THE Asean Economic Community (AEC) may only become a reality at the end of next year, but many Malaysian companies have been busy preparing for it. In some cases, like with Malayan Banking Bhd, the regional mindset has been there almost from the get-go.

Driven by its four pillars — a single market and production base, a highly competitive economic region, equitable economic development and fully integrated into the global economy — economic integration makes for greater business opportunities across the Asean nations, especially with the region set to grow at an average pace of 5.4% in 2015, according to the International Monetary Fund’s latest World Economic Outlook.

The AEC is going to be second only to China in the emerging market sphere, with a combined gross domestic product of US$2.3 trillion (RM7.6 trillion), according to a report by MIDF Research.

Malaysian companies are poised to take advantage of the soon-to-be-integrated market. The country already boasts some of the world’s leading companies in their respective industries. For instance, Top Glove Corp Bhd and Hartalega Holdings Bhd are two of the world’s largest glove producers, while IHH Healthcare Bhd is the world’s second largest hospital operator.

Petronas remains a powerhouse, not just in the oil and gas sector but also as an icon of Malaysia’s corporate might. The company consistently appears in Fortune magazine’s list of Global 500 companies, and is ranked 69th this year.

AirAsia is the strongest low-cost carrier in the region and it will be some time before other airlines are in a position to challenge its entrenched dominance. Even smaller companies, such as MyTeksi, have successfully regionalised their operations.

Maybank branched out to Brunei and Singapore in 1960, the very year it was incorporated. As its group president and CEO Datuk Abdul Farid Alias points out, this was motivated by Maybank’s desire to support its customers who had business and banking requirements in those particular markets.

Having had a head start has been beneficial. Maybank has been able to grow in tandem with these markets.

AirAsia may have ordered too many aircraft for the short-term needs of its business, but that is only a blip on its horizon. It is still the only airline to have full-fledged operations across Malaysia, Thailand, the Philippines and Indonesia and is considered the best-positioned carrier to reap the benefits of the AEC, even if they do not come right away.

As for the medical sector, this year, IHH managed to get into the Forbes Fabulous 50 List, which ranks Asia’s largest 50 companies by market capitalisation. IHH head of corporate communications and CEO of the Pantai operations division Ahmad Shahizam Mohd Shariff says Asia and Asean, in particular, has always been an attractive growth market for the group in view of its changing demographics, growing affluence and strong demand for quality private healthcare.

“Our hospitals in Singapore and Malaysia also serve a very large number of patients from all Asean countries and play a significant role as regional healthcare hubs,” he adds.

MyTeksi is one of the darlings of the Malaysian SME sector, a success story that started with an idea competition at the Harvard Business School and went on to demonstrate the viability of the idea, not just in Malaysia but in Singapore, the Philippines, Thailand and Vietnam very quickly.

Its expansion into these markets has been a success because MyTeksi (known as GrabTaxi in other markets) does not fall into the easy mistake of “one size fits all”. In each market, it keeps its focus on “hyperlocal” and tackles the problems in those markets, be it safety, reliability or speed.

Maybank

As the fourth largest banking group in Asean by assets, Malayan Banking Bhd has long been prepared for the liberalisation of the Asean financial sector. In fact, it was thinking regional almost from the outset. As soon as it was incorporated in 1960, it set up branches in Singapore and Brunei and, not long after that, in Hong Kong and London.

“At the initial stages [in 1960], Maybank’s expansion abroad was motivated by the desire to support our customers who had business or banking requirements in those specific markets as well as to facilitate trade between Malaysia and the respective countries,” says Farid.

“That was when Malaysia, as a newly independent nation, began to expand its trade with regional countries as well as key major international business centres. As we became more established and familiar with those markets, we felt we could leverage the long-term growth opportunities and hence, expand our services to cater for local clients. Having a headstart in these markets has paid off for Maybank as we have grown in tandem with the development in all these countries,” he adds.

