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.

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.

Emerging Market View: What Our Analysts Are Reading

EM View

After defaulting on some of its restructured debt on July 30, Argentina has petitioned the International Court of Justice to hear a lawsuit against the U.S. According to the Wall Street Journal, the South American nation claims that decisions by the U.S. courts in the legal battle between Argentina and some of its creditors have violated its sovereignty, but FSG’s senior analyst for Latin America research says it’s merely a stalling tactic.

“Argentina’s lawsuit against the U.S. is a stalling tactic intended to bolster the Argentine government’s political rhetoric. Most likely, its main result will be a further delay in negotiations with holdout creditors,” says Gabriela Mallory.

On Tuesday, South African publication The Daily Maverick asserted that “corrupt, incompetent governments and their repeated failure to protect their citizens” was more to blame for the Ebola outbreak than the disease itself. FSG’s Sub-Saharan Africa analyst Alexa Lion agrees, adding that the virus will have little affect on Western businesses involved in the region.

“Ebola is scary but is fairly isolated from Western economic interests. Its spread speaks more of government inability to contain the virus rather than high risk of contagion. MNCs must be vigilant and articulate health precautions to their partners, but also remain aware that it is business as usual in West Africa’s largest hubs,” she says.

In Indonesia, members of losing presidential candidate Prabowo Subainto’s political coalition are planning to form a special committee, or pansus, in the House of Representatives, claiming electoral fraud. Despite Prabowo’s large presence in the legislature, FSG’s Adam Jarcysk says it is unlikely the court will rule in his favor.

“The Prabowo camp’s decision to begin saber-rattling now about launching a pansus in October suggests that the Constitutional Court is likely to support Jokowi in its ruling later this month,” says Adam Jarczyk, FSG’s Asia Pacific Practice Leader.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Manufacturing Attractiveness Index of the ASEAN Countries

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc).

FSG’s Country-Level Manufacturing Attractiveness Index
As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)

FSG has created an industry-agnostic, manufacturing attractiveness index of the five major ASEAN countries based on the assessment of 30 key indicators under 6 key major groupings. See bar-graph below for the results of our analysis:

  • Labor conditions: average wages, minimum wages, engineer’s salaries, redundancy costs, literacy rate
  • Transport infrastructure: Quality of roads, quality of ports, quality of railroads, quality of air transport, logistics competence
  • Utilities (Support infrastructure): Quality of electricity supply, electricity production, energy production, broadband penetrations, mobile penetration
  • Regulatory environment: Investment freedom, tax rate, openness to foreign investment, prevalence of trade barriers, intellectual property rights
  • International trade conditions: Efficiency of import-export, number of days to import and to export, cost to import and export
  • Risk Factors: Gini coefficient, corruption, equity risk premium, banking sector risk, natural disaster risk

ASEANs Country Level Manufacturing

For companies conducting a similar analysis, couple of points to note before embarking on the exercise:

  • Make use of Weights: This benchmarking assumes equal weights for all parameters; however, companies should make adjustments according to their business needs to create the most accurate comparison
  • Conducting A Time Series Analysis: The benchmarking exercise should be done annually to measure change in the market’s dynamics

Country Profiles of the Major ASEAN Players and Their Key Provincial Regions of Manufacturing

1.       Malaysia

  1. Established industrial base: MNCs entered Malaysia as early as the 1970s, conducting manufacturing assembly in the country as a cheaper alternative to Singapore. The early entry of Western companies, access to raw materials (oil), and its established supply chains have allowed Malaysia to become one of the most competitive manufacturing locations in the region with top quality infrastructure
  2. High sophistication: Compared to its ASEAN peers, Malaysia has steadily moved up the value chain and is now mostly involved in higher value-added manufacturing and assembling, attempting to closely follow the footsteps of its neighbor, Singapore
  3. Cost barrier: With continuous progress and increasing sophistication, the cost of labor has also risen; engineers and manufacturing labor are the most expensive in the region

