Globalization: Considerations For Global Companies In Asia.
Legal News & Analysis - Asia Pacific - Regulatory & Compliance
5 January, 2017
The rate in which global businesses are tapping into local markets is rapidly rising. As the world gets increasingly smaller, the ability to create and deploy globally relevant products and services is more important than ever. There are a number of reasons global companies may decide to enter the Asian market, although the primary two are either to develop export sales in Asia, or to find less expensive manufacturing options.
Asia’s diversity can make it challenging for many global firms to maintain a consistent strategy across the region and to properly ascertain some of the risks.
Globalization also works both ways, and in the coming years we will see increasing numbers of global companies headquartered in Asia expanding into Europe, the USA and other regions.
The demographic and business challenges that global companies face in Asia
Compared to many of the more developed economies globally, in some jurisdictions in Asia - particularly those
attractive as manufacturing bases - financial regulations and related enforcement can be limited. This could lead to potential legal compliance issues and corruption risks.
The variety of legal systems can produce challenges; for instance, China and Malaysia heavily constrain the operations of foreign companies, and in some locations IP theft is common and often not enforced with any enthusiasm by the local authorities. Linking in with this, are the varying and often unique business cultures and non-western ideologies which favor domestic companies and intensify protectionism; in South Korea for instance, the government favors the Chaebols, the local conglomerates. In many areas foreign companies have to frequently compromise management control by creating partnerships with local businesses.
Geopolitical relationships between Asia and the West and within Asia, can pose serious risks for conducting business. In reviewing economic, political and social developments in Asia, foreign companies have to be particularly careful on how those developments may play-out and potentially adversely affect their business operations. For instance, the disputes between China, Japan and Vietnam in the South China Seas could harm companies in the technology or energy sectors that may depend on these disputed resources. Formulation of new trading areas, such as amongst ASEAN members, would compete with China’s current role and may affect foreign companies with exchange rates and new regulations. Foreign companies may also be affected by the policies of their own home governments when expanding into Asia, including specific trade disputes and sanctions in some cases.
Growth strategies & considerations to cope with these challenges
Becoming established in Asia can be a slower process than many global businesses realize. If your objective is to manufacture in Asia, it may be worth formulating your plans based on supply chain dynamics and efficiencies rather than on the basis of a particular country in Asia. You will need to understand where your main manufacturing bases will be and if you will manufacture the whole product in Asia or just a part of it.
Having a thorough strategy and business plan cannot be underestimated. If you are expanding into different markets within Asia, consider sub-region or country specific strategies. Consider conducting a SWOT analysis on your own company and your chosen markets (strengths, weaknesses, opportunities, threats).
- What are your company’s motivations for entering a new market:
- reducing costs?
- replacing lost customers elsewhere?
- increasing revenues?
- What are the attitudes of the host country to your product or service?
- What is the competitive landscape like, both from domestic and other global companies like yours?
The answers will help you to decide how to proceed and where to go.
- If your company plans to open new sales markets, do you understand the customer segmentation and dynamics of that market?
- Will your firm be offering the right products and services, which will potentially need cultural adaptation for that market or be subject to differing regulatory oversight?
In the case of healthcare in Asia for instance, the Korean and Japanese governments are investing greatly in the sector, inspiring growth and diversifying the market. China is the third largest market for healthcare in the world but you may face potentially stringent regulatory hurdles along with stiff competition from other global firms; these scenarios all need to be fully investigated and thoroughly understood.
Have you formulated a specific marketing and branding strategy for that market, including marketing materials, websites and packaging?
Many global companies have the philosophy that branding should be consistent across the world; but does that work for your product or service in Asia?
In international business, there are many nuances of meaning (perhaps even with your company or product name); get it wrong, and pay the consequences.
It is essential to identify suitable partners that are trustworthy and experienced in trading internationally. Depending on your objectives for coming to Asia (for expanded sales or as a production base), these partners may include manufacturers, distributers and agents. It is also essential to take your advisors seriously including legal advisers and others providing advice on mitigating risks for instance.
For foreign companies entering a completely new market for the first time, international logistics providers with local operations can often provide invaluable insight, including on business etiquette and cultural considerations.
Many jurisdictions within the Asian market are opaque in comparison to accepted international standards; you can’t make a multi-million dollar decision based on a wing and prayer, or a gut feeling. When things go wrong, it is frequently due to lack of diligence: having an insufficient understanding of the integrity and reputations of your partners, the overall market and business environment, and how the complex tectonic plates of geopolitical dynamics could create black swan events that can seriously undermine your business. Not investing in professional advice could be the costliest mistake you ever make.
Predictions for the future of the Asian Business Landscape
Over the coming years, current business models will need to adapt to keep pace with the rapidly changing technology, regulatory and economic environment. It is becoming increasingly more difficult for companies to anticipate the changes ahead. Disruptive technologies and changing consumer preferences have the potential to create a significant impact on the operations of business within a relatively short space of time (think of Uber as an example).
As technology develops, so will the risks from cyber-crime. Although the attacks and risks on companies in Asia are increasing, many companies in Asia are currently turning a blind eye to protecting sufficiently their assets and data from cyber-attacks, particularly in industries with little regulation. Part of the reason for this is that many boards of senior management don’t understand or buy-in to the increasing threat that lies ahead.
To provide a domestic simile, every law enforcement professional knows that in protecting your house and personal property, additional security will produce a leveraged reduction in your risk (unless you are being targeted for specific reasons); criminals will naturally gravitate towards the softer and more accessible targets (why make life difficult?). As the traditional cyber-attack targets of USA and Europe become ever more protected where will the cyber-criminals gravitate towards? This will increasingly develop into a serious issue for Asia in the coming years.
As I mentioned in the introduction, globalization works both ways. Over many years, we have become familiar with the status quo of international (principally ‘western’) companies expanding into new overseas markets.
In the coming years, there will increasingly be a shift of power away from European and US companies, fundamentally changing the competitive dynamics of the global economy.
A 2013 McKinsey report suggests that by 2025, nearly half of the biggest companies will likely be based in emerging markets. Already, China has overtaken the USA in terms of overseas direct investment, expanding into Europe, the USA and other regions.
For further information, please contact:
Bill Sims, Managing Director, Stroz Friedberg