Dealing with Distribution Challenges in Vietnam

Why are distribution challenges in Vietnam more acute than they are in other major ASEAN markets?

Multinationals operating in Southeast Asia’s major emerging markets tend to rely heavily on distributors, and nowhere is this more true than in Vietnam.  According to a survey we ran while studying channel performance, companies tend to realize more revenue through distributors and sacrifice more margin to distributors in Vietnam than they do in Indonesia, Malaysia, Thailand, or the Philippines.

This wouldn’t be such a problem if companies were satisfied with their distribution partnerships in Vietnam.  Unfortunately, they are not.  Executives report significant difficulty partnering with distributors in the country and register particular frustration with Vietnamese distributors’ lack of financial and operational transparency.  To make matters worse, many feel that they lack leverage to change the situation because a scarcity of available partners often makes switching a hollow threat.

This situation naturally raises the question: how can companies build better distribution partnerships in Vietnam at a reasonable cost?  To find answers, we recently took a trip to Vietnam to interview multinational executives and distributors on the ground.  During our discussions, the individuals we spoke with highlighted three issues that set Vietnam’s distribution landscape apart from that of other major ASEAN countries: significant regional divisions, low distributor maturity, and extraordinarily tight credit.

Vietnam Distribution Challenges

By taking these three issues into account and using the six tactics outlined in our report (accessible via our portal here), companies can avoid pitfalls in Vietnam’s distribution landscape and build better working relationships with their distribution partners.


For a full report on dealing with distribution challenges in Vietnam, FSG clients can visit the client portal. Not a client? Contact us to learn more.

E-commerce Strategy Vital for B2C Companies in China by 2020

Over the last two weeks, I have been bombarded with e-commerce news from China. Amazon set up shop in China’s Shanghai free trade zone to give Chinese customers access to its products from its global supply chain and to help SMEs in China to export their products to customers in other countries.  Amazon’s biggest competitor, Alibaba, has unveiled plans for an initial public offering that values the company at $US 155 billion, one of the largest listed in the US and one of the biggest stock market debuts ever. Chinese real estate conglomerate Dalian Wanda formed an alliance with two Internet giants, Baidu and Tencent, aiming to become the largest O2O (online-to-offline) e-commerce platform in China.

Each of these movements reflects the increasingly fierce competition in China’s e-commerce market. As many multinationals initiate their 2015 planning, I believe all of them need to think deeper about their e-commerce strategy for China.

China’s e-commerce market is now bigger than America’s

China already has the world’s largest Internet user population, representing 22% of the world’s total in 2014. It has also overtaken the US as the biggest e-commerce market in the world and is set to be worth US$ 541 billion by 2015. These facts make China an ideal location for expansion, as 49% of its population made an online purchase last year. This figure is set to rise to an unprecedented 71% by 2017, so expanding into this profitable international market is becoming more and more inviting for online businesses.

Making the e-commerce decision a part of your “go deep” or “go wide” decision

This decision will be integral to your China 2020 “go wide” or “go deep” strategy, and it can’t be ignored because local companies are already making deep inroads and leveraging the current prevailing online platforms. See the chart below to get a sense of how important online sales are going to be in future. Something else worth mentioning is that online research will have a tangible impact on offline sales, as well.

China E-Commerce 1

Companies that delay the development of their online channels now will forego a significant portion of this enormous market. In the future, they will have to scramble to take market share away from their faster-moving peers.

Bypass the retail bottlenecks in China

The Internet’s extraordinary reach in China offers companies a way to bypass the fragmented retail bottlenecks and expand their customer base in lower-tier cities. Companies that aim to capitalize on the growing consumer base in China’s lower-tier cities must develop an effective e-commerce strategy; those that depend solely on brick-and-mortar retailers for their expansion will be left behind. See the chart below to understand how wallet share increases from tier 2 to tier 3 and 4 cities.

China E-Commerce 2My recommendations to all B2C companies are as follows:

  • Build a strong fan base by leveraging social media platforms and engaging with opinion leaders
  • Leverage multiple websites to capture browsing shoppers, i.e., open more than one Internet channel to capitalize on Chinese consumers’ online shopping habits. However, make sure that you are cognizant of the effect your online channel is having on your current distribution partners
  • Choose e-tailing partners beyond Tmall to target the right customer by adopting a hybrid model with complementary approaches may be worth exploring too

FSG clients can access the full report on China’s E-Commerce Market on the  client portalNot a client? Click here for more information about our China research.

 

What Makes Managing Talent a Challenge in ASEAN?

This is part two of a three-part series on Talent Management in ASEAN. View part one here.

