Understanding the ASEAN Economic Community

What is The ASEAN Economic Community (AEC)?

Contrary to common belief, the goal of The ASEAN Economic Community is not just to form a free-trade area, but to create a highly integrated economic community by 2015, that focuses on four pillars, majority of which will impact multinational companies. See the graphic below for a simple analogy explaining the relationship of the ASEAN to the ASEAN Economic Community:

 

Four pillars of The ASEAN Economic Community

What is FSG’s View on the ASEAN Economic Community?

  1. Multinationals across the board stand to gain from the AEC, either by directly participating in the growth story through their industry specific strategies or indirectly through the spillover effects of increased economic activity
  2. The AEC is more than just a free-trade agreement; MNCs should soon begin to experience other benefits as the region begins to improve its infrastructure, have better intellectual property rights protection regulation and harmonized investment laws, and allow for easier movement of capital and skilled labor
  3. Foreign direct investment should witness a surge as both inter-ASEAN and external foreign investments pour into the region to benefit from the access to the larger market, lower trade barriers, and increasing ease of doing business
  4. It is unlikely that ASEAN can achieve its target of completely building the AEC by 2015. However, the deadline of December 31, 2015 does not indicate a magical date when the economic community suddenly ‘turns on’; it is already happening and therefore companies can benefit from the changes taking place right now

 

Watch out for these 4 red flags when doing business in Myanmar

Important to remain alert: Amidst the enthusiasm, multinationals should not underestimate the fragility of Myanmar’s long path of development that can easily be derailed by misguided leadership and influential crony businessmen. Here are four red flags for you to look out for:

Myanmar

Organizational Structure Best Practices in Asia Pacific from Valmont

Valmont

In one of the most diverse and varied marketplaces, senior executives in the Asia Pacific region face complex challenges in developing an efficient organizational structure.  Should companies group their business units geographically?  By function?  How decentralized should decision-making be? In order to gain insight into the unique strategies for confronting these questions, I sought out the expertise of Valmont’s Asia Pacific senior management team, who has successfully navigated a large acquisition to meet growth and profitability targets in Asia.  In a recent interview, Vik Bansal, Group President of Asia Pacific, and John Fehon, VP – Finance, shared their best practices for successfully creating a matrix organizational structure in Asia Pacific.

The Valmont APAC executives are firm believers that business unit leaders need to be empowered to run their businesses. However, Valmont is able to maintain control over this decentralization by thinking of their matrix organizational structure uniquely.  “Our business is a necklace with individual pearls, the threads that go through all of those pearls are the functions that should be common across each unit”. For Valmont, they selected three key common threads that link each disparate business unit together.

  1. Standardized financial systems – this is non-negotiable across business units.
  2. Applying the Valmont way – with a focus on continuous improvement, individual business units are able to apply this concept in the most relevant manner for their market.
  3. Talent identification and succession planning – In order to ensure a healthy pipeline of future managers, Valmont leadership spend significant time identifying leaders from compatibility and capability perspective.

Multinationals that have their strategic plans jointly owned by both regional executives as well as local teams have an opportunity to promote alignment throughout their organization.  Valmont has been able to leverage their internal collaboration into a strong, autonomous, and agile workforce that is capable of succeeding in the diverse and fast-paced Asia Pacific business environment.

How to Most Effectively Influence Government Policy-Making in Asia?

Effective Channel Management

Frontier Strategy Group’s research has found that Multinational companies across Asia use a wide variety of channels to influence government policy as differing political systems and cultural norms demand unique strategies to manage domestic government engagement.    

1. Effective Channels For Influencing Government Policy

Companies across China, India, and S.E. Asia find local industry organizations, chambers of commerce, and external government affairs agencies to be the three most effective channels for influencing government policy

2. Top Choice For Influencing Government Policy

Government Engagement Graph Local industry organizations are also the first choice for more than 40% of the respondents for influencing government policy across all regions

Interestingly, India is the only region in which engaging external government affairs agencies is a top choice for influencing public policy. Handling India’s political complexities and unreceptive government officials requires strong local connections that government affairs agencies are able to manage effectively

In China, engaging business partners to influence public policy is considered highly effective due to the strong relationship between the government and the private sector. This is not surprising because “guan xi” (relationship ties) play a very important role in gaining access to policy makers thus influencing their decisions

 

*Shishir Sinha contributed to this post

Will Chinese Consumers Pay for Quality?

Chinese market

The following post is from Frontier Strategy Group expert advisor, Richard Brubaker’s All Roads Lead to China blog. The post is called Quality in China. Is it Valuable Enough to Pay for?

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While the typical conversation about “quality” in China will be one of manufacturing failures, I was asked by a good friend to comment about my thoughts on whether or not the “Chinese” market was ready as a consumer of quality.

A topic that I would say I brush past on a regular basis as in the last few years it is easy to see there is a market of Chinese consumers who are looking to enjoy a higher level of standard in products (middle market and luxury), but more widely there was a mass who were engaging in what I call fear based consumerism as a result of the countless consumer scandals in China.