2.       Thailand

  1. Detroit of Asia: Accounting for over 12% of the country’s GDP, the automotive sector in Thailand has played a large part in cementing the country’s role as a key manufacturing location in the ASEAN region. Thailand has benefited heavily from sustained Japanese investments and is now the most industrialized nation in the region
  2. Rise of the Northeast: While most MNCs are unlikely to be exploring opportunities in Thailand beyond the central area, local firms are expecting the Northeastern region to perform better in the future, as it has access to a large consumer base, closer proximity to China, more attractive government incentives, a geographical area not prone to flooding, and mostly non-arable land

3.       Indonesia

  1. Manufacturing laggard: Despite obvious advantageous in terms of its location and relative wages, Indonesia has continued to remain a small player in regional production networks. Its labor market rigidities, a history of political uncertainty, and protectionist measures have kept MNCs at bay, but these trends are likely to change soon
  2. Rising interest because of costs and customers: Rising demand from ASEAN’s largest market has led several big-name MNCs to invest in the country; P&G began operations at its diaper production facility in 2013, and Foxconn, the world’s largest contract manufacturer, has committed a US$ 1 billion investment in order to set up its manufacturing facility

4.       Philippines

  1. Long-time semiconductor affair: The Philippines began to witness investments from semiconductor MNCs back in 1970s, when Western companies avoided the better established locations of Hong Kong, Taiwan, and South Korea, which were feared to be affected by the ongoing Cultural Revolution in China. Till date, the industry has a stronghold on the Philippines; almost 50% of the country’s network products (parts and components, and final assembly) exported are semiconductors, with another 27% related to computer manufacturing
  2. Philippine Economic Zone Authority’s (PEZA):  PEZA is an ISO 9001:2008 rated government agency responsible for being the one-stop-shop for investors looking to set up in the Philippines. The agency’s lack of corruption and relative efficiency have allowed for the 286 economic zones it manages, under which there are more than 3,000 companies and over 800,000 skilled and semi-skilled workers. The advantage companies find when dealing with PEZA is that it is a single entity, making stakeholder management simpler while reducing external intervention

5.       Vietnam

  1. Concentration: Vietnam’s most important industrial zones are concentrated in a remarkably small number of provinces. The majority of Vietnam’s manufacturing is located in the Southeast and the Red River Delta; together, these regions account for almost 75% of the country’s industrial output
  2. Cheap labor and proximity to China are Advantages: Samsung announced plans to invest US$ 4.5 billion in two plants in Bac Ninh and Thai Nguyen as part of its plans to relocate production from China. Both factories are expected to produce 250 million mobile phones per year. Vietnam serves as an excellent source of cheap labor (the cheapest among the ASEAN five) and is relatively close to two other manufacturing economies, China and Taiwan

Highlighted areas account for more than 75% of the manufacturing output in their respective countries

Manufacturing Map

For more information on the topic, you can download the podcast in which we discuss (a) the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of industries into the region, and (c) decipher the impact of the AEC

What Does The Rise of Manufacturing in ASEAN Mean for Multinationals?

While the rise of Southeast Asia has been discussed widely over the past few years due to its strong consumption demand, the production aspects of the region remain relatively unexplored with many companies not having examined ASEAN’s manufacturing capabilities, its ability to achieve economic integration, and the comparative strengths of the individual members as production units. FSG’s research shows that manufacturing is likely to play a significant role in ASEAN for years to come

The Rise of Manufacturing in ASEAN

Southeast Asia has experienced a strong CAGR of 5.5% in terms of its manufacturing output over the last decade and is now responsible for almost 4% of the global manufacturing output. This growth has been funded both by domestic companies as well as foreign investors; ASEAN surpassed China in terms of the FDI inflow in 2013 and the manufacturing sector received a large chunk of the funds. In fact, more than 30% of all FDI that has flown into ASEAN between 2005 and 2010 (see pie-cart below) has been towards manufacturing, and the sector is likely to continue to be one of the biggest beneficiaries of the growing interest from foreign investors. The major reasons for this drive in investments can be summarized through the ASEAN’s four C’s: Consumption (growth), Cost (low), Commodities (abundant), and Community (single ASEAN trade bloc)