ASEAN’s Market is Characterized by Scarcity  

ASEAN’s talent market exhibits the classic signs of an emerging market suffering from an increasing demand for talent and lack of supply.  Various studies have come to the same conclusion—the talent landscape across ASEAN can be characterized by overall scarcity; as reported by 70% of the respondents in a Deloitte survey. The region’s talent shortage is creating a vicious cycle that is likely to exist for the short-to-medium run. The lack of a steady talent supply and increasing demand are leading to competition for the same resources, which in turn results in challenges in attracting and retaining the right employees.

Development will be a Top Internal Priority for MNCs 

The distinctive characteristics of the ASEAN region have created unique management challenges that could only exist in very few parts of the world. It is growing at a pace that is much faster than that at which talent can be developed, its complexity (managing 10 countries) requires experienced professionals that don’t exist in the market, and its composition of as many cultures and languages as an entire continent erects further cultural complications. The focus for most MNCs (as shown in the table below) is going to be on developing the next generation of executives who can take up regional (not just national) leadership positions and will strategically execute plans set out by corporate teams.

Top-Priorities-of-Talent-Management-in-ASEAN

ASEAN Talent Management Puzzle – Key Challenges MNCs Are Likely To Face

  • Regional Talent – ASEAN’s significant diversity causes regional leadership positions to be much more complex to handle. Moreover, given low mobility in the region, many executives only have strong market knowledge of their home country and have limited regional knowledge.
  • Attraction- Given the shortage of high-quality talent, expectations are growing from quality candidates for not only competitive compensation packages but also working conditions and benefits that not all MNCs are ready to provide.
  • Retention- Most organizations in ASEAN experience high levels of turnover predominantly at junior and operational levels. At these levels, salaries are comparatively lower, and extrinsic factors play an important role.
  • Regional Competition – ASEAN-based companies have been growing quickly; they did not go through any major job cuts during the last financial crisis, they are able to offer several mobility opportunities, and the size of the responsibility/portfolio is often comparable to what is offered by developed-country firms.

ASEANS_talent_management_puzzleWarning: Don’t Fall Into the ‘Buying’ Trap

Why make investments in talent and leadership if competitors can poach the best employees? Poaching rather than developing talent is ultimately a shortsighted strategy; it sends an unhealthy signal to employees that they need to change jobs in order to advance their careers. Companies that employ such a strategy will eventually lose their competitive edge, but local companies may want to follow it

In FSG’s latest work on the subject, titled Effectively Managing Talent in Southeast Asia, we highlight 10 issues that MNCs will likely face in ASEAN and 10 tactics that can used by MNCs to address those challenges.


FSG clients can access the full report here. Not a client? Contact us for more information.

Preempting & Solving Future M&A/JV Issues in China Now

It is becoming particularly difficult to design partnership models in China, a market that’s rapidly changing and will be dramatically different in two to three years. However, given the size and scale of China, it’s likely that M&A will continue to become a recurring critical issue for MNCs, so it’s worth it to get it right. I recently participated in a teleconference with FSG clients, comprised of general managers and heads of strategy for Asia-Pacific and China. I have included several key takeaways from the conference below.

  1.  Partnerships in China are a “marriage of convenience” and never a “match made in heaven.” In order to succeed with a partner in China you need to have an open mind, a willingness to engage like you have never been engaged before, flexibilities to deal with whatever is thrown at you, and determination to stay the course.
  2. Strategic alignment with local partners is utopian in China. At the simplest level, Chinese companies want know-how while foreign companies want market access. If MNCs are not careful about the potential know-how loss, this marriage will be dissolved in a flash or alternately maintained but milked to your detriment.
  3. Always give yourself options when selecting partners: try to approach partner selection by giving yourself options. At the very least, this helps your negotiation position and also ensures your ultimate selection is more considered.
  4. The transaction process is often unpredictable in China and rarely is completed on-time. That’s why it is sensible to try to run discussion in parallel rather than end to end. Don’t let impatience or frustration lead to unnecessary compromise or poor deals. 
  5. It is critical to manage headquarter expectation: Managing expectation of key stakeholders is critical and this requires clear, consistent, and frequent communication. Despite the limitation of written agreements, one of the best strategies is to commit intentions to writing and get all parties to sign. This tactic can be applied not just externally but also internally with headquarters. MNCs can conduct post-venture reviews of the partnership and evaluate best practices for future acquisitions.

I’ll be participating in more conversations around this topic in the next 2-3 months and look forward to sharing additional highlights.


FSG clients can access all of our China research through the client portal. Not a client? Click here for more information about our China research.

Does India’s Q1 Performance Make It Stand Out Among BRIC Peers?

Registering an annual growth rate of 5.7% in the first quarter of its new fiscal year (Apr-Jun) has put India on the top of many global and regional publications’ ‘to follow’ list, hailing it as the surprise success story among the faltering (large) emerging markets (see snapshots from various global publications below). And by no means should one discount the importance of 5.7% figure, given that it is the country’s fastest growth in more than two years. But at this juncture, it is important to ask three fundamental questions to keep matters in perspective: (1) How surprising is India’s out-performance? (2) Is this a result of the ‘Modi-Effect’? and (3) Does this mean India is back on its path to recovery?

India Stands Out Among BRIC Peeres

1. How surprising is India’s out-performance?

  • India’s growth outpacing that of its peers should not surprise most MNCs; according to forecasts as early as March of this year, South Africa and Brazil were expected to grow at 2.5% and Russia at barely 0.8%, all significantly slower than India 5.4%, for the year 2014. The major adjustment then doesn’t come so much from an improvement in India but the continued deterioration of its peer markets; Brazil has now entered a technical recession and the Ukrainian conflict is expected to take Russia into one as well

2. Is the improved Q1 growth a result of the ‘Modi-Effect’?

  • Narendra Modi’s victory was announced on the 16th of May, his party officially began to take office by the start of June, and the new budget was only announced during the second week of July, much after the end of the first fiscal-quarter. Given this chain of events, the party would have been unlikely to have had any direct impact on the Q1 growth figures but their impeding victory might have played a significant role in the uptick. Improved consumer sentiment (from their expectations of faster growth ahead) and investor confidence (in their belief in a stabilized policy-making environment) likely led to the higher output from manufacturing and services

3. Does this mean India is back on its path to recovery?  

  • Companies should not assume that India is going to return to its 8-10% growth potential in the next 6-to-12 months because the Modi government has yet to roll-out the major overhauls the country require in-terms of (a) taxation, (b) land-acquisition, (c) labor regulation, (d) sector deregulation, and (e) infrastructure upgrades. However, improving consumption demand along with revival in capital investments (yet to be seen) can allow India to grow from 5.5% in 2014 to 7.5-8% by 2016. Leading indicators to monitor – car sales, electricity consumption, oil imports, money-supply, and capital investments (Watch out for FSG’s next Quarterly Market Review on India)

Indonesia’s Political Landscape: Credible opposition from Prabowo unlikely

FSG’s Practice Leader for APAC, Adam Jarczyk, sat down with the host of CNBC’s “Squawk Box” recently to discuss developments in Indonesia’s political landscape.

Excerpts from Adam’s notes:

Will Prabowo continue to oppose Jokowi now that his appeal has been rejected?

  • He may try, but it’s likely to be a futile battle.  Now that Indonesia’s Constitutional Court has issued its ruling, there will be significant pressure on Prabowo’s political allies to desert him and move into Jokowi’s camp
  • Unless Prabowo can hold his coalition together, it will be very difficult for him to mount a credible opposition

What is the outlook for Jokowi’s leadership and policy direction?

  • The outlook for Indonesia’s next administration is broadly positive; the executives we work with have expressed quite a bit of optimism about Jokowi’s potential to cut red tape and fight graft
  • Even so, deep-seated changes in a decentralized government like Indonesia’s will take time.  Jokowi will be pushing for bottom-up reform in a system full of powerful vested interests. And he will be doing it with a fragmented coalition
  • With this in mind, companies and investors need to maintain realistic expectations, particularly in the short term. Jokowi is trying to steer a very large ship back onto the right course, and that takes time

What is the outlook for investment from multinationals now that the elections are over?

  • We expect to see more investment flow into Indonesia once the dust has settled and a new administration is in place
  • The executives we work with ask for information on Indonesia more frequently than any other ASEAN country (and about as frequently as they ask for information on India), and this election is likely to reinforce that tendency
  • Indonesia’s relatively smooth democratic process stands in stark contrast to the political transitions we’ve seen in some other ASEAN countries recently, and the multinational executives we speak with in the region are taking notice

Urgent Needs for Talent Management in ASEAN

Talent-related Challenges are on the Rise in ASEAN

Numerous reports consistently highlight skill deficits as a major ASEAN concern. The Economist Intelligence Unit (EIU) also noted that the lack of labor and talent was causing significant issues for employers in Indonesia, the Philippines, Thailand, and Vietnam. In a recent survey, the International Labor Organization (ILO) on ASEAN revealed that skill shortages were inhibiting growth in several key sectors, such as trade, hotels, telecommunications, and IT. A vast majority of the companies recently surveyed in ASEAN revealed that they are facing severe issues with talent attraction and retention. According to the Hay Group, between 75% and 96% of firms in ASEAN are having trouble attracting the right type of talent. Given the lack of investment in high-quality tertiary education and training programs, issues associated with talent are here to stay.

Talent Management Urgency in ASEAN

Proactive Management is the Need of the Hour

The majority of multinationals in ASEAN, 61% according to one survey, expect the size of their workforce to grow alongside their thriving businesses. Although business planning often incorporates multiple variables that can affect growth, workforce planning in the region isn’t proactive and doesn’t account for talent supply-demand gaps. MNCs can’t afford to put addressing this need on hold for the following reasons: (a) As development of regional talent could take up to 10 years, starting early is important; (b) Many fast-growing and ambitious regional companies have more pulling power, making them just as attractive, if not more, as a choice of employer; (c) Because education standards in the region remain relatively low, investing early in the training process and sponsoring tertiary education is recommended.

Why is Proactive Talent Management Necessary Today?

In FSG’s latest work on the subject, titled Effectively Managing Talent in Southeast Asia, we highlight 10 issues that MNCs will likely face in ASEAN and 10 tactics that can used by MNCs to address those challenges. Clients can access full reports here.


This article is part 1 of three-part blog series on Talent Management in the ASEAN region. Check back next week for part 2.

For a full report on Effectively Managing Talent in Southeast Asia, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Trace the Lights III: Using FSG’s Clustering Approach in China

Following up from my last blog post on China’s blueprint for developing 19 city clusters by 2020 from the New National Urbanization Plan, FSG has gone one step further and analyzed the clusters beyond the policy level to help MNCs craft a cluster-based go-to-market strategy. My recently published piece on China’s evolving customer base and urbanization is not an academic treatise on urbanization policy or a primer for governments. Instead, it is a commercially focused wake-up call for multinationals under pressure to grow profitably.

With the rise of cities and city clusters in China representing the largest commercial growth in the decades ahead, most business decisions pivotal to the 2020 game plan should be made based on the commitment to winning in these cities/clusters with magnitude and well-defined strategies.

Where to Play:

FSG_clustering_approach2

First, FSG divided each cluster into three categories:  hub cities, big shots, new stars, and other surrounding cities for multinationals to use for resource prioritization. Hub cities are defined as super metropolitan cities and regional economic capitals. Big shots’ GDP exceeded over 300 billion RMB (US$ 48.4 billion) in 2013. New stars are promising, small and midsized cities ranked by FSG’s city index.

FSG lists the top 20 Chinese cities that may provide high market potential by 2020 based on analysis of 10 indicators, including both quantitative macroeconomic indicators and forward-looking investment indicators (e.g., the government’s high speed railway development plan and “hukou” reforms). Multinationals can use “hub cities” as a springboard to penetrate the whole cluster. To seek national coverage, companies can further penetrate “big shots” with a large market base to capture significant opportunities. After establishing scale in hub cities and big shots, companies should ramp up scale in the “new stars,” which are expected to lead market growth by 2020.

How to Play:

FSG_clustering_approach

Second, after addressing the question of “where to play,” the most important question is how these urban clusters will impact MNCs’ organizational decisions regarding channel strategy, organization strategy, talent strategy, and product strategy. For example, multinationals will have to assess the possibility of decentralizing their Chinese sales headquarters by branching out sales centers to other hub cities to get closer to local businesses—for instance, using Beijing as the northern China headquarters, Guangzhou as the southern China headquarters, and Chongqing as the western China headquarters.

Breaking down functional responsibilities into different clusters by leveraging the clusters’ specializations—for instance, building a logistics center in Wuhan because of its favorable geographic location, establishing an e-commerce hub in Chengdu, and incubating R&D innovation in Suzhou—will have to be mapped out in the process.


This article is the final piece of a three-part blog series on China Urbanization called Trace the Lights. View part 1 here, and part 2 here.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Trace the Lights II: China’s 19 City Clusters by 2020

China Clusters Map by 2020

As outlined in China’s 11th five-year plan, the Chinese government has pushed for the development of regional city clusters, aiming to drive economic growth, strengthen transportation, and influence the pattern of migrants. For those less familiar, city clusters are comprised of one or two cities, considered the nucleus, and several neighboring cities with well-connected transportation facilities.  China already has several mature mega clusters such as the Yangtze River Delta centered in Shanghai and the Pearl River Delta anchored by Guangzhou, but new initiatives to continue city cluster development are underway.

Earlier this year, The Central Committee of the Communist Party of China together with the State Council released the New National Urbanization plan, a series of integrated, cooperative government initiatives to establish a more coherent city cluster plan.  According to the document, China will have 19 clusters by 2020 as illustrated in the map above. The government intends to break the constraints of administrative divisions of these city clusters, realize the integration and consolidation of social and economic activities within vast areas, greatly reduce the distance and space between people, and promote human movement and economic activities at regional and national levels.

The formations of these metropolitan areas and urban clusters are changing and will continue to fundamentally change the way we look at China’s cities. In my previous post, I discussed China’s urbanization as a major driver for the future consumption-led economy.  As China continues to urbanize, the inter- and intra-cluster’s connectivity and motilities, driven by the development of public transport infrastructure, city boundaries are increasingly blurring.

FSG has aligned the clusters’ definitions with the government’s plans. Of the 19 clusters, 3 super clusters have been targeted to become world-class economic zones. An additional 8 clusters are called emerging clusters, each composing as much as 3–9% of total GDP in 2013. The government aims to turn these clusters into national zones as key pillars of the Chinese economy. The remaining 8 frontier clusters are included in government’s 2020 cluster master plan but haven’t yet taken shape, each with equal to or less than 2% of total GDP. Apart from the well-known super clusters, 8 emerging clusters have already or will feature prominently in the national urbanization process. Among them, FSG has highlighted the Yangtze Mid-River cluster and the Chengdu-Chongqing cluster because we believe they are poised to be the upcoming super clusters.


This article is part two of a three-part blog series on China Urbanization called Trace the Lights. Check back next week  for part three.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Trace the Lights: 5 Key China Urbanization Stories for MNCs

nasa earth at night
Source: NASA Image

Take a look at this famous NASA image, a satellite photo of the Earth at night. This map shows the geographic pattern of night time electricity consumption, but it also clearly shows the geographic distribution of cities and population. Lights are bright in South Korea, but most places are in dark in North Korea; within the US, the east coast is brighter than the rest. Likewise, the lights are brightest around Paris and London in Europe. While there are still lots of dark places in China, we must ask ourselves, as urbanization continues in the country, what will this map look like for China in 2020, and where will the brightest lights be?

1. Strategic plan for China 2020 should incorporate future urbanization landscape—“go deep” vs. “go wide”

Every Western multinational needs to ensure they look at China’s urbanization as a major driver for the future consumption-led economy. FSG’s analysis is a starting point to assess the clusters in which multinationals already operate, and more importantly, what the best plan for the future should be—“going deep” vs. “going wide.” A clustering approach uncovers synergies, which are necessary given the scale in China and therefore an important input into the game plan for China 2020. My next blog will provide more details on which clusters I’m referring to.

2. Managing profitable growth in China

Concentrating resources on certain clusters brings the opportunity to exploit scale more quickly, because companies can leverage the synergies in sales force, distribution partners, supply chain, and marketing efforts across a wider geographical scope than by managing on a single city basis without sufficient regional scale.

3. Future organizational design is tilting toward decentralization

Multinationals will have to assess the possibility of decentralizing their Chinese sales headquarters by branching out sales centers to other hub cities to get closer to local business—for instance, using Beijing as the northern China headquarters, Guangzhou as the southern China headquarters, and Chongqing as the western China headquarters. MNCs can also consider breaking down functional responsibilities into different clusters by leveraging the clusters’ specializations—for instance, building a logistics center in Wuhan because of its favorable geographic location, establishing an e-commerce hub in Chengdu, and incubating R&D innovation in Suzhou.

4. Western multinationals need to monitor the industry clusters very closely

The government is and will continue building numerous industry clusters across the country that will help build the ecosystem around them. High-skilled and high-tech industry value chains are gradually taking shape. For example, a few biotechnology companies set up their administrative operations and R&D centers in Shanghai, while locating manufacturing in neighboring cities such as Suzhou or economic zones such as Kunshan or Zhanjiang Industrial Park. MNCs can leverage the formation of mature industry clusters to screen out horizontal suppliers and customers, as well as monitor the vertical competitive environment.

5. Multinationals need to keep an eye out for key signposts that will evolve over time; everything may not be rosy

China’s urbanization program will cost approximately US$ 6.8 trillion. From 2015 to 2020, more than US$ 100 billion of new, related professional services and biddable infrastructure contracts are estimated to be available every year. However, local governments are already deeply debt-ridden, given that China’s total local government debt in mid-2013 ballooned to 17.9 trillion RMB. The gap between the urbanization rate and urban “hukou” rate has widened over time. The high levels of local government debt will make it difficult to provide provisions for adequate public services, including healthcare and education, to new migrants.


This article is part one of a three-part blog series on China Urbanization called Trace the Lights. Check back next week for part two.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.