk frameworks is essential for the establishment of an effective supply chain. Leveraging global resources will also ensure these companies remain globally competitive.’’
This article was contributed by Ernst & Young, a leading global professional services firm.