ASEAN 1

However, even though the majority of the ASEAN countries have moved out of the agrarian state and have seen this growth in manufacturing, many are still in the early industrialization phases; meaning that the manufacturing sector is going to continue to see strong growth over the next 10 to 20 years (see graphic on the evolution of countries below) and will play a significant role in the development of the region

ASEAN 2

Assess the Direct Impact of the Rise of Manufacturing

  1. Serving the market: As costs rise elsewhere and the addressable market becomes larger in ASEAN, companies should explore the viability of moving production to the region using a “total factor performance” analysis. It is important to make sure that the analysis looks beyond the simple math of labor-cost and considers total factor performance (labor, transport, leadership, material, components, energy, and capital)
  2. Business customers (B2B) movement: Companies serving other manufacturing and production types of businesses should be assessing what types of industries are likely to invest heavily into Southeast Asia and which are not likely to consider moving beyond China

Gauge the Spillover Effects from the Rise of Manufacturing

  1. Productivity impact: The rise of manufacturing is going to positively impact productivity within the region, which has not seen a large improvement over the past decade. Manufacturing makes outsized contributions to trade, research and development (R&D), and productivity. The sector generates 70% of exports in major manufacturing economies, both advanced and emerging, and up to 90% of business R&D spending. Such productivity growth provides additional benefits, including considerable consumer surplus
  2. Rise in consumption will impact all industries: As the less industrialized countries of Indonesia, Vietnam, the Philippines, Myanmar, and Cambodia move from agrarian societies to manufacturing ones, companies should expect consumption dynamics to evolve. As people move from the less predictable farming sector to the fixed-wage manufacturing sector, they tend to experience strong income growth, increasing their capacity to consume. Even companies not exploring manufacturing opportunities in the region need to be monitoring this trend

Establish a Strategic Role for the ASEAN Region in Your APAC Portfolio

  1. Evaluate a “China Plus” strategy- China’s rise to manufacturing prominence over the past two decades has been staggering. However, rising costs, more sophisticated consumers, and fundamental macroeconomic realities mean that current approaches to manufacturing are losing their relevance. As the imperative for companies in China will be to boost productivity, refine product-development approaches, and tame supply-chain complexity, ASEAN has appeared on the horizon as a viable alternative for companies looking to expand their manufacturing footprint into relatively lower-cost locations. ASEAN countries provide cheaper labor, investor-friendly governments, and are part of established supply chains
  2. Compare the competitiveness of ASEAN (to China and India) – China is unlikely to lose its dominant position as the “factory of the world” anytime soon because of its well-established infrastructure, existing manufacturing facilities, ability to scale quickly, and strong involvement in established global supply chains. However, certain low value-added industries are likely to consider moving out of the country or at least setting up their next facility in Southeast Asia, where the cost of labor can be less than half of that in coastal China. ASEAN countries provide access to several raw materials, and certain locations have strong linkages to trade infrastructure
  3. Explore ASEAN’s complementarity to China- ASEAN countries are also likely to be playing a complementary role to China within several industries that depend on Asia for producing parts and final assembly. Given China’s established role as one of the most productive assembly locations in the world, due to its ability to scale quickly and availability of infrastructure, many companies produce their parts and components in cost-effective locations within the ASEAN region, conduct the final assembly in China, and then have the finished product shipped to the end customer. The ASEAN-China free trade agreement has helped companies create such fragmented supply chains

In FSG’s latest report on the region, titled ‘ASEAN’s Role in Manufacturing’, (a) we explore the rise of ASEAN as a manufacturing hub, (b) diagnose the viability of movement of different types of industries into Southeast Asian countries, (c) conduct a location analysis of the various manufacturing sites in ASEAN, and (d) decipher the impact of the ASEAN Economic Community on manufacturing decisions. FSG clients may click here to see the full report

Emerging Markets Opportunity Not Over

Currency-Volatility-Global-Performance-DriversRecent reversals in capital flows caused large and sudden currency devaluations, faster than many emerging markets expected or could manage. As a result, many market commentators have called this end of the emerging markets opportunity. That statement couldn’t be further from the truth. While companies should always expect challenges in emerging markets, the changing environment will also create a new set of opportunities.

