asean and asian emerging markets: from exporting to innovating · asean and asian emerging markets:...
TRANSCRIPT
ASEAN and Asian Emerging Markets:
From Exporting to Innovating
George Abonyi
Visiting Professor
Department of Public Administration and Executive Education Program
Maxwell School, Syracuse University
24 July 2015
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Overview of “the story”
Challenge
• Thailand’s manufactured exports stalled (macro, micro)
• “New normal” of global and regional growth
• China market is not (yet) the answer
Opportunity
• Asian emerging markets: ASEAN, China, India (ACI)
• But these markets and consumers are different
Response
• From exporting to innovating for Asian emerging markets
• But innovation with a difference
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MACRO CONTEXT
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Thailand: sustained development success
Thailand has achieved a remarkable
combination of sustained rapid growth,
macroeconomic stability, economic
diversification, declining poverty, until
the Asian Crisis of 1997-98
Asian Crisis eroded but did not erase
gains from growth and development;
and the economy generally recovered
Since the Asian Crisis, economic
performance has been moderate; and
there are concerns that Thailand has
fallen into the “middle-income trap”
Source: Pasuk (2014)
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Export-driven growth Source: NESDB, 2015
Critical role of exports
• Import intensity of exports, e.g. hard disk drive (HDD)
Note: Significant drop in investment since Asian Crisis
(1997/8); particularly private investment
• Key reason for infrastructure investment need, e.g. logistics
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Manufactures dominate exports
(% share of exports) Source: Ministry of Commerce, NESDB 2015
Dominated by Electronics and Electrical (E&E):
30% of manufactured exports (2014)
Automotive (parts, assembly): around to 10%
Compare with rubber products: under 3% of manufactured exports• Yet Thailand is the world’s largest producer/exporter of natural rubber
• But close to 90% of rubber exports is not manufactures – little value added
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From sustained development success
to Middle Income TrapSource: Ohno (2011)
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Income growth stalled• Manufactured exports stalled
Trap: between low-wage
manufacturers and
high-wage innovators
CHALLENGE
Manufactured exports, key driver of growth, have stalled
•Product/production challenge
•Market challenge
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Product Challenge: What/How
Manufactured exports diversified and increased in
sophistication, e.g. hard disk drive (HDD)
Thailand is losing comparative advantage in low-wage
sectors (+ demography, e.g. migrant workers)
Most Thai firms, unlike in Korea or Taiwan, have not
used low-cost labour advantage to create knowledge-
based capabilities to compete: upgrade (innovate),
e.g. HDD
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Example: Thailand’s position in the Hard
Disk Drive (HDD) Global Value Chain (GVC)Source: Hiratsuka (2006)
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Stuck in the middle of the GVC “smile curve”
with lagging productivity: challenge of
process and product innovation
Stuck in the middle? Value Added per Worker in 1990,
2000, 2010: USA figure = 100Source: Suehiro (2015)
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Market challenge: “New normal”
in the global economySource: IMF WEO, July 2015; October 2008
Slow-growth global economy esp. developed economies (e.g. EU,, US);
slowing but relatively faster growth in Asian emerging economies
• Especially ASEAN, China, India (ACI)
Source: IMF WEO, July 2015, October 2008
Note: IMF has continually overestimated growth since 2009
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East Asia’s export-driven growth is dependent on external
developed economies, particularly within framework of
global value chains, e.g. electronics
(e.g. Intra-ASEAN trade is less than 25% of region’s total trade)
Source: Lim and Lim (2012)
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Thailand’s changing export markets (%)
and the role of China
Source: Suehiro (2015), NESDB
China is now the largest single market for Thai exports – but
misleading
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China: key global and regional role
– limits on the role of the China market
Role in the global growth
• “Contribution” (China) vs. “driving (US)Source: IMF, 2014
Role in the region • China major importer of East/SE Asia’s
exports of parts and components – 50%
of all intra-regional intermediate
imports; for final export to developed
economies, e.g. iPhones to US and EU (Source: ADB, 2011)
• But not yet major market for region’s
final manufactures
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China market challenge (1)
Challenge: investment and export driven growth; and lagging consumption
• Investment-driven economy; primarily by State-Owned Enterprises (SOEs), local
governments, financed by State-Linked Banks
• But investment increasingly unproductive; e.g. excess capacity -- particularly in real estate,
increase in unproductive debt (i.e. decreasing capacity to service debt)
• Exports also key driver of growth (“export excess savings”) to now slowing developed economies
• Share of household consumption in GDP falling since 1990s from over 55% to less than 35% in 2014
Rebalancing involves:
• Shift in economic power, e.g. away from State-Owned Enterprises (SOEs) to
households higher wages; and to SMEs
• Reducing (SOE) unproductive investment and (bad) debt higher interest rates
Implementing reforms = challenge of political economy
Rebalancing to consumption-driven growth will involve significantly slower
growth – but more stable and sustainable –over medium/longer term