Today, Maybank has a presence in all 10 Asean countries as well as major financial hubs, such as London, Shanghai, New York, Hong Kong and Mumbai. Being in these countries has placed Maybank in a strategic position to capitalise on increasing business integration in the region, something which Farid points out is already happening.

“We estimate that the share of intra-Asean foreign direct investment (FDI) to total FDI into Asean has steadily risen for five consecutive years, to 25.5% so far this year,” he says. “The rise in intra-Asean FDI should feed into the rise in intra-Asean trade. This indicates Asean corporates are strategically positioning themselves for the Asean Economic Community.”

According to Farid, a common theme is shaping up across Asean, namely investment in infrastructure to modernise facilities, expand growth capacity and boost economic efficiency and productivity. “This is great news for Asean banks, such as Maybank, owing to the increasing demand for trade, corporate, retail and project financing as well as other financial services, like investment banking,” he says.

“In that sense, the AEC offers a solution to the prospect of increasing liberalisation of the domestic banking industry by enabling us and other Malaysian banks to grow into a regional player,” he adds.

However, not all expansion plans always work out for the better, Farid observes. “We closed two offices, one in Hamburg and the other in Kowloon, years ago,” he says, adding that they were closed because it decided there were better opportunities in other markets.

“Apart from these, there has not been any major branch rationalisation to date,” he adds.

One of the key themes of the AEC that will affect the banking sector in particular is financial integration. In 2011, the Asean central bank governors adopted the Asean Banking Integration Framework (ABIF) to remove restrictions on Asean banks, insurance companies and investment companies providing financial services in Asean markets. The AFIF aims to achieve a semi-integrated financial market by 2020.

However, Farid believes regional financial integration will take time. “Considering that the financial services sector is a highly regulated one, realistically, it will be a gradual process,” he says. “Despite the start of the AEC at end-2015, Asean countries are basically given the leeway to undertake financial liberalisation to open up their respective financial sectors and integrate regionally, in view of the different levels of economic and financial development, which implies different priorities among the regulators.

“Nevertheless, things are moving in the right direction. For example, the Asean Trading Link was launched two years ago. Presently, it covers only three Asean equity markets — Malaysia, Singapore and Thailand. Asean offers a combined equity market capitalisation of US$2.5 trillion (RM8.4 trillion) and more than 3,300 listed companies to invest in.”

“This will eventually broaden to comprise other exchanges, such as Indonesia, the Philippines and Vietnam, that form the Asean Exchanges collaboration,” Farid says.

Meanwhile, the nature of the banking industry is such that mergers and acquisitions are a common theme, leading banks to capitalise on larger economies of scale to grow further. In July, Singapore-based OCBC Bank acquired Hong Kong-based Wing Hang Bank for S$6.23 billion (RM16.1 billion) while on the home front, the proposed CIMB Bank-RHB Bank-Malaysia Building Society Bhd merger is set to dislodge Maybank as the country’s largest bank.

Is Maybank prepared to withstand the increasing competition? “Consolidation among industry players and inorganic growth are part and parcel of business in all industries,” says Farid. “We see this as an encouraging sign that the banking sector is getting stronger and we are confident enough that we will give the leadership position a good fight.”

He cites the example of the Philippines, which recently allowed 100% ownership of local banks by foreign companies or the complete foreign ownership of locally incorporated entities, while Myanmar has announced new banking licences for foreign banks.

“We plan to ramp up our business across the region in all our financial offerings, and we have built a strong and leading domestic presence in Malaysia that gives us sufficient size and scope to tap the potential in the local market and withstand any competition that may come,” Farid says. “We continue to believe there are windows of opportunity for all banks in this region.”

AirAsia

As a negative year for aviation draws to a close, the industry is finding itself in unchartered waters. Having experienced overcapacity, falling yields and the after-effects of aviation disasters throughout the year, airline operators face an uncertain 2015 with renewed challenges ahead.

The Asean Open Skies policy, to be introduced by end-2015 as part of the AEC, is expected to transform the aviation industry by allowing for more liberalisation between the regional aviation markets, thus encouraging greater connectivity, higher traffic growth and service quality, while lowering ticket prices. Nevertheless, the outlook for the aviation industry remains bleak.