FSG identified four ways companies can capture growth in this shifting environment:

  1. Leverage home-currency strength to win share back from emerging markets–based competition
  2. Double down on local production to reduce production costs
  3. Use balance sheet strength to earn financing margins
  4. Reassess customer segmentation to identify local customer “winners”

FSG looks at these strategies and the drivers of the changing global environment in our 2014 Global Performance Drivers report, now available for FSG clients.

What happened?

Capital flows reversed because of push and pull factors.  As the US economy continues to improve, the Federal Reserve is expected to reduce bond purchases, changing the risk-return payoff for portfolio investors, “pulling” capital out of emerging markets.  We also see slowing growth in emerging markets “pushing” capital to developed markets.  The outflow of capital is more concerning for countries like Turkey, Poland, and Ukraine, which have high levels of short-term external debt. Countries fitting this profile may run into short-term funding challenges that could drive up local interest rates, or in the worst case cause temporary liquidity problems. Other countries like India and Indonesia may now struggle with inflation as currencies decrease faster than is manageable, driving up costs for consumers.

PODCAST: Managing Indonesia’s Workforce Risks in 2013

Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, and a new regulation will be implemented that restricts companies’ flexibility on staffing.

In this podcast, Adam Jarczyk, Associate Practice Leader for Asia Pacific Research, discusses these risks in detail and explains how you can use a 2-pronged approach to limit their impact on your business.  For further information on managing Indonesia’s workforce risks, be sure to read Managing Indonesia’s Workforce Risks in 2013, a blog post also authored by Adam Jarczyk.

To listen to or download the podcast, click on this link to access the iTunes store.

Managing Indonesia’s Workforce Risks in 2013

Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, pushing companies towards a labor cost trap, and a new regulation slated for implementation later this year will restrict companies’ flexibility on staffing.

It’s been a rough Q1 for many executives in Indonesia.  Double-digit minimum wage hikes, which came into effect at the beginning of the year, are driving up labor costs for companies across the board and putting significant pressure on their bottom lines.  This effect has been particularly acute in Greater Jakarta where mandated increases reached upwards of 40%.

Adjusting to these wage hikes has been a painful process, and executives would undoubtedly welcome a reprieve from dramatic shifts in their labor costs.  Unfortunately, however, a reprieve is not in the cards.  Over the next 12 months, workforce risks for companies in Indonesia will only continue to increase.

Mindful of upcoming elections and ongoing labor protests, Indonesia’s politicians will continue raising minimum wages, likely by another 15-30% over the next 12 months.  This will push companies towards a trap in which they must pay out hefty sums before reducing headcount and driving productivity among their remaining employees.

Minimum wage increases (2012-2013) and firing costs

 

If this weren’t difficult enough to deal with, Jakarta has also passed a regulation that will restrict companies from using temporary contracting for most positions. (In Indonesia, this practice is commonly referred to as “outsourcing” and remains a very sore point with labor leaders.)  When the regulation comes into effect in the middle of November, over 13 million workers currently employed under temporary contracts could start demanding full-time employment.

These developments have the potential to create significant liabilities for multinationals operating in Indonesia.  With this in mind, executives should take steps now to mitigate rising labor costs and upcoming staffing limitations.  Companies that proactively manage these workforce risks should be able to offset some of their costs.  Those that don’t will look back 12 months from now and reminisce about how good they had it in Q1 of 2013.

 

Emerging Market View: What Our Analysts Are Reading – 2/22/2013

Setbacks in the hopeful open sky policy for ASEAN, as well as more nervy news for Egypt’s declining fiscal health round off this week’s headlines highlighted by our research analysts:

The Wall Street Journal wrote an article on ASEAN’s open sky policy setbacks due to Indonesia:

“A good example showcasing the good intentions of the community and their positive impact on commerce in the region, but the unfortunate slow progress due to its consensus based approach of ratifