Andrew Clark of Boston Consulting Group on doing business in Asia

Over 70 guests at the eighth Asia:NZ Business Leaders Seminar in Auckland on 14 June had the opportunity to hear Andrew Clark, senior partner at The Boston Consulting Group (BCG), talk about  ways in which New Zealand businesses can improve their prospects for successful expansion in Asia. Andrew Clark has worked across the region for the past 15 years on projects for clients operating in Japan, China, Korea, Southeast Asia, India and Pakistan. He now heads BCG's Asia-Pacific corporate development practice and is overseeing the establishment of BCG's office in Perth. Asia:NZ would like to thank ANZ for sponsoring this event.

Download the presentation slides by Andrew Clark.

High growth in developing markets

Trade friction with the United States and political pressure to lower the Chinese exchange rate leads people to forget that GDP in China is driven almost entirely by domestic activity. By comparison the contribution of exporting activity to China’s economy is almost irrelevant.

While the absolute level of demand in developed economies is still important, growth in demand will come from BRIC countries.  To take Indonesia as an example, even if you grow your asset base by 25 percent per year, you’ll lose your market share, the speaker pointed out.

India and China expected to continue to grow at 8 and 10 percent respectively. There will be bumps along the way such as the bursting of a housing market bubble, but the bigger picture is the rapid creation of wealth across vast populations.

“If you want a government-run economy that is world class, other than Singapore, China is it,” said Andrew Clark. The Chinese system is very complicated, but the Chinese government has done a tremendous job of maintaining growth of 8 to 12 percent per year. They have also done a good job of controlling inflation in an environment where consumer-demand is soaring.

Coming off a low base, most developing markets are showing rapid increases in productivity. This increase will be partly driven by consumer aspiration: people want more than they have and that drives economic activity. In Asia, we’re witnessing the greatest expansion of the middle class in the history of the world and multinationals are chasing the region because of this picture.

Indonesia’s economy during the Asian financial crisis shrank by 16 percent, but has been growing by 5-6 percent annually since the recovery. This has been driven by domestic aspirational growth in an environment of nearly zero foreign direct investment. It’s not just low-cost manufacturing exports that are driving economies in Asia - growth is largely driven by self-generated aspirational demand.

Another indicator of growth is the ‘mom and pop’ stores that are becoming local supermarkets in places like Vietnam, Thailand and all over Java which have driven growth and created opportunities.

“There can be no debate that if you want growth it’s going to come out of Asia where there are opportunities for New Zealand companies. While Australia might be important, if you want growth it’s going to come out of Asia,” stressed Andrew Clark. By comparison, twenty million Australians, even with high rates of per capita GDP, will be dwarfed by Asia.

Doing business in Asia is difficult, even more so for an SME. Large companies like Fonterra or Fletcher Building have the critical mass to scale up. Strategies include putting people in market who can gradually build a business or buying a small company to build a presence.

Key questions to consider when going into Asia include:

Preparation

“Before you get on a plane you need to do a lot of homework”. There is no point flying up to China, for example, unless you have put in a lot of preparation, as you can be there a week and come back without having had a single meeting. People don’t value your time the way that you do.

Protecting your intellectual property

 In an environment of aspirational growth, if people can copy something, they will. “You’ve got to have something that can be defended, because if you’ve got something that can be copied, it will be”.

Contracts

Outside Singapore contracts are only a nice statement of intent. By going through the process of drawing up a contract you’ll get a sense of intent. Later, however, if you find yourself referring to a contract, at that point you are going into debt.

Partnerships

You need a partner. Law firms for example have a partner because they are legally required to, but more importantly, you are going to need their contacts. Partners may bring a retail network. An SME will always need a partnership of some form such as a joint venture arrangement. “But don’t go into a partnership unless you know how you’re going to get out of it”, was Andrew Clark’s advice.

If you’re a small company, you need to avoid fixed cost investments. This is one of the reasons for entering into a partnership. Expats cost NZ$250,000 per year and more to keep installed in Asia. Ultimately you do want to have your own people up there, but it’s not the place to start. Using people from New Zealand’s local Asian populations is not always the answer either. Just because someone has relatives in India, it doesn’t mean they are going to be able to help you. You need to have people on the ground in India who are able to help you.