According to Maybank Investment Bank’s recent report on the sector, the performance of the aviation industry in the second quarter of this year (2Q2014) was the worst since the height of the global financial crisis in 2008. “The industry reported a cumulative net loss of RM534 million during this time, versus a core net profit of RM31 million in the corresponding period last year,” says Maybank IB Research’s Mohshin Aziz in the report. In fact, AirAsia was the only airline that was profitable — but only just.

Overall industry passenger traffic was shown to have grown only 6% year-on-year in 2Q2014, compared with 18.4% in 1Q. According to the report, in terms of passenger traffic growth, only AirAsia X and Malindo stood out while all the other airlines were reeling.

Meanwhile, the spectre of Malaysia Airlines and its future plans continue to loom over the industry, even as the national carrier’s minority shareholders gave Khazanah Nasional Bhd’s proposed restructuring the green light.

With all the negativity surrounding aviation, AirAsia is finding itself in a unique position. While it retains a competitive advantage over its competitors, it is not immune to industry headwinds.

“The overall industry is not looking rosy at the moment, and it is showing in AirAsia’s financial performance. Although its costs have been stable, profits and yields have declined,” says Mohshin.

AirAsia’s revenues amounted to RM3.13 billion in 2009 and grew to RM5.11 billion in 2013, but during that period, its net profit went from RM506 million in 2009 to RM362 million in 2013. The drop was nearly half the previous year’s figure of RM790 million, according to its annual report.

Despite a recovery in the second quarter, overcapacity continues to cast a shadow over AirAsia’s business. In fact, overcapacity concerns have led to an inability in AirAsia’s end markets to absorb its new aircraft. “AirAsia over-ordered aircraft — 13 Airbus A320s and eight A330-300s. These were originally meant to be deployed across its global network,” says Mohshin.

“When it comes to buying aircraft, you have to buy several years ahead. However, no one expected Indonesia, Thailand, India and the Philippines to perform as poorly as they are now,” he adds. “The idle aircraft will cost the group up to RM1 million a month cumulatively.”

Overcapacity issues may also be compounded by the uncertainty of Malaysian Airline System Bhd’s (MAS) future plans. “MAS is the biggest variable going forward for the AEC,” says Mohshin. “However, it has not announced any cutting of routes and it would be unwise to try and compete with AirAsia. MAS services a different segment altogether,” he adds.

The national airline’s next move remains unclear, despite a regionally focused network being part of Khazanah’s 12-point plan for MAS’ restructuring.

Nevertheless, AirAsia remains the best-positioned airline to reap the benefits of the AEC’s implementation, even if these benefits do not come in 2015, says Mohshin. “AirAsia has always been our top pick to benefit from the AEC. It is the only airline to have full-fledged operations in Malaysia, Thailand, the Philippines and Indonesia,” he adds.

AirAsia ventured into Thailand in 2003, a year before it was listed on Bursa Malaysia’s Main Board. After its listing, it began flying to Indonesia and Cambodia in 2005 before spreading its wings to Brunei and Vietnam in 2006. Today, 65 of AirAsia’s 95 destinations are in Southeast Asia.

Another strength of the airline is its cost-management structure. This has seen it consistently ranked among the most cost-efficient airlines in Asia-Pacific, according to figures by the Centre for Asia-Pacific Aviation (CAPA). “Simply put, AirAsia has no competitor of equal calibre, and it will be a long time before a competitor can erode its [market share] in the region,” says Mohshin.

As it stands, the Asean Open Skies has been ratified by all the Asean countries except for the Philippines. Recently, the Civil Aviation Authority of the Philippines (CAAP) gathered officials and aviation practitioners at a forum aimed at bringing the country closer to being part of the policy. The Philippines’ Finance Secretary Cesar Purisima had said that Manila was “not yet ready” to sign the agreement, but industry followers have expressed confidence that it will eventually sign up before the December 2015 deadline.

The Asean Open Skies presents opportunities for AirAsia to leverage its scale, according to Mohshin. “AirAsia can choose to increase the frequency of its flights, for example. Or should it want to fly from Singapore to Yangon, and then to Jakarta, it can. The AEC will allow for more freedom of movement. It can also add more hubs around the region should it want to,” he says.

“Nevertheless, we might not see the full impact of the Open Skies until a few years later. The European Union has problems even four decades on. So we may only see the AEC consolidate by perhaps 2020 at the earliest,” says Mohshin.

IHH Healthcare

Insufficient healthcare has been identified as one of the key threats to economic development in Asean. According to MIDF Research’s report on the AEC, healthcare is one of the high priority sectors under the Asean Framework Agreement on Services (AFAS), which is aimed at facilitating a free flow of services — one of the AEC’s five key pillars. With the Ebola pandemic raging across the globe, there is renewed interest in Asean’s focus of facilitating the integration of its healthcare sector.

Already, Asean has seen an improvement in the quality of life. For instance, the infant mortality rate (as measured per 1,000 live births) improved from 35.9 in 2000 to 22.4 in 2012, while life expectancy figures for both sexes showed an uptrend in nine countries. Only Indonesia posted a downtrend.

Meanwhile, the annual healthcare expenditure growth rate for seven Asean countries between 2009 and 2012 stood at an average of 14.4%, according to figures by the World Health Organisation (WHO) and the World Bank.

The shifting demographics and rising affluence in Asean represents an ideal opportunity for IHH Healthcare Bhd, the world’s second largest hospital operator by market capitalisation and a regional player with a footprint in four countries. This year, the company got into the Forbes’ Fabulous 50 list, which ranks Asia’s 50 largest companies by market cap.

“Asia, and Asean in particular, has always been a highly attractive growth market for us in view of the changing demographics, growing affluence and strong demand for quality private healthcare,” says Ahmad Shahizam Mohd Shariff, IHH’s head of corporate communications and CEO of its Pantai operations division. “Our hospitals in Singapore and Malaysia serve a large number of patients from all Asean countries and play a significant role as regional healthcare hubs.”

Southeast Asian countries have been the preferred destination for medical tourism because of their affordability. According to a healthcare report by MIDF Research, a typical spinal fusion surgery would cost US$6,000 in Malaysia — one-tenth of what it costs in the US. The Asia-Pacific medical tourism market is estimated to be worth US$4.4 billion, according to Frost & Sullivan. The Asia-Pacific healthcare industry is expected to represent 34.6% of the global healthcare market by 2015.

Being the world’s second largest hospital operator, IHH’s competitive strengths lie in its state-of-the-art medical technology at its hospitals. “In Malaysia, IHH has developed centres of excellence in specialties such as oncology, cardiology and cardiothoracic surgery, orthopaedics, obstetrics and gynaecology, urology, neurology and neurosurgery, aesthetics amd reconstructive surgery, gastroenterology and pain management,” says Ahmad Shahizam.

“These specialty centres provide our patients a one-stop service and they are located within our hospitals to provide seamless integrated care supported by a comprehensive and more integrated range of medical services,” he adds.

Along with its medical technology, IHH is looking to consolidate its presence by opening new hospitals. It recently opened its 12th hospital in Malaysia, Pantai Hospital Manjung, with another two more in 2015 — Gleneagles Kota Kinabalu and Gleneagles Iskandar. IHH is the second largest hospital operator in Malaysia behind KPJ Healthcare.

“The total outlay for Malaysia over the next three years will exceed RM1 billion,” says Ahmad Shahizam. “On the regional front, the group’s plans include refurbishment, expansion and putting greenfield developments in place.”

Meanwhile, IHH will continue to extract operating leverage to realise synergies, according to Ahmad Shahizam. “We have consistently proven our ability to do this. Our new hospitals that opened in 2012 — Mount Elizabeth Novena Hospital in Singapore, Acibadem Ankara Hospital and Acibadem Bodrum Hospital in Turkey — all achieved break-even in Ebitda [earnings before interest, tax, depreciation and amortisation] faster than expected.

“Mount Elizabeth Novena was able to achieve this within 10 months of starting operations, compared with the typical three years required in Singapore. We believe that will remain the case going forward and our optimism for the region remains.”

MyTeksi

By now, MyTeksi’s unique story would have been told countless times. Nevertheless, its success in Asean warrants a retelling. In 2011, Anthony Tan and Tan Hooi Ling, then students at Harvard Business School, decided to enter a business competition with the idea of using a mobile application to hail taxis in Malaysia. The duo did not have any expectations, but they came in first runner-up. Their winnings became their seed capital.

Today, the company operates as GrabTaxi in the Philippines, Singapore, Thailand and Vietnam. It is one of the few Malaysian small and medium enterprises (SMEs) to become a household name in the region. The inspiration to go regional, however, was born out of disappointment.

“The reason we came in second in the Harvard Business Plan competition in 2011 was due to our pitch being too Malaysia-centric, according to the judges,” says Adelene Foo, GrabTaxi’s general manager. “Thus, regional expansion was always part of the plan. We realised from the start that we needed to expand in Southeast Asia to make an impact.”

To date, the GrabTaxi app has been downloaded onto more than 2.1 million mobile devices in all the countries in which the company operates, with an impressive average rating of more than four stars on both Google Play and the App Store. The app has 300,000 active users monthly, according to Foo, with two GrabTaxi bookings made every second.

Successfully achieving positive feedback across different countries with different operating landscapes is no mean feat. How did GrabTaxi successfully navigate its way in these markets?

“Firstly, we needed to understand the issue we’re trying to solve,” says Foo. “Each country presents its own challenges. Is it a concern about safety, reliability or speed? We only enter a market or launch a new service when there is a very real problem to solve and we feel we can truly make a difference.

“In Malaysia, safety was an issue while in Singapore, our focus was to help solve issues such as waiting time and unavailability during peak periods.”

According to Foo, the taxi industry in Southeast Asia is very fragmented, and this represents a great opportunity for GrabTaxi to make its mark in the region. “We want to be in every major city in the region within 12 months,” she says. “This is one of the main reasons we continue to stay ‘hyperlocal’ in each market, which means hiring locally and keeping the focus very local. At no point do we think ‘one-size-fits-all’.”

The company’s tailor-made approach is evident in the way it tackles the different markets. Last month, GrabTaxi introduced a motorcycle-hiring service called GrabBike, which is currently available only in Vietnam as it capitalises on the country’s thousands of motorbikes-for-hire.

What would be the main challenges for a start-up like GrabTaxi in attempting regional expansion? “Finding market fit and funding,” Foo says.

“We believe in constructive disruption. This means we take into account the existing system and see how we can innovate. We don’t believe in disrupting a market for the sake of it. And that means improving the existing infrastructure and enriching lives, and doing all this by revamping the current system,” she adds.

“Meanwhile, as a start-up, funding is always something on our mind. We have been fortunate to have partners who believe in us.”

While GrabTaxi has made a name for itself on the Southeast Asian mobile-booking scene, its competitors are no less resilient. In June, its American rival Uber raised US$1.2 billion in funding — significantly more than GrabTaxi’s own US$90 million Series C funding this year — and also introduced its own taxi-booking variant UberTaxi in Singapore. Nevertheless, GrabTaxi has always reiterated that it remains focused on its own plans, while welcoming competition. The US$90 million it raised is one of the largest fundings received by a Southeast Asian company, according to Foo.

How will the AEC change GrabTaxi’s business? “We believe it will deliver real gains and promote regional integration,” says Foo. “One of the key

areas that will benefit is the transport sector, which will be essential as mobility increases. Our business model in transport will definitely benefit as we offer a seamless on-demand transformation solution with the same app that can be used in all the countries we operate in. We are in a strong position for the regional overview,” she says.

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

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