Thursday 28 Mar 2024
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SOUTHEAST Asia is coming out of the shadow of China and India, and is taking its place as an integrated market — and a force to be reckoned with on the world stage.

In the meantime, the companies in these markets are preparing themselves for both for the threats and opportunities represented by an integrated market that allows for the free flow of goods, capital and labour.

Unsurprisingly, the ones in the lead are from markets where the governments have done the most to boost their competitiveness, such as Malaysia and Singapore, according to a report by Boston Consulting Group (BCG), entitled “Winning in Asean: How companies are preparing for economic integration”.

Written by Vincent Chin, senior partner and managing director of BCG’s Kuala Lumpur office; Michael Meyer, partner and managing director of the Singapore office; Evelyn Tan, lead knowledge analyst in Singapore; and Bernd Waltermann, senior partner and managing director of the Jakarta office, the report is based on a survey of several hundred top executives of companies of varying sizes within and outside the region and covering a wide range of industries — energy, consumer products, industrial products, financial services and telecommunications — as well as senior government officials in these markets.

“Our research found that companies within and outside the region are remarkably bullish about what integration will mean for their businesses and industries, as well as for Southeast Asian economies. In fact, most of them are actively preparing for integration,” says the BCG report, which was published last month.  

According to a report by AT Kearney and JWT, “Countdown to 2015: Creating Asean champions”, years of growth have left many of the region’s companies cash-rich compared with their Northeast Asian or Western peers.

“Forward-thinking Southeast Asian CEOs are putting that cash to good use, snatching up competitors at home and across the region. The first half of 2013 saw 183 merger and acquisition deals worth US$27.1 billion [RM90.2 billion], up 10% by volume and 6% by value over the same period in 2012.

“Most of these were in-country acquisitions, and the bulk of cross-border activity consisted of outbound deals initiated by Southeast Asian companies expanding outside their home market,” says the report.

It goes on to say that companies across Southeast Asia are going to have to work harder to defend their home turf against a growing number of global and regional competitors.

“Many domestic players in this region have historically focused on their home markets, where they often enjoyed minimal competition. Many more have created scale through mass production of low-cost goods, with little thought to building real brands.”

Cross-border M&A on the rise

BCG says the companies are already mobilising their forces. Whether they regard integration as an opportunity or a threat, they have already started taking action to improve their competitiveness.

They are working to increase penetration in their own markets as well as expand across the region. More than half surveyed by BCG are adjusting their product and service offerings, while two-thirds are internationalising their organisations, investing in foreign talent, improving their M&A and joint-venture capabilities, and upgrading their regional supply chains.

The AT Kearney-JWT report says smart Southeast Asian companies are not waiting for the Asean Economic Community to kick in to get a piece of the region’s growth pie. They’re already moving in.

For instance, Hello Axiata, the Cambodian subsidiary of Axiata Group Bhd, acquired Latelz Co’s Smart Mobile phone brand in Cambodia in December 2012, merging the two to create the nation’s second largest mobile operator. At the time, Cambodia had nine mobile phone companies and Axiata’s CEO said it was primed for consolidation. Axiata wanted to be an early mover to create scale and scope and secure market leadership.

Thai billionaire Charoen Sirivadhanabhakdi kicked off 2012 with Southeast Asia’s biggest takeover, acquiring Fraser and Neave Ltd, the leader in Singapore and Malaysia’s soft drink market, for US$11.2 billion. The deal adds popular brands and distribution networks to Charoen’s Thai Beverage pcl, which also brews Chang beer and market spirits, instant coffee and energy drinks.

“Asean companies are on the prowl. In 2011, they went on a regional shopping spree, with more than half the M&A deals being cross-border transactions,” the report says.

In 2012, M&A activities were driven by intra-country deals, except for Vietnam, with Malaysia as the most active market. Energy, utilities and mining have seen the most consolidations, followed by the financial industry.

BCG says a clear majority of companies view integration as an opportunity to grow their businesses. Some 76% of the companies surveyed said they want to increase their market share within Asean over the next three years, while 53% said they had already increased market share over the past three years.

“The biggest expansion plans are targeted for the three countries that respondents see as having the most difficult markets within Asean — Indonesia, Myanmar and Vietnam. Roughly 40% to 50% of respondents agreed that these three markets are highly challenging, citing issues such as protectionism, opaque regulations, a history of political instability, scarce talent and limited infrastructure,” BCG says.

However, despite the scenario, these are still seen as the markets with the greatest potential.

Why? In a nutshell, because of a growing middle class and rising number of affluent households, stabilising political and economic environments and abundant natural resources.