And in answering her questions below, I really felt it was best to focus on the later group because (in my mind) these are the consumers that are going to be far more interesting, stable, and loyal in the future. And that for all the hub bub of China’s growth in luxury, it will ultimately be the middle market where firms focused on “quality” should be focusing their efforts.

Question 1: How will Chinese consumers be thinking about Quality (Durability, Safety, Longevity, etc) for products in 3-5 years

This is ultimately the question that will drive brands nuts going forward because there are going to be some very clear markets that develop, and some which pop up and then die quickly, all depending on the “consumer”.

If one views the government as a consumer who is looking to by “quality” for their projects (think cleantech, healthcare, security, etc).  This is a very large market already, and is one where the “buyer” is looking for quality (even in the face of domestic innovation policies), and it is a market that is largely owned by foreign firms like CISCO, GE, and NALCO

If the market is of the average consumer, this will obviously re-frame a bit, but buying quality if becoming something important to them, particularly if one considers food, children, and healthcare markets.  In these markets, there is a lot of anxiety, and foreign pharma and overseas Organic labels are selling at a premium to the local alternatives.

… and this trend will only continue consumer income increases, awareness of local product safety issues increases, and access to “quality” items increases.

Question 2: Will they pay more

Yes.  They already are.

Looking at food alone, you have markets for local organic and imported organic, which both carry a premium.

In areas of education, parents are more likely to pay the 20% premium to send their kids to Disney English, than to the even the best nationally branded schools, and there are parents who are (currently) willing to spend the 20% premium to send their kids to the nationally branded English schools than to a local English school

.. and in the area of healthcare, Shanghai and Beijing hospitals have up to 50% “waidi” patients who have opted not to visit local/ provincial options.  They are seeking the best in care, and are willing to pay (above and below the table) what it takes.  Even if that means selling land.

Question 3: What will be top of mind for them

Depends on category, but product safety will be one of the biggest drivers for consumers to seek out, and remain loyal to, a product.  However performance and durability will also be at the top of the list.  There will be a point where consumers locally understand that there are some products whose short term savings will have a much higher long term cost due to their design, materials, etc, and these consumers will begin moving towards quality in that regard as well (even at a premium) so as to reduce their own time suck.

Question 4: How should companies be thinking to cater their offerings towards these needs

Companies that succeed will be the ones that understand the undercurrents the best. A lot of firms who have entered China do so without considering the big picture.  They have researched a specific market, or group of people, in a vacuum environment without considering the what ifs, and a year later they are shuttering operations (or hemorrhaging cash keeping it on life support)

Entering the market doesn’t just require a good product, it also requires good technical support (for the development of future products) and after sales service (for when things go wrong), and anyone who is operating a model without either is either going to burn out quickly or have a pack of angry consumers banging on their door. Either way, they are not developing a loyal consumer base.

 

Despite Strong Growth, Significant Risk Threatens Asia

Most Asian countries have maintained strong economic growth in recent months despite the turmoil in global markets; however, significant downside risks threaten the region’s continued performance. In Thailand, floods threaten to undermine the country’s growth and disrupt regional supply chains. In China, a spate of defaults in the informal banking market is casting a shadow over the country’s prospects

  • Bangladesh: Bangladesh’s deal with India will likely lead to long-term growth of bilateral trade and improvement of domestic infrastructure
  • Cambodia: As Cambodia becomes increasingly integrated into the regional and global economies, it will start drawing significant attention from investors
  • China: Multinationals should watch for news of further SME defaults as they could put a drag on Chinese growth
  • India: India’s Right to Information Act is beginning to create serious problems for corrupt politicians and businessmen
  • Indonesia: Indonesia’s policymakers have shifted their attention from inflation to growth, confident that they have price pressures under control
  • Japan: The economy’s slow path to recovery will further decelerate due to the  global economic slowdown, rising Yen, and continuing energy issues
  • Malaysia: Malaysia has drawn significant FDI so far this year, suggesting that the country remains an attractive destination for manufacturing
  • Pakistan: Recent interest rate cuts, which were aimed at promoting growth, are likely to spur already high inflation
  • Philippines: A recently announced fiscal stimulus package may create opportunities for multinationals operating in the Philippines
  • South Korea: New anti-graft reform measures should help to improve South Korea’s corruption landscape over the medium term
  • Taiwan: Taiwan’s business environment will continue to improve as the island’s leaders work proactively to attract investment
  • Thailand: The recent floods will impact global supply chains for agricultural goods, automobiles, and consumer electronics until at least Q1 2012
  • Vietnam: Pledged foreign direct investment is dropping as growing domestic risks give companies reason to pause

Monthly Regional Insights – Asia Pacific October 2011

Most Asian countries continue to exhibit strong growth despite the recent turmoil in global markets. However, if there is a full-blown recession in the developed world, some markets will weather the storm better than others. In particular, domestically-oriented countries like India and Indonesia will be much less affected by a downturn in the West than will export-oriented countries like Thailand and Malaysia