You need sufficient support to make a market appealing, but it can’t be an end game. Eventually you want to station your own people in-market. You might suddenly discover Indonesia is booming and appoint regional distributors around the country. But you need to know what you’re going to do as you hit certain volume benchmarks.

If New Zealand Trade and Enterprise (NZTE) can’t help you directly, there are plenty of companies that can. You need to scratch around and leverage every contact you can get. Social contacts with local connections can be very important as on-the-ground knowledge can’t be replicated from a desk in New Zealand.

Distribution

Getting your product to market will involve partnerships. You need to know what the right product is and how to position it. Examples from Indonesia of local marketing twists other companies have deployed include the following:

• Product labelling in foreign languages such as English and Japanese to convey a sense of the product being of export quality.

• Selling of sticking plasters as single items rather than in whole packets, which consumers can’t afford to buy. The company subcontracted manufacturing and was able to distribute to half the market, which is very big.

Selling to retail operations is difficult because they require large volumes. It’s probably better to sell business to business. NZTE did a consolidation deal that involved supplying Shangri-La hotels with wine and cheese.  Getting it through the Shangri-La Hotel chain system, rather than targeting individual hotels, is a better way to get volume through the door.

A certain minimal level of investment is required if you’re marketing products in order to build inventory levels and to build a brand. You need to have a clear business plan with clear milestones that will ensure you decide when you need to change your investment profile in response to change in trajectory of demand. What you can afford to invest will dictate the nature of the partnership you enter.

The opportunity in Asia for New Zealand

Asia doesn’t have the farming capacity it needs to feed its populations; it will always be a net importer. New Zealand is a giant farm and Asia will always need what we’ve got. New Zealand’s greatest source of competitive advantage is that it rains a lot here. We have many things that can’t be replicated because of a lack of arable land, sub-scale farms, and water or quality problems. If they can’t grow it, then we can really can control it, and that is important because then that’s defensible.

Fonterra had an unpleasant experience with San Lu, but they are all over China because the demand for New Zealand dairy products is enormous. The brand positioning of New Zealand milk powder is still pristine.

The opportunities in Asia are huge and a small success in Asia translates into a gigantic success in New Zealand. Doing business in Asia is challenging and if you’re doing well you might say, Why bother? But for the New Zealand economy to grow, even if company headquarters are moved up to Asia, as long as those companies pull product out of New Zealand, it doesn’t matter.

Q&A Session

Below are some highlights of questions that Andrew Clark was invited to answer.

What is the proportion of people that go to Asia and make it compared to those that lose money?

It’s no different from any other geography, but you’re more likely to grow your revenues in Asia, as opposed to Germany for example. It’s always nice to set up your business where growth is happening very fast. ANZ did well by setting up credit cards when there was lots of demand and caught the S curve.

As a country we don’t even discuss, let alone debate or formulate a national strategy to take advantage of the opportunities you’ve discussed. In this little place of barely 4 million people there is no sense of direction or togetherness, wouldn’t you agree?

It’s not a perfect analogy, but I spent three years consulting to Nokia. Around Nokia you have a myriad of companies. Nokia’s importance to Finland is almost the same as Fonterra’s importance to New Zealand. If a channel to market for New Zealand companies could be created then all companies could piggy back on it in Asia. I don’t favour a subsidised environment, but there needs to be some nucleus around which all companies can operate. The problem is SMEs here will always be small until someone comes and buys them.

What advice can you give someone concerned about governance issues in Asia?

In places like Indonesia, governance is something for the golf course and formal meeting should be seen as a rubber stamp environment. If you want to get something done you do it on a one to one basis. Force-fitting New Zealand standards of governance onto companies in Asia is not possible and if the business is going well, be happy. The partner will do a lot of things because they have to and that is the legitimate role for a partner. You’ve got to be pragmatic.

Photos:

1) Asia:NZ trustee David Rishworth introduces Andrew Clark

2) Andrew Clark with Bik Hou (middle) and Sophie Tamati of Nikos