The AT Kearney-JWT report says companies across the region face fresh competition from both younger, marketing-savvy local competitors and international brands.

“Consider the fate of Komix, an Indonesian cough syrup brand that created a new market when it released a line of inexpensive cough syrups in dose-size packets, with ads focused on price and practicality. When Vicks — a better-known global brand — released a competing product, Komix’s sales plummeted,” it adds.

AT Kearney and JWT warn that being the first, cheapest or even the most innovative is not enough to ensure that a company remains in pole position.

Ample opportunities for SMEs

Not that the smaller company will always lose out. BCG maintains that Asean integration will provide ample opportunities for such companies. But these businesses are less likely than the larger ones to invest in areas that will make them regionally competitive, such as market research, international talent and programmes to build operational excellence in manufacturing and supply chain management. “Financial and, especially, managerial resources are the most critical constraints,” it says.

Indeed, it is for this reason that many Malaysian small and medium enterprises (SMEs) do not have a regional plan.

JWT CEO Bob Hekkelman notes that SMEs do not necessarily have the scale to participate in the regional integration process. “It’s vital that SMEs in Asean are engaged in the AEC as they contribute significantly to their countries’ GDP. I think the region’s governments have done a lot to make domestic businesses aware of the AEC … but the focus has probably been more on changes to import duties and tariffs.”

Hekkelman opines that there probably needs to be more dialogue on less tangible but equally important competitive issues. “There needs to be more discussion and direction to spur domestic companies, particularly the SMEs, to make the switch from simply selling products to managing brands if they want to compete in the larger market place, post-AEC … these companies need to think of how to move up the value chain.”

The BCG survey revealed that multinationals and regional companies based in Southeast Asia are concentrating on different things to boost their competitiveness.

“Multinationals are focusing on understanding the nuances of specific Southeast Asian markets more clearly and on adapting their business models to local conditions. By contrast, big globally minded companies based in Southeast Asia — which have a stronger understanding of local markets and can readily apply strategies honed in other rapidly developing economies — are placing greater emphasis on building international organisational capabilities and operational excellence,” says the report.

AT Kearney and JWT, on the other hand, feel that the most important thing is building a brand. “If companies want to move up the value chain, having a strong brand is crucial, particularly in an age of commodities, fierce competition and rapidly advancing technologies where tangible product differences can be replicated within a brief time frame.”

BCG, however, thinks that securing talent is the most urgent need of all companies targeting the challenging Asean markets. It points out that Indonesia, for example, faces growing gaps in its workforce, from entry-level workers and middle managers to senior executives.

“A scarcity of talent can become a hindrance to understanding local markets and to successful sourcing, distribution, product development and marketing. Nurturing and retaining talent, therefore, will become a critical source of competitive advantage,” it adds.

BCG says Southeast Asian companies that currently have a domestic focus have three choices. They can choose to stay domestic and channel their energies into defending or increasing their market share. They can go regional by branching out into neighbouring economies and working aggressively to gain share organically or through M&A. Or they can create partnerships and extend their reach through joint ventures and alliances with multinationals and regional challengers that want to expand at home.

“The approach a domestically focused company chooses should depend on its industry and its position in the market. In the consumer goods and industrial sectors, defending domestic markets may prove difficult.

“In regulated industries, such as financial services and telecommunications, a domestic orientation may remain viable. Domestic conglomerates that are in multiple businesses need to decide in which industries they should attempt to go regional,” it says.

AT Kearney and JWT think companies need to have a growth strategy that includes M&A. But they point out that such corporate exercises are risky business, particularly in this region.

“Many companies go into M&A without any preparation, resulting in botched deals or expensive and chaotic acquisitions. Few companies in Asean have the experience to execute M&A. But planning ahead in three areas will increase the chances for success,” they say.

These are building a sound strategy and plan for M&A, scrutinising the risks and conducting proper due diligence, and establishing a post-merger integration plan.

Building brands

JWT’s consumer survey found that awareness of Southeast Asian brands outside their home markets is low, apart from a few brands such as Singapore Airlines, AirAsia, Petronas, Tiger, Proton and some of the region’s bigger banks. In addition, many consumers worry about the quality of products from neighbouring markets.

One problem with many Southeast Asian companies is that they develop brands with purely the local market in mind. Their brand idea, and even the name, might not be suitable in other markets.

As BCG has found in its survey, multinationals and regional players are expected to reap the greatest gains from Asean integration. SMEs that focus primarily on their home markets have the most to lose.

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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