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China’s investment-driven growth:
increasing debt, declining efficiency
China’s increasing debt and composition –
mostly SOEs and local government• Nearly 50% related to real estate
Source: MGI (2015)
Growing non-productive overinvestment:
i.e. declining efficiency of investment
(Marginal Product of Capital)Source: Ha Jiming, Goldman Sachs China (2015)
S
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China market challenge (2)
China’s rebalancing from investment to consumption-driven growth does not
automatically translate into increased imports of final manufactures
China as market for final goods is shaped not by size or growth of GDP,
but capacity to generate net demand for import of final manufactures
• China is major importer of Thailand’s/region’s exports of parts and components for its final exports
to developed economies, e.g. iPhones to US and EU; domestic value added less than 4%
• Not yet major market for final manufactures: around 60% of imports used, directly and indirectly,
for exports; 20-25% for investment; less than 15% for domestic consumption (Akyuz 2012)
To become a growth locomotive for manufactures of Thailand and region
China would need to raise not only its domestic consumption as a share of
GDP, but also its imports of final goods from the region
• But average accounts receivable for consumer electronics retailers and manufacturers:123 days
• But average days of inventory for clothing companies: 174 days (Bloomberg 2015)
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OPPORTUNITY
Over the longer term, Asian emerging markets – particularly
ASEAN, China, and India (ACI); but different from developed
economies, Thailand’s traditional final markets.
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Future of Asia is bright
By 2030 40% of global consumer spending from Asia, especially ACI
Source: Australian Government White Paper (2012):
Note: assumes China will grow on average by 7% p.a. 2012 - 2025
Asia’s rising share of global GDP Asia’s rising incomes (Bubble area
reflects size of GDP; income per person in PPP)
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ASEAN consumer expenditure is
increasing…but unevenlySource: Euromonitor (2015)
ASEAN’s Real GDP Growth and Total
Consumer Expenditure: 2000 – 2014
By 2030 ASEAN to be the 3rd largest
economy in the world, after US and
China, worth $3.1 trillion in constant
2014 dollars
ASEAN Economic Community:
Integration with Diversity
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Asian emerging markets and
consumers are different
But significantly lower disposable incomes in AEC in coming years as compared with developed
economies, region’s traditional final markets (source: Lawrence, ADBI (2013))
Fragmented markets,
growing income inequality,
and high proportion of
rural population will condition
consumer spending
Per Capita Real Annual Gross Income
in China and USA (1990–2030)
Reflects consumers’ purchasing power
In 2030: narrower, but US still 4.6 x China
Source: Euromonitor (2014)
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ASEAN market compositionSource: Euromonitor (2015)
Household Income Distribution in
ASEAN: 2014
Households by Annual
Disposable Income Band in
ASEAN: 2014 and 2030
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The consumer is at the centre of
understanding market growth
Consumer Expenditure per
Household in ASEAN: 2014 and 2030• Note: growth vs. size (e.g. Lao, Cambodia)Source: Euromonitor (2015)
Growth for Lower Income Groups
Outpaces Middle ClassSource: AllianceBernstein (2015)
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RESPONSE
From exporting to innovating for Asian
emerging market consumers – but with a
difference
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The not-so-good news: Thailand is lagging on
traditional measures of innovation such as R&DSource: NESDB, ADB
R&D as % share of GDP
Thai private sector's share of investment in total R&D is around 35-
45%, vs. 77% for Korea, 76% for Taiwan, 66% for Singapore
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Other constraints on innovation
Limited innovation-related knowledge transfer from multinational enterprises (MNEs)
to domestic suppliers, particularly SMEs
Education system, including training institutions, has not responded effectively to
market demands for innovation- related skills
Lack of clear and coherent policy priority and direction by the government in support
for innovation, constrained by fragmentation and limited cooperation among key
agencies and with the private sector
Many private sector associations have not placed innovation as priority
Gaps in innovation-related infrastructure, such as “technology and innovation parks”
of the type that have been particularly successful for example in East Asia
Significant shortage of appropriate financing mechanisms for innovation, particularly
for entrepreneurial SMEs
“Conceptual constraint”: relatively narrow concept of innovation driving
policies, programs, and corporate strategy
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The good news: wider concept of
innovation for Asian emerging markets
Consumers in Asian emerging markets have high aspirations, relatively low incomes,
and a variety of constraints
Innovation not only from investment in high-level R&D and science and technology
(S&T): many entry points exist for Thai firms to “add value” along the value chain
Challenge to is to strengthen innovation suited to consumers and conditions of Asian
emerging markets, e.g. frugal innovation
Investments in marketing, and product-related interactions with consumers may be as
or more important to a firm in commercializing new ideas
• Interaction with consumers at early stages of product development is especially important in
shaping innovation for emerging markets: innovation as (low cost) experimentation
• Provides insights on the use of the product and required adaptations for successful
commercialization.
“Breakthrough customer insights vs. (primarily) breakthrough technology”
• Disposable income distribution: from “value for money” to (also) “value for many”
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Wider concept of innovation:
frugal and reverse innovationSources: e.g. Zechsky et al (2014); Radjou and Prabhu (2014); The Economist (2014)
Frugal innovation
Cost Innovation: Same Functionality at a Lower Cost • Responds to constraints such as income, e.g. purchase price, servicing costs
• Example: Huawei (China) smart phone; Hindustan Unilever (India) detergent powder
Good-Enough Innovation: Tailored Functionality at a Lower Cost • Responds to specific customer needs and constraints
• Example: Mettler Toledo scale (China); Wireless computer mouse (Rapoo, Logitech)
Frugal Innovation: New Functionality at a Lower Cost• Responds to specific needs of emerging markets/consumers
• Example: MittiCool clay refrigerator (India); GE ECG (electrocardiogram) MAC 400 and 800
Reverse innovation
• Innovation for emerging market consumers finds market in developed economies
• Example Haier refrigerator; Logitec M215 wireless mouse; GE ECG MAC 600
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Source: adapted from Stassopoulos (2013)
Redefining the market and consumer:
Meet the consumers “up close and personal”
Understand their aspirations, constraints
Understand their environment
Understand through “low cost experimentation"
Know the consumer
Forecast shape, size, and timing of
opportunity
How does a business:
Succeed in this market Access this opportunity
e.g. product innovation, process innovation,
business model innovation (e.g. marketing and
distribution)
Identify and understand companies:
Succeeding today in this market; how; why
Likely to succeed in the future
Segment income groups
e.g. rural, lower, middle, high; age…
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Examples of
Frugal and Reverse Innovation
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Product innovation: RapooMouse (China) [and Logitech]
Product & Business Model innovation;: First Energy’s
Oorja Stove (India)
Reverse innovation: GE ECG MAC 400, 600, 800 (India & China )
Conventional vs. Frugal and Reverse Innovation:
Different paths to emerging regional and global
opportunities (e.g. GE Healthymagination)
Conventional Innovation
Frugal and Reverse Innovation
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Products modified
(“stripped down”) for
emerging market
consumers
R&D/innovation and
commercialization for
developed market
consumers & conditions
Needs and
conditions in
developed markets
Applications in
developed markets
(Reverse innovation)
Innovation for emerging
market consumers and
conditions: translate “voice”
of consumer into
products/services (Frugal
innovation)
Aspirations and needs
in emerging markets
Thailand:
Toward innovation-led growth
Thailand has enormous potential for innovation, reflected in the inherent capacity
for design, and globally admired crafts, products and services
Moving from potential to performance requires strengthening “national innovation
system”: government + business + education + NGOs
• Starts from broad concept of innovation, not just high level R&D/S&T
• Includes investments in early stage product-related interactions with consumers on the
“why” and “what” of a product or service; production process improvements; technology
adaptation; and new types of business systems -- including key services (e.g. product
design, marketing, distribution)
• For SMEs: adapting existing technology to local (regional) user needs is a practical way
to commercially viable products and services
Widens greatly scope for innovation and exports for Asian emerging markets
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THANK YOU
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