  • Bangladesh: Bangladesh’s deal with India will likely lead to long-term growth of bilateral trade and improvement of domestic infrastructure
  • Cambodia: As Cambodia becomes increasingly integrated into the regional and global economies, it will start drawing significant attention from investors
  • China: Signs of weakening consumer demand have appeared in the luxury goods industry, which has seen stellar growth numbers in H1 2011
  • India: Continuing interest rate hikes along with inflationary pressures will dampen GDP and industrial growth for the remainder of 2011
  • Indonesia: MNCs should ensure that they are effectively taking advantage of Indonesia’s numerous government incentive programs
  • Japan: The economy’s slow path to recovery will further decelerate due to the  global economic slowdown, rising Yen, and continuing energy issues
  • Malaysia: Malaysia is pursuing an unprecedented expansion of its oil infrastructure that may create significant opportunities for multinationals
  • Pakistan: Companies should expect price pressures in Pakistan to remain elevated for the foreseeable future
  • Philippines: A new agreement with China will bolster bilateral trade and boost foreign direct investment in the Philippines
  • South Korea: New anti-graft reform measures should help to improve South Korea’s corruption landscape over the medium term
  • Taiwan: Taiwan’s business environment will continue to improve as the island’s leaders work proactively to attract investment
  • Thailand: Companies should remain cautious of the political landscape until the country’s new government has established a solid base of support
  • Vietnam: The government’s new minimum wage hike will undergird Vietnam’s inflationary spiral, prolonging the pain for multinationals in the country

Western MNCs Shifting from Asia to Latin America

In emerging markets, multinationals are shifting from Asia to Latin America, boding well for the region’s growth. Frontier Strategy Group’s Matt Lasov explains more in this interview by MarketWatch’s Laura Mandaro.

Central Banks Attack Economic Imbalances through the New Monetary Calculus

Malaysia surprised markets last week when it did not raise interest rates. Instead Malaysia’s central bank instituted increased reserve requirements in an effort to restrain the flow of credit and cool inflation in a hot economy.

This is the new monetary calculus in emerging markets. In a globalized world, most emerging market central banks do not have the firepower to maintain prices with monetary policy alone. Capital from slow-growth mature markets, mainly the US and Europe, is attracted to emerging market bonds because of strong growth prospects, increased stability and widening interest rate spreads. As emerging market central banks raise rates to cool their economies, more foreign capital pours in and exacerbates the currency and inflationary imbalances that the central banks are looking to control.

Malaysia’s move will not go far enough to normalize its economic imbalances, but it is an important and creative start. Companies can expect similar moves by central banks in other emerging markets. If the new calculus can turn into consistent policy, currency appreciation will slow to mirror the pace of rising standards of living rather than the more rapid and unpredictable pace of foreign capital flows. This will impact hedging strategies as corporate treasuries can more accurately anticipate currency volatility across their growing emerging markets portfolio. Inflation may also cool as bank lending becomes more stringent, increasing consumer wallet-share for discretionary goods while also relieving some pressure from rising labor costs.

Brazil employed similarly creative strategies around taxing portfolio inflows to slow currency appreciation, while also using more traditional rate hikes in a combined effort to curb inflation and currency appreciation.

The new monetary calculus is a key step for financial stability and continued economic growth in emerging markets. Markets employing these strategies are likely to outperform in an unbalanced economic environment characterized by slow growth in mature markets and rapid growth in emerging markets.

 

Monthly Regional Insights: Asia Pacific

Each month Frontier Strategy Group releases monthly market reports to its clients. These concise, executive-friendly reports highlight key developments and market trends in a particular region.

Inflation continues to be a concern in July for most countries in the Asia Pacific region, although its magnitude and impact differ across markets. In Indonesia and the Philippines, inflation seems to be under control; in India and Bangladesh, rapidly rising consumer prices threaten to accelerate; and in Vietnam, soaring inflation is eroding available income and undermining consumer spending, starting to fuel labor strikes.

Other insights from this month’s report include:

  • Bangladesh: Multinationals should monitor Bangladesh’s budgetary spending, as it will impact the country’s ability to support substantial industrial development
  • Cambodia: Shortages of skilled workers may create a drag on Cambodia’s rapid growth in the coming years
  • China: The Chinese government is becoming more assertive in promoting national interest and guiding development in key industries
  • India: Multinationals should plan for inflationary pressures in India to remain strong for at least another year
  • Indonesia: Consumer confidence will remain steady this year as long as inflation doesn’t spiral out of control
  • Japan: Funding Japan’s recovery may become increasingly difficult as future budget packages reopen political rifts within and between parties
  • Pakistan: Efforts to boost economic development in Pakistan will be marred by worsening relations with the US
  • Philippines: Recent moves by the Aquino administration suggest that it is serious about reducing waste and fighting corruption
  • Thailand: Companies that have not already done so should make contingency plans for further unrest and the possibility of a coup d’état
  • Vietnam: If Hanoi does not bring inflation under control soon, strikes will multiply, wages will rise, and FDI will drop