Asia Corporate Strategy Assessment

10 Trends in Corporate Strategic Planning for the Asian Region

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1

Asia is becoming the preeminent

global market and global source of

competition. Multinational companies

(MNCs) have a 5-year window in

which to devise new corporate

strategies—including product

portfolios, cost structures, business

models, speed of decision making and

capabilities—in order to achieve

sustainable growth and profitability in

the Asian market.

Regional corporate strategy is subject

to a myriad of company-specific

issues such as current performance,

organisational capabilities and

strength of financial resources.

However, there are some defining

characteristics that highlight a number

of future themes in strategic market

management for Asia.

Asia’s high-growth markets face rising

competition from low-cost local

players for customers with modest

incomes, disparate preferences, and

limited brand loyalty. Markets and

distribution channels are fragmented

and the dominance of China and rise

of India is complicating risk

management.

Future and ongoing corporate

strategies to meet the Asian challenge

will include the following:

Organising for Regional

Integration (and other FTAs)

The establishment of the ASEAN

Economic Community promises a

single market and production base,

with free flow of goods, services,

skilled labour, investments and capital.

While sceptical of the timetable and

implementation, and wary of

countervailing non-tariff barriers (e.g.

standards and domestic taxes),

corporates are already organising and

planning for an integrated market

nonetheless. TTP negotiations may be

concluded by March 2015 (or delayed

due to US elections).

China Plus1 Continued

The increasing territorial assertiveness

of Beijing has reminded investors that

doing business in China comes with

risks. Labour and other business costs

continue to rise, weakening the

comparative advantage of China as an

export platform. Although few are

abandoning China altogether, surveys

reveal a continued strategic intent to

rebalance regional investment

portfolios.

Regional Supply Chain

Management

As MNCs turn their attention to the so-

called ‘middle of the pyramid’—Asia’s

next one billion consumers—there is a

growing impetus to adopt lower price

points or differential pricing.

Competition is intensifying also.

Hence, there will be a greater need to

secure competitive advantage via

more efficient regionalised supply

chains.

Senior MNC Leadership to Asia

To better capture the high growth

market opportunity, MNCs are moving

more of their senior management

teams to Asia. They are sourcing

more global management from Asia

also. Across many different industries,

there is growing awareness of Asia’s

potential as a source of learning.

Lifting the Local Relevance of

Products

HQ will demand 30% growth from

Asian operations and then provide

‘world-beating’ products from the

home market (yes, it’s a trap). As

premium market segments mature

and local competitors start to emerge,

MNCs will develop more relevant,

second tier ‘good enough’ product

offerings for Asia’s emerging markets.

Productivity Prioritisation

Executive

Summary

2

As the demographic dividend winds

down and some Asian markets

mature, growth rates will start to taper

off. In response, and to sustain

competitive advantage, MNCs and

policymakers are prioritising

productivity growth.

South-South Strategies

The rise of emerging markets, the

deepening business links between

them, and the importance of Asia to

the new South-South axis (emerging

markets are mostly located in the

Southern hemisphere) have important

implications for corporate strategy.

The tilt in economic power from North-

South to South-South is creating new

trade and investment flows, to which

corporate leaders must respond.

New Corporate Strategy for

China

China is still the next ‘big China’ (the

BRICs are a con job—there is only

one China). How companies respond

to the China challenge is no longer a

key element of Asian strategy—some

MNCs have removed China from

Asian regional management). China is

central to global strategy—70% of

MNCs, according to IMA Asia, expect

to have more sales in China than their

home market within a decade.

Key issues to manage: (a) how best to

manage the internationalisation of

Chinese business; (b) resource should

allocation given the expectation of

slower growth, over capacity and

competition; (c) how to deal with the

risks associated with a more assertive

China at home, and abroad; and (d)

how to organise for China given its

growing role importance both within

the region and as a rising contributor

to companies’ global sales.

Competing Against Emerging

Asia

Corporations from emerging

economies are becoming important

players in the world economy. The

best of them have embarked upon

rapid globalisation targeting the

industrialized economies, particularly

North America, Australia and Europe,

as well resource-rich Africa and the

Americas. Internationalising Asian

companies have a better

understanding of their local markets.

They are also more nimble in terms of

resource allocation and decision

making.

Leveraging Asia as a Source of

Innovation

Asia is emerging as a global

innovation powerhouse; the region’s

growth in purchasing power, its tech-

savvy skilled workforce and high-tech

production capabilities are attracting

corporate R&D as innovative vitality

shifts eastward. Increasingly Asia will

be used as an innovation incubator for

other emerging markets.

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Organising for

ASEAN Economic

Integration

(& other FTAs)

The ASEAN Economic Blueprint (AEB)

outlines a wide-ranging series of goals

for a single market and production base,

including the reduction/elimination of

barriers to trade in goods and services

and investment. The large majority of

companies in a recent survey of

business executives based in the 10

ASEAN markets believe that ASEAN

integration is important in helping them

do business in the region. More than

half of the companies surveyed claimed

to have an ASEAN regional strategy

based on the objectives of the ASEAN

Economic Blueprint. The companies

that have yet to develop an ASEAN

strategy, said that they were following a

global corporate strategy or they were

unsure about the timeline and/or

feasibility of the ASEAN Economic

Community (AEC) scheduled for

implementation at the end of 2015.

Intra-ASEAN import tariffs on most

product lines have already been

eliminated, at least for the founding

ASEAN-6 members (Brunei, Indonesia,

Malaysia, Philippines, Thailand and

Singapore). The tariffs that remain

mainly relate to agricultural products

such as rice and sugar. However, the

dismantling of non-tariff barriers (NTBs)

remains a major hindrance, and many

regional businesses are sceptical about

the integration timetable (see table on

following page).

Longer term, corporate confidence in

the regional grouping process is high

says Deloitte. Based on its recent

survey of companies doing business in

Southeast Asia, a large majority of

business leaders believe the AEC will

be implemented; certainly late, and

possibly not in its entirety—but it will

happen. Another survey commissioned

by Boston Consulting Group in April

2014 concluded that integration will now

occur whether or not governments are

fully supportive. The AEC is not an "if" –

it’s a "when" and corporates must

assess if they are ready.

Beyond the AEC

Manufacturers are also using ASEAN’s

FTA to export products to ASEAN

partner countries under the various

ASEAN FTAs with Australia and New

Zealand (notably consumer goods),

China (consumer goods and

electronics), India (machinery and

electronics), Japan and South Korea.

The Regional Comprehensive

Economic Partnership (RCEP), which

was announced in 2012, aims to

consolidate various ASEAN + FTAs (as

well as bilateral agreements, such as

TAFTA) into a broader regional free

trade network that includes China, but

excludes the US.

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Companies are also looking forward to

the completion of the Trans-Pacific

Partnership (TPP) agreement (including

ANZ, Brunei, Canada, Chile, Japan,

Malaysia, Mexico, Peru, Singapore, the

US and Vietnam). A ministerial meeting

in Singapore in December 2014 claimed

to have made substantial progress. The

TPP promises a gold standard

agreement covering previously

unaddressed issues of intellectual

property (IP) protection, competition

with state-owned enterprises, regulatory

coherence, investment rules, etc.

The so-called ‘Noodle Bowl’ proliferation

of bilateral and multilateral agreements

in recent years—over 100 are in effect,

150 under negotiation in Asia—presents

both opportunities and confusion,

especially for manufacturing MNCs with

assembly lines in multiple countries and

complex supply chains.

ASEAN management implications

• ASEAN will gain prominence with

Corporate HQ. A decade of strong

growth, political stability and declining

country risk has seen ASEAN gain

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attention (coincidently, this has

happened as India has slowed, and for

some foreign firms, operating in China

has become more problematic).

Companies operating in ASEAN may

experience growing expectations for

ASEAN to make up for slower growth in

India and China.

• Competition from MNCs that have

successfully leveraged ASEAN will

grow. While few expect a full economic

community to be realised anytime soon,

firms are planning for a gradual

evolution into a more uniform operating

environment. Perhaps 50 or so major

MNCs (led by Japanese auto firms and

Western FMCG companies) have

already exploited ASEAN integration for

ASEAN production and sourcing

operations to underpin competitiveness.

• Singapore’s global city advantages.

Singapore stands at the geographic

centre of ASEAN. It is rated one of the

world’s most competitive business

environment with outstanding services

and an environment that is attractive to

global managers. It has formal ties to its

ASEAN partners and even stronger

informal ties as a regional haven and

hub for safe business transactions. The

city’s excellence provides a compelling

logic for an ASEAN management

structure although most firms

acknowledge that a Singapore RHQ

should not undermine country growth

plans.

• Regional product solutions. Nearly all

emerging market regions that reach

globally significant scale will need local

product and marketing solutions. Most

MNCs are learning how to balance

these requirements within a competitive

and efficient global portfolio. The

emergence of large ASEAN customers

with big orders will signal that ASEAN

has reached a tipping point for regional

product solutions.

• Key ASEAN issues to manage: (a) the

risk of overcapacity in some industries

in some countries, especially if NTBs

are not dismantled; (b) servicing global

clients who organize on an ASEAN

basis; (c) dealing with client demands in

remote ASEAN locations, as relevant;

(d) delivering a localised value solution

that has traction with customers in most

ASEAN states; (e) responding to

competitors who have gained an

advantage via an ASEAN level strategy

(such as Japanese auto firms); (f)

finding, developing, and retaining talent

in each country (strengthened by an

ASEAN game plan for HR); (g)

rationalising acquisitions—a challenge

as operating licenses often reflect local

government aims to retaining

operations.

5

China Plus 1

Strategy …

Continued

The concept of ‘China plus one’,

diversifying some investments or

businesses away from China into

ASEAN or other Asian markets such as

Vietnam, Thailand, Indonesia and India,

is not a new one. The strategy first

came to prominence in 2010, since

when China’s cost advantage has

further diminished and other business

challenges have emerged. As a result,

many companies are looking to invest

more in other emerging Asian markets

with the dual aims of containing

production costs and reducing

overdependence on China as source of

supply. A recent annual survey of

mainly US MNCs in ASEAN revealed

continued interest in diversifying away

from China (see below).

Manufacturers that heavily depend on

production based in China are likely to

accelerate plans to shift some

production lines to regional neighbours

or at least reallocate investment

budgets for one or more of the following

reasons:

(1) Risk diversification — spreading

production across regional markets

hedges investment in China by making

producers less vulnerable to supply

chain disruptions, currency fluctuations

and in particular disruptions due to

political risk.

The increasing assertiveness of Beijing

in the East and South China seas,

exemplified by the row with Tokyo over

disputed islands which subsequently

sparked a consumer boycott of

Japanese brands in 2013 and the more

recent confrontation with Vietnam over

the Spratly Islands, has reminded

investors that doing business in China

comes with geopolitical risk.

(2) New market access — frontier

economies such as Myanmar, are

poised for rapid growth with early entry

seen as providing a competitive

advantage; deepening ASEAN

economic integration also promises a

larger alternative market to China.

(3) Cost containment — workers in

emerging Asian countries are generally

less expensive than Chinese workers.

(Although productivity is much higher in

part due to the countries deep and

elaborate supply chains.)

In particular, toy, footwear and apparel,

electronics assembly and similar

businesses requiring less skilled labour

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will increasingly seek out alternative

production sites.

An ongoing strategy

The “China Plus One” strategy is not

just a theory, it is already being put into

practice.

• Foxconn, which has roughly one

million employees in China, is

negotiating to relocate a large part of its

assembly operations to Indonesia.

• Volkswagen has decided to base its

new Asian production facility in

Thailand; their existing China operations

will continue to focus on the Chinese

domestic market.

• Amid the restructuring of its Nokia unit,

Microsoft is also joining many

technology companies moving

manufacturing from China to Vietnam

(also to Brazil and Mexico).

In 2013, the value of Japanese FDI into

ASEAN exceeded investment in China

for the first time. The top Asian

destination is now Indonesia — followed

by India, Thailand, China and Vietnam.

But this does not mean that Japanese

firms are leaving en masse: they are

simply seeking out alternative1

investment destinations.

Many thousands of factories have

already slipped away from China, or

moved to inland provinces, a production

line migration that has largely gone

unreported. The trend has involved

Taiwanese and Korean companies

more than Western investors. But the

latter are also changing their China

business models, moving away from

export-driven manufacturing to focus on

servicing Chinese domestic demand.

Staying in China

Despite greater caution about China

investment, companies are unlikely to

shift huge amounts of production out of

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China any time soon (see below for the

Japanese experience according to

JETRO).

Most factories are staying put to cash in

on China’s private consumption growth,

using new products lines developed

specifically for the Chinese market.

Many MNCs also derive a large and

growing proportion of their worldwide

profits from the China market.

Recent Foreign Direct Investment

(FDI) Trends in Asia (UNCTAD)

With total FDI inflows of US$426bn

in 2013, developing Asia

accounted for nearly 30% of the

global total and remained the

world's number one recipient

region.

Inflows to South East Asia grew

6.7% to US$125bn, with Singapore

– another RHQ economy –

attracting half of this total. FDI into

India was up 16.5%.

This compares with China inward

FDI up 2.3% in 2013. (China’s

Ministry of Commerce puts the

2014 growth rate at a meagre

1.7%). With inflows of US$124bn

in 2013, China again ranked

second in the world. Additionally

Hong Kong saw its inflows rising

slightly to US$77bn, much of it

related to new regional

headquarters (RHQs) of MNCs,

the number of which reached

nearly 1,400.

Quitting China is not easy. MNCs can

find it expensive to retrench workers

and rumours of production line closures

have been known to trigger onerous tax

audits by local authorities.

Case study

Nissei Plastic Industrial

China + 1 Strategy

In April 2013, Nissei Plastic Industrial

(Nissei), a Japanese manufacturer of

injection molding machines, completed

its second offshore manufacturing

plant—in Thailand. The main reasons

behind this initiative, according to

company president Hozumi Yoda, were

to have a “China plus one” strategy and

to take advantage of a tariff-free

agreement between the ASEAN region

and India. India applies punitive tariffs of

25-40% on imports of injection moulding

machines to protect locally-based

suppliers that include Japanese- and

US-owned competitors. The Thai

factory also exports to the US and

Mexico, and Vietnam and Indonesia.

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More Regional

Supply Chain

Management

Throughout most of Asia’s economic

modernisation, the region’s supply chain

flowed largely East to West. Asia’s low-

cost labour manufactured low-cost

products for export to the developed

markets of Europe and North America.

More recently, however, Asian cities

with their emerging middle classes have

become centres of demand, prompting

a flow of imports from the West.

Moreover, as these Asian export

platforms developed, more companies

based in Asia (including MNCs with

Asian subsidiaries) began making

products for sale in their home market

or other Asian markets. This important

shift in demand dynamics will drive the

future organisation of global and

regional supply chains.

Sub-regional supply chains

Worldwide, large MNCs follow a similar

pattern of regional standardisation of

functions. However, the sheer

complexity of the Asian market—

including its sprawling geography,

distinct cultures, divergent levels of

economic development and very

different regulatory and infrastructure

environments—has inhibited the

development of regional supply chains,

and all that implies for sourcing and

procurement practices.

The supply chain management function,

along with IT, R&D and product design,

is now migrating to a more regionalised

model. (Other functions, such as sales

and support will stay at the country

level.) Asian-based businesses are

reorganising from matrix management

accenting country-based models to a

more integrated structure with shared

and sometimes outsourced regional

functions. The benefits of such an

approach include deduplication, better

coordination, economies of scale,

broader application of standards and

the ability to locate functions in the best

country to access external services or

minimise the corporate tax burden.

Regional approaches to supply chain

planning and sourcing/procurement

provide attractive benefits for

companies that manufacture or

purchase in a few locations for supply to

customers in multiple countries. For

example a company with factories in

China, Thailand and India and

customers across most of Asia may

usefully adopt a sub-regional or even a

fully regional supply chain model. The

latter is less practical given Asia’s size,

diversity rate of flux.

The beneficial roles of sub-regional

supply chain management hubs:2

• Strategic sourcing and regional

procurement;

• Consolidation of country demand

forecasts into a regional demand

perspective;

• Regional-in-scope sales, operations

and inventory planning;

• Delivery/shipment plans for

manufacturing sites (incl. contract

manufacturers) to meet country

requirements;

• Greater standardised supply chain

practices, processes, systems and

compliance across the region;

• Increased use of supply chain

intelligence tools (SCM analytics, KPI

metrics, reporting, alerts, etc.);

• Coordination and sharing of leading

practices, performance reporting and

supply chain skills development.

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The sub-regional supply chain

management centre may also be well

placed to have a stronger voice on

issues such as product harmonization,

route-to-market, cost-to-serve, and

corporate social responsibility.

Case study 3

Canadian Pharma Company re-aligns

Supply Chain to focus on APAC

A Canadian MNC specialty

pharmaceutical company with an Asia

Pacific beachhead in the Australia and

New Zealand markets had its regional

headquarters in Sydney. It had enjoyed

good growth in these ANZ markets, but

the next phase of growth was expected

in Asia proper, specifically the emerging

ASEAN markets of Indonesia,

Philippines and Thailand.

In order to achieve its new growth

objectives, the company’s supply chain

organisation was relocated to the

region. ASEAN was rightly recognised

to be a complex opportunity with each

country having its own regulatory

requirements. Managing these multiple

country jurisdictions needed

management resources to be located

within the region. The company

embarked on a transformation program

to change its operating model in the

region and move its regional supply

chain headquarters from Sydney to

Singapore. This achieved two goals:

increased supply chain agility and better

alignment with corporate tax objectives.

The revamped supply chain

organisation included the establishment

of a Singapore-based operating

company with several ‘limited risk’

distribution companies in individual

ASEAN markets. The company put in

place a revised ERP to support its new

operating model in the region and

provide the required financial reporting

to HQ in Canada. It facilitated tax

efficiency and provided the platform for

more competitive cost structures.

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Regional SCM agility required

Demand in high-growth Asian markets

will, initially at least, be difficult to

predict and lead times and revenue

flows will be hard to forecast. Agility will

be a key factor. Versatile and lean

supply chains will need to switch

sourcing to match demand. As market

conditions become more volatile and

difficult to predict, the key to flexibility in

longer supply chains originating in Asia

will lie not in improving the ability to

plan, but rather in mastering the

capability to adapt quickly to fluctuations

in demand and supply.

The Asia-Pacific region’s growth

potential, as a centre of manufacturing

and source of supply, and as a market

for locally and internationally-

manufactured goods is extraordinary.

But, for the foreseeable future, the

region is likely to remain highly diverse.

Asia’s unique challenges may require

the deployment of multiple supply

chains, each tailored to the

requirements of specific sub-regions

and communities. These will need to be

supported by locally-developed

capabilities, nimble enough to

accommodate the region’s rapid

change.4

In Asia Pacific, MNCs will no longer

simply use supply chains as a means of

supporting growth. They will look to

supply chains as a source of

sustainable competitive advantage.

11

Senior MNC

Leadership

Moves to Asia

The distance of several thousand miles

between many MNCs’ corporate

headquarters and the locus of

opportunity is becoming more evident

as Asia’s economic growth continues to

outpace that of the developed world.

Business leaders who spend most of

their time in London, New York or

Helsinki will inevitably view the world

through British, American or Finnish

eyes. Corporate leaders in far flung

capitals are far removed

psychologically, cognitively as well as

physically from the new commercial

epicentre of the global stage. Fed out-

of-date, filtered and processed

information, it is perhaps not surprising

that corporate leadership is not the most

effective.

Given the vastness, complexity,

dynamism and importance of Asia’s

markets, there can be no substitute for

gut-level judgement based on direct

observation and deep immersion within

these societies5. In 2009, trendsetter

John Rice, Vice Chairman of GE and

president and Chief Executive of Global

Growth and Operations relocated from

corporate HQ to Hong Kong. He

captured the issue succinctly: “I’ve

come to China close to 100 times,” he

said, “but I’ve learned more about China

in the last 18 months than I did in the

preceding 20 years.”

Not so long ago, corporate

management was focused on

globalising the supply chain and

relocating manufacturing to Asia. Now it

is also concerned with globalising

corporate thinking. The issue is more

than one of differing cultures: it is harder

to make decisions to invest in growth-

oriented markets when based in a

region where austerity and belt-

tightening is the order of the day.

Placing global corporate functions in

Asia will help attune a company to the

region’s potential.

Many MNCs have already moved some

of their global corporate functions to

Asia citing the rationale that Asia is too

important to have a managerial layer

between the region and corporate HQ.

Such reorganisation also ensures that

sufficient attention is being paid to Asia

at the highest levels in the company.

Others MNCs have parachuted

representatives of global business units

(BUs) into Asia, the reasoning being

that some BUs now have most of their

sales and/ or highest growth potential in

Asia and therefore should have decision

making situated closer to customers.

This can be a difficult organisational

structure for the BU manager if the key

decisions concerning the BU remain

with corporate HQ or if distance from

the “mothership” affects voice and

resource allocation.

Companies that have relocated some of

their most powerful executives to Asia:

• GE - In Sept 2014, General Electric

Co (GE) opened a Global Operations

Center (GOC) in Shanghai to serve the

Asia-Pacific region. The GOC, one of

five such GE facilities, aims to simplify

the company's business by integrating

services for 16 countries, including

Japan, Korea and ANZ in one location.

• Cargill - the global model of Cargill is

very business unit-led. Singapore is the

regional hub of Cargill in Asia-Pacific

and four of Cargill’s business units are

headquartered in the same city.

• Cisco – the tech giant has developed

four innovation hubs in Songdo, South

Korea, Rio de Janeiro, Brazil, Toronto

and Germany.

• Nissan opened the its new global

headquarters for the Infiniti brand in

Hong Kong in May 2012.

• IBM – selected Singapore as its

Global-Asia hub.

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• Procter & Gamble – in 2012 P&G

moved its global HQ for Personal Care

from Cincinnati to Singapore.

Surveys conducted by the Economist

Corporate Network reveal how the trend

toward more Asia-based management

has accelerated in recent years (see

chart below). In 2008, just 19% of non-

Asian MNCs surveyed had one or more

board members living and working in

Asia; by last year (2014), the

percentage had passed 40%. What is

more, 45.3% of the respondents

expected to have board members

placed in the region by 2016.

Sourcing global management from

Asia

Other MNCs have upped the seniority of

people with Asia or Asia- Pacific or

China roles leading to ‘more senior

people from Asia’6 and/ or ‘more senior

people in Asia’. The rationale is twofold:

Asia needs more experienced people;

and senior Asia managers deserve a

greater voice at corporate HQ.

The CEOs of several global MNCs had

their immediate past position or position

just prior to that in Asia, or had

extensive Asia experience under their

belts. Asia’s growing importance means

it must be understood at the highest

levels within the company. But this

situation can result in conflict, not

between the CEO and the Asia-Pacific

regional management which are usually

alignment, but between bureaucratic

management layers who “do not get it”

when it comes to Asia.

City implications

The above shifts imply a change in city

roles. The choice of city to manage the

Asian region (or sub-regions therein)

will often depend on the nature of the

business, but in general global

corporate functions have tended to

locate in a few cities only. Singapore

has attracted an expanding number of

top-flight managers and divisional

headquarters as companies seek to

capitalize on the city-state’s flexible

OHQ (operational HQ) incentives and

highly educated work force. Hong Kong

is seen as the gateway to mainland

China, but Shanghai is rising too,

supported by new inducements and the

gradual internationalising of the

Renminbi. By the end of 2013, 445

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MNCs (three times the number in

Beijing) had set up their regional HQs in

Shanghai.7

Multiple global hubs

Firms are moving away from the old

paradigm of a global HQ to one of a

network of global hubs, underpinned by

the new need to connect and coordinate

rather than command and control.

14

Lifting the

Local Relevance

of Products

As premium market segments mature

and local competitors start to emerge,

MNCs will develop more relevant,

second tier ‘good enough’ product

offerings for Asia’s emerging markets.

A new battleground is emerging for

companies seeking to establish,

sustain, or expand their presence in

Asia’s emerging markets: the so-called

“good-enough” market segment: reliable

products of reasonable quality, at low-

enough prices to attract the cream of

Asia fast-growing cohort of mid-level

consumers.

Competition for the ‘good enough’

segment is heating up. Competitors are

both home grown and other MNCs.

Home-grown low cost carriers (LCCs)

such as AirAsia and Lion Air have been

growing very fast by both gaining share

and expanding the market. Indonesia’s

Astra is expecting a breakthrough in the

Low-Cost Green Car category targeting

buyers in Indonesia with US$5,000-

10,000 annual disposable income,

equivalent to 60m potential customers.

Another Indonesia success story in the

FMCG sector is Wingsfood, which has

stolen market share from the incumbent

using a focused strategy of mainstream

pricing, smaller pack size and a

concentration on small retail outlets

(local warungs/kiosks).

Big Cola, owned by obscure Peruvian-

owned AJE Group, has used a low-cost

entry strategy, clever marketing and

relentless focus on emerging markets to

successfully take on Coke and Pepsi,

the global soft drink giants, in Asia.

Honda has been very successful

against low-cost motorcycle competitors

in the ASEAN market. It defended its

Asian export turf against Chinese

encroachment by lowering by

performance, revising design standards

and sourcing lower cost parts while

maintaining reasonable quality.

Samsung is fighting back against the

local challenge to its market share in

Southeast Asia, India and China where

local brands are offering increasingly

robust devices that rival its

smartphones—but a fraction of the

price.

15

Implications for product strategy

Companies brave enough to look

beyond Asia’s premium market segment

will need to make major adjustments to

their product portfolio, their

manufacturing cost structure and their

organisation.

Competing in the good-enough space is

not necessarily a sensible strategy for

MNCs operating in sustainable premium

segments. These companies should

rather lower their costs and innovate to

maintain their premium or niche

positions and sustain their margins. B2B

customers are often willing to pay more

for reliability (lower cost of ownership),

even when faced with a variety of other

cheaper options. For engineering

companies in particular, R&D and

enduring differentiation may be

sufficient to keep local competitors at

bay, while allowing time for expanded

distribution/service to improve

responsiveness, and lower costs by

using more local or regional

procurement.

These premium players are the lucky

ones. In China, many local firms are

looking to move upmarket as the lower-

end segment becomes increasingly

crowded and competitive. If growth in

the premium segment is slowing and

returns are slipping, MNCs should

consider a position in the good-enough

space. The MNCs that eschew the

middle market because of their current

competitive strength should regularly

revisit their decision and guard against

emerging competitive threats.

A move into the good-enough space

can occur in one of three ways:

(1) Leading MNCs providing ‘excess

quality’ in the premium segment can

attack from above. The goal for these

organizations is to lower their costs,

introduce simplified products or

services, and broaden their distribution

networks—while maintaining

reasonable quality. Simple cost cutting

may not be sufficient to bridge the price

differential; quality and design

standards must be reviewed.

(2) Local market challengers in the low-

end segment burrow up from below.

These companies aim to take the legs

out from under established players by

providing new offerings that ratchet up

quality but cost consumers much less

than competitive premium products.

(3) Some MNCs may not be able to

quickly reduce their costs or rapidly

adapt their processes. Acquisition is a

breakthrough option for entering the

middle market for these companies. A

classic example is Gillette’s acquisition

of Chinese battery maker Nanfu. Gillette

continues to sell premium batteries in

16

China under its Duracell brand while

developing Nanfu as the leading

national brand in the mass market.

Similarly, F&B company Danone

acquired four local water brands to

achieve #1 positions in both the

Indonesian and Chinese markets.

17

Productivity

Prioritisation

In Asia’s diverse regional economy

almost all countries and territories are

making concerted efforts to industrialise

and accumulate capital in order to

improve their growth potential and catch

up with the so-called developed world.

According to the Asian Productivity

Organization, their efforts are yielding

results beyond impressive growth rates.

Asia’s capital accumulation is being

accompanied by strong productivity

improvements.

To date, much of the region’s growth

has been driven by a demographic

dividend. 40% of past growth in ASEAN

for example was created by an

expanding working class8, now the third

largest in the world; and half of

productivity gains were the result of the

transition from agriculture to

manufacturing. These drivers are

fading, highlighting the need for new

engines of growth. The answer for some

governments is productivity.

Policy prescriptions

At the policy level, the need for

productivity growth is most acute in the

more developed and mature markets. In

Singapore, the country’s meagre

productivity growth rate is a national

priority and the government is throwing

resources at the problem.

The government has devised a slew of

generous financial incentives and

schemes to support firms to upgrade

productivity, whether by investing in

technology, training workers or

streamlining operations. Foreign worker

inflows are being restricted to

pressurise employers to upgrade their

workers, instead of just hiring more.

Not only is productivity important for

GDP growth, it has a politically

advantageous consequence of raising

incomes. In the longer term, wage rises

can only be sustained through higher

productivity.

MNC corporate priority

At the corporate level, more MNCs are

experiencing or anticipating slower

growth in some Asian markets. The

economies of countries such as China

are also slowing—but costs are not,

hurting margins. According to the

European Chamber of Commerce only

63% of European companies in China

were profitable in 2013, down from 73%

in 2011. Revenue growth expectations

are now at their lowest since the peak of

the Global Financial Crisis. Fewer

American companies expect major

gains in their China revenues (see chart

on previous page).

18

In response, many corporates are

prioritising productivity growth. A survey

of over 100 regional managers

conducted by IMA Asia in January

2015, revealed the following initiatives,

ranked in order of importance, for

achieving productivity gains in Asia:

Supporting a culture of innovation

Re-engineering of internal processes

Incremental / one-time

organisational restructuring

Technology upgrades

Overhaul of business model

architecture (e.g. fewer models)

Hiring staff for new business issues

(e.g. data analytics)

A ‘laser-like focus’ on staff productivity

will involve a variety of efficiency

metrics, including sales / profit per

employee, cost-to-income ratio or gross

cost savings. These measures are

complemented by a range of non-

financial metrics such as revenue

growth/new business, client/customer

satisfaction and staff satisfaction.

Expectations for regional growth remain

relatively high. A key concern is then

how to maximise the growth potential

while sustaining productivity

improvements. Some approaches:

Reduce complexity in the business

model organisational structure;

Introduce flexible operating platforms

and flexibility in fixed cost structure;

Make the organization leaner,

including significant headcount

reductions;

Make heavy investments in new technology;

Target internal development of staff

rather than relying on expensive

expatriates.

Solutions wanted

Consulting firms are gearing up to help.

In October 2014, US management

consultancy McKinsey opened its first

McKinsey Productivity Sciences Centre

in Singapore. The centre, a partnership

with Singapore Economic Development

Board (EDB), provides research, bench-

marking tools and technology-based

solutions to help companies drive

productivity. The centre promises

productivity gains of 10-15%.

Finland, a league leader in

manufacturing productivity may be able

to leverage its expertise in this regard.

0,0%

30,0%

50,0%

20,0%

0% 10% 20% 30% 40% 50% 60%

Not a priority

One of several priorities

A leading priority

The top priority

Productivity Prioritisation

% survey respondents

Source: IMA Asia Survey of C-Level Asian Manager, Jan 2015

19

South-South

Strategies

The rise of emerging markets, the

deepening business links between

them, and the importance of Asia to the

new South-South axis (emerging

markets mostly located in the Southern

hemisphere) will have implications for

corporate strategy. The tilt in economic

power from North-South to South-South

is creating new trade and investment

flows, to which corporate leaders must

respond.

Following WWII, the Western world

successfully promoted global integration

as a way of ensuring world peace and it

caused a surge in trade and investment

flows. In the 1980s and 1990s the same

developed nations built global supply

chains, accessing cheap Asian labour.

Today, a third phase of global

development is dawning: deepening

South-South trade and investment

flows.

South-South trade has grown at double-

digit rates annually for the past three

decades, rising from a 6% share of

global trade in 1990 to 24% in 20129

(see figure above). South-South foreign

direct Investment (FDI) activity is also

expected to expand. Overseas

investment by transnational

corporations (TNCs) from developing

economies (‘South’ economies)

continued to grow in 2013, reaching a

record level of US$460bn. Together

with FDI from so-called transition

economies (another US$100bn) these

investments accounted for 39% of

global FDI outflows in 2013.10

An important qualification to the

impressive trade and investment trend,

is that three quarters of South-South

trade now takes place within Asia. Asian

exports to other developing countries

account for another 10% of such trade.

China alone accounts for about 40% of

South-South trade, almost half of intra-

Asian total merchandise trade and 60%

of intra-Asian trade in manufactures, as

well as for about one third of all

developing-country imports from Africa

and Latin America.

The economic rise of China has been

the single most important factor in

stimulating South-South trade through

its imports from other developing

countries and overseas investment over

the past two decades. In the meantime,

FDI outflows from China swelled by

20

14% in 2014 to US$103bn—almost

matching FDI inflows. However,

networks of global flows are broadening

and deepening as emerging economies

join the South-South paradigm and

emerging economies beyond Asia are

becoming important as both consumers

and producers in the global economy.

Global Heads of Emerging Markets

One ramification of the growing South-

South dynamic is the increasingly

common practice of stationing the

Global Head of Emerging Markets in

Asia. Not only are global division heads

and CEOs being sourced from Asia

(see Senior MNC Leadership Moves to

Asia) but Asia is increasingly being

used as a base for Global Heads of

Emerging Markets. The expertise

developed in Asia’s challenging yet high

growth emerging markets is readily

transferable to other regions. The logic

is simple: if you can make it in China or

India, you can make it anywhere.

GlaxoSmithKline is one example of a

company that has based its head of

global emerging-markets operations for

the UK pharmaceutical giant, in

Singapore.

South-South Strategy implications

Companies operating along the South-

South axis will need to adjust their

business models and alliances:

(1) Successful models created in Asia

will be adapted for use elsewhere.

Products and services developed for

Asia’s consumers and industrial end

users will likely be more transferable to

other emerging markets.

(2) Partnerships forged in Asia’s

emerging markets will be carried

forward to countries outside the region.

Many MNCs are well placed to help

internationalising Asian MNCs, thanks

to their established global networks.

(3) As emerging markets become more

connected, competition in some sectors

may stiffen. Early investors, typically

Western or Japanese MNCs, often had

emerging markets much to themselves.

But competition will intensify as

emerging market companies expand

along South-South lines.

(4) With Asia at the core of emerging

market integration, the role of new

21

business and financial hubs will

evolve—cities with cultural diversity,

such as Singapore, Kuala Lumpur or

Dubai, will benefit.

22

Corporate

Strategies for

China

China will be high on the agenda of

many MNC boardrooms. Key discussion

points: (a) how best to manage the

internationalisation of Chinese

competitors and customers; (b) what

resources should be allocated to China

given the expectation of slower growth,

continued over capacity, hyper

competition in some sectors and greater

market volatility; (c) how to deal with the

risks associated with a more assertive

China at home and abroad; and (d) how

to organise for China given its growing

importance both within the region and

as a rising contributor to companies’

global sales.

China’s internationalisation

China’s ‘strategic’ SOEs are being

pressed to venture overseas to build

high-speed-rail links, construct new Silk

Route roads and pipelines, buy up New

York and London real estate and to

develop infrastructure to exploit

resources in the emerging continents of

Africa and South America. Many of

these projects have geopolitical aims

and many are supported or underwritten

by Beijing.

Senior executives in China’s private

sector companies want to move

overseas also. By pivoting to new

sectors within China, or more likely to

international markets, these Chinese

companies hope to sustain their

accustomed revenue growth rates.

Some of these Chinese investors are

rolling out devastating business models

in overseas markets, ones that western

listed companies simply cannot

compete with (razor-thin margins or

lengthy ROI).

China’s internationalisation drive

includes coordinated ‘Soft Power’

initiatives. China large and sustained

current account surpluses are providing

ample financing for expanding foreign

aid and for unofficial government-linked

investment. Newly pledged aid from

China was a massive US$189.3bn in

2011. Though not directly comparable,

this sum dwarfs the funding provided by

the US Agency for Development

US$8bn in the same years11

. China is

also projecting massive soft power

overseas by building cultural and

language institutes. One initiative

example is the proliferation of Confucius

Institutes. Following a rapid rollout,

there are now around 500 of these

institutes on six continents12

.

Dealing with a more assertive China

At its core, China is still a command

economy driven by a political agenda

that seeks to legitimise the ruling party.

But the implicit Social Contract in China

is expected to come under some strain

in the near future. The accustomed

double-digit annual increase in wages

and salaries may soon end, perhaps in

2015. Lower GDP growth will not

support the same level of job creation

and factory automation is reducing the

need for workers. Many low-skill

assemblers are downsizing, some are

moving offshore. To forestall the

potential for social discontent, the

government may be inclined to become

more nationalistic.

MNCs are complaining that they are

being unfairly targeted for tax evasion,

unfair pricing, abuse of monopoly power

and corrupt practices. Targets in many

cases have been foreign companies

with a commanding presence in their

markets or ones that lack strong

Chinese competitors. They typically

high profile companies reporting strong

profitability. (Although to be fair, some

the same companies have fallen foul of

regulators in Western jurisdictions also.)

China’s is using the levers that it

controls to demonstrate that foreign

companies operate at the pleasure of

the Chinese government.

23

Organisation

Previously, corporates would attempt to

align their China strategy with the

relevant aspects of China’s latest 5-year

plans. Today, the challenge is to more

broadly align with President Xi Jinping’s

quasi-official ideology captured in the

phrase ‘Chinese Dream’. Unlike the

individualistic ’American Dream’, the

Chinese version is more suggestive of

the future revival of Chinese as a great

nation.

This importance of the new alignment is

mirrored in corporate organisation for

China:

(1) A growing number of MNCs have

elected to relocate global business units

(GBUs) to Shanghai or Beijing, a clear

statement of the role of China in their

global strategy. The GBUs are usually

businesses that rely heavily on the

China market. Typically, this

organisational structure requires strong

support from head office and there is a

danger that decision–making can

become too China-centric.

(2) Some companies have removed

China from their Asia Pacific

management structure altogether,

making it report directly to HQ. The

danger with this approach is that the

growing importance China’s regional

role maybe be under appreciated.

(3) Other firms have relocated their

regional headquarters from Singapore

or Hong Kong to mainland China. Here,

the main concern is that smaller

emerging markets in Asia may be

overlooked given the higher priority in

terms of management and resources

that China will command.

Corporate imperatives for China

It is not just what happens within China

that matters. Since the turn of the

century, global manufacturing has been

redefined by China production lines.

The country will continue to move up

the value chain over the next decade—

improving productivity and efficiency will

be essential to maintaining profitability

for many companies, given lower

industry growth (see Prioritising

Productivity). China’s coming flood of

overseas funding and investment

(including unrecorded unofficial

investment by banks and SOEs) may

redefine the global economy in ways

just as profound as China’s current

influence on world trade.

Companies should think of China

strategy as a two-way street. In one

direction, it is what you do in China that

will count. In the other direction it is

what you do with (or about) China. Most

companies will ultimately decide to stick

with their current China strategy, but

there will be real choices and trade-offs

on the table. Even companies only

peripherally engaged with China should,

start monitoring the key trends,

particularly as they spill over China’s

borders: China’s tourists are reshaping

global tourism; China’s engineering and

construction firms to move offshore;

China machinery manufacturers are

slicing European market share away

from Germany and so on.

Companies that pivot to support

outbound China companies and

confront Chinese competitors will find

new market opportunities and increase

their chances of survival in the new

world order.

24

Competing

Against

Emerging Asia

Corporations from emerging economies

are becoming important players in the

globalized world economy. The best of

them have embarked upon rapid

globalisation targeting the industrialised

economies, particularly in North

America, Australia and Europe.

Internationalising local companies in

emerging Asia have a better

understanding of their markets than

Western MNCs. They are also more

nimble.

There are several segments groups of

newly emerging Asia competitors.

These include overseas Chinese

corporations based in countries such

Hong Kong, Taiwan, Thailand and

Indonesia, the Korean chaebol,

government-linked ‘Singapore Inc’

corporations and so-called national

champions (such San Miguel in the

Philippines and Sime Darby in

Malaysia).

Dragon abroad

The main threat is China. Keeping their

Western counterparts awake at night,

China enterprises are investing heavily

in R&D, securing resource inputs,

expanding offerings of high-value

products and aggressively pursuing

acquisitions to gain access to

technology, brands and markets. The

Chinese are becoming a major

competitive force in the global economy

based upon relatively inexpensive and

highly productive labour as well as scale

and cost advantages. Worse, they are

using process innovations to boost

productivity and raise efficiency.

Everywhere, Chinese manufacturers

are sharply increasing their global

market shares: construction equipment

–from 3% in 2006 to 15% in 2011;

telecoms equipment—from single digits

to ~25% in the same period.

The same German engineering

companies that benefited from strong

sales to China in recent years are

seeing Chinese encroachment in its

core EU market (see Calculating the

Chinese Threat below).

25

The ascent of Asian manufacturers was

enabled by the rise of the Asian middle

market and the development of “good

enough” products that accent price

competitiveness and basic functionality

(see also Lifting the Local Relevance of

Products). Demand for these products

is now increasing in Europe and other

developed markets, as companies and

consumers seek to reduce supply chain

costs in the face of persistent economic

uncertainty in the EU and elsewhere.

Going beyond cost leadership, some

new Asian competitors are also offering

highly customised products and turnkey

solutions. In an effort to improve access

to global markets, they are building their

own sales networks in developed and

developing countries and partnering

with MNCs to share distribution

channels. They are gaining access to

advanced technology through

aggressive investments or acquisition of

companies with cutting-edge technical

capabilities.

The rising number of Asian companies

in the Global 500 reveals the extent of

emerging Asia’s new found corporate

power. The number of Chinese

companies in Fortune’s Global 500 has

increased six-fold since 2005.

The new global reality is forcing MNCs

to fundamentally rethink strategy and

devise new business models that can

win the new middle class market in

emerging Asia, while holding Asian

market rivals at bay in home markets.

Success factors

Almost by definition, emerging markets

grow strongly and change rapidly.

Entrepreneurial family-owned Asian

firms immersed in the local business

environment can often out compete

developed market MNCs. They can

make decisions quickly, without

recourse to board approval, without the

need for detailed due diligence and

oblivious of onerous governance

requirements.

On-the-ground decision making makes

for faster and better decisions. By

leveraging local partners’ understanding

of market conditions and opportunities,

MNCs may partially overcome this

inherent competitive weakness.

Writing for Harvard Business Review,

business advisor Ram Charan suggests

there are four ways in which business

leaders in emerging Asia may have a

competitive advantage 13

:

(a) They make do. Many have grown up

26

under conditions of scarcity and

hardship. Improvising and working on

tight margins is second nature, as is a

fierce focus on operations.

(b) They think big. Emerging market

business leaders have experienced

massive changes in their home

countries; their growth and opportunity

expectations are vastly different from

those of European or American

businesspeople.

(c) They learn fast. Many are adept at

using partnerships, joint ventures,

licensing deals, and acquisitions—

whatever it takes—to establish

themselves in a market or industry and

scale up quickly.

(d) They move fast. These leaders are

energized by the opportunities they see

before them, and they are decisive.

Emerging market acquisitions

Acquisitions by emerging Asian firms

are having a significant impact on the

competitive landscape. They allow

emerging market competitors to14

:

• leapfrog entry and mobility barriers

into mature markets;

• introduce new competitive models in

new markets by combining low cost and

differentiation in new ways;

• transfer local market competencies,

e.g. frugal engineering, to new markets;

• leverage home market economies of

scale—in addition to absolute cost

advantages—in developed markets;

• reconfigure their value chains to

complete more effectively on a global

scale; and

• force competitors to make hard

choices when devising countermoves.

MNC competitive strategy

With the rise of indigenous Asian

corporations, companies are looking for

new ways to compete in Asia against

Asian firms. Incumbent MNCs—at least

those that that fully appreciate the threat

from emerging market MNCs—are

devising their strategic response, both

in Asia and home markets. Options will

include:

(a) block market entry by emerging

Asian MNCs in home markets;

(b) attack the home markets of

emerging Asian rivals (example: in

2014, Whirlpool bought a 51% stake in

China’s Hefei Sanyo, a joint venture

between Japan's Sanyo Electric Co a

Chain partner for US$552m to give the

company traction in the Chinese

appliance market); and

(c) partner with those Asian firms

looking to internationalise their

business.

Tactically, the following options can be

considered also:

(1) Identify and understand Asian

competitors. In many boardrooms,

Asian competitors are still not yet on the

radar. MNCs should seek to enhance

competitive intelligence on the

capabilities and strategic intent of these

new rivals.

(2) Appreciate the new partnership

paradigm. Previously, Western MNCs

partnered with Asian firms to gain

access to domestic markets, political

patronage and local distribution. Secure

in their technical expertise and

manufacturing excellence, MNCs would

typically expect to be the dominant

partner. Today, the roles may be

reversed with the Asian partner bringing

technical strengths and seeking global

expansion.

(3) Appreciate (and exploit) home

strengths. Many Asian competitors still

have weak brands with little recognition

beyond national boundaries. They are

often hierarchical, lacking in both

cosmopolitan management and

international experience.

27

Leveraging

Asia as a Source

of Innovation

Innovation is the lifeblood of every

successful company. Historically,

Western MNCs adopted the so-called

‘waterfall innovation model’, whereby

invention occurred in the European and

North American research labs. Over

time the resulting innovations were

introduced to other Western/developed

markets before eventually finding their

way onto the world’s emerging markets.

Today, declining MNC market shares in

some of Asia’s high growth emerging

industries is forcing firms to rethink the

waterfall innovation paradigm. The

pernicious meme that Asia lacks a

culture of innovation is woefully out of

date. Forbes latest ranking of the

world’s most innovative companies

ranks 16 Asian firms in the top 100,

from seven Asian countries (see table

below).

Asia’s leading innovators

In truth, Asia is beginning to shape

global business trends, most notably

China and most obviously in social

media and electronics:

Xiaomi has reinvented the

smartphone business model by

selling at wafer-thin margins and

focusing on revenue streams

provided by software applications.

Beijing Genomics Institute (BGI) has

made DNA sequencing a mass-

market proposition becoming the

world's largest DNA sequencer in the

process. A ‘biological Google’, in

2013 BGI acquired California-based

Complete Genomics, a leader in

genome-sequencing machines.

Tencent, China's most popular

Internet service portal, has beaten its

Chinese social-networking rivals and

sent chills through Silicon Valley with

a 10-terabyte storage offer.

Consumer electronics and home

appliances company Haier saw

revenue grow to more than US$29bn

in 201315

, in part through innovative

management practices, including the

use of a unique internal talent pool

and bidding system, allowing

business units to bid on project

proposals—and vote out

incompetent managers.

Geak, a division of Chinese group

Shanda, makes wearable tech

including a novel ring that syncs to

phones and shares contacts via ‘fist

bump’. It has also launched an

Android-powered smartwatch.

Baidu has expanded from its

dominate position in search to

hardware, including Wi-Fi controlled

smart cameras which records and

monitors children, aging parents, or

pets from afar. Baidu also has a

translation app that includes speech

and text recognition.

While China still lacks international

brand strength, it is making inroads in

28

consumer products also. China’s home

grown luxury brands have developed

offerings tailored to the country’s

growing middle and upper classes (see

also Lifting the Local Relevance of

Products). President Xi Jinping’s

austerity drive may have undercut sales

of foreign prestige brands like Hermes,

but local brands have emerged to take

advantage of the shift in the luxury

market. Chinese fashion labels like

Nisiss have been leaders in targeting

China’s second-tier cities, where

McKinsey estimates around half of the

country’s middle-class, high-income

earners reside.16

Following the mobile revolution, the

‘Internet of Things’ is widely touted to be

the next global trend—from wearable

tech to tracking technologies. Asia is

uniquely poised for this next wave with

its powerful combination of

manufacturing expertise and tech savvy

population.

Asia as innovation incubator

Asia is starting to drive a wave of

innovation across other emerging

markets. Given the size of its markets

and its talent pool, Asia is now the

epicentre of innovation not only for the

region, but for all emerging markets.

The flow of innovation out of emerging

Asia into similar markets is expected to

accelerate for two reasons: (a) most of

the recipient countries are greenfield

investments; in the developed world it

can be difficult to displace legacy

technology investments; and (b) the

people in emerging markets are

younger and more willing to experiment.

The result is not only a surge in

investment in R&D focused specifically

on emerging markets, but also a

process of cross-fertilisation as ideas

and innovations flow out of Asia to other

emerging markets.

MNC R&D targets Asia

Companies that have not done so

already will soon join Asia’s R&D

revolution. The appetite for emerging

market innovation among MNCs shows

up clearly in the number of R&D centres

that global MNCs have set up, mainly in

China and India. In 2000, just 361 such

facilities were in operation. By 2010,

that number had risen to over 2000. A

survey conducted by the Economist

Corporate Network suggests that a

rising percentage of R&D will be

conducted in Asia—with the gain in

R&D allocation outpacing the region’s

contribution to global GDP (see

adjacent chart).

R&D in China and India

R&D in China has steadily grown from

1.4% of GDP in 2008 to around 2% in

2012 (vs 2.8% of GDP for the US)17

.

China today is the leading destination

for R&D investments by MNCs with 385

Global 500 companies having an R&D

presence in China. The number of G500

R&D centres in China doubled between

2009 and 2013.

29

India has some catching up to do. The

Deccan Triangle in India (Bangalore-

Hyderabad-Pune) now has over 200

established R&D centres (G500

companies) and is rapidly becoming the

innovation engine of South Asia. Half of

the of the world's biggest R&D spenders

have already invested in India. Globally,

the automotive vertical has the highest

R&D spend, which augurs well for India,

the country being one of the key

development centres for these firms

with cities such as Pune and Chennai

fast emerging as auto hubs. The same

is true for a growing number of

pharmaceutical and healthcare

companies.

While some of these investments were

attracted by cheaper technical skills,

today they are more focused on

producing innovations that are relevant

to lower income environments.

Cisco’s R&D in Asia

US tech firm Cisco has set up R&D

centres in both China and India, as well

as in other Asia countries such as South

Korea. The stated purpose is to design

products appropriate for emerging

markets, ones that are not ‘over-

specced’. For Cisco this meant

designing products that were smaller,

consumed less energy and were more

affordable. These R&D centres are not

only about re-designing existing

products. Increasingly, they are

developing entirely new products based

on local market requirements. Cisco

also placed its emerging market

innovation centres in Asia because of

the size of the talent pool of engineers

and scientists in the region. More

importantly, Asia is where the global

middle class expansion will be most

dramatic and it has the greatest unmet

needs. Once Cisco addresses these

unmet needs in Asia, its products will

also be rolled out to other countries at

similar stages of development.

1

Endnotes

1 Japan Bank for International Cooperation.

2 Supply Chain Strategy for the Asia Pacific Region, Accenture 2014.

3 Extracted from: Supply Chain Growth in Asia-Pacific - How Pharmaceuticals can

manage complexity on operating models, Deloitte, 2014. 4 World Economic Forum, Global Agenda Council on Logistics & Supply Chain

Systems 2012-2014; Outlook on the Logistics & Supply Chain Industry 2013. 5 Global Strategies for Emerging Asia, Anil Gupta et al, Jossey-Bass 2012.

6 Michael Enright (IMA Asia Briefing July 2014).

7 Asia Briefing Ltd.

8 McKinsey Global Institute.

9 Global flows in a digital age: How trade, finance, people, and data connect the world

economy, McKinsey, April 2014. 10

Global Investment Trends Monitor, No.16 28 April 2014, UNCTAD. 11

China’s Foreign Aid and Government-Sponsored Investment Activities, Rand Corporation, 2013. 12

http://www.confucius.ucla.edu/ 13

Ram Charan, Harvard Business Review. 14

Global Strategies for Emerging Asia, Gupta, Wakayama & Rangan, Wiley 2012. 15

www.haier.com 16

The Rise of the Middle Class in China and Its Impact on the Chinese and World Economies, Dominic Barton, Global Managing Director, McKinsey & Company 17

World Bank Indicators (accessed Jan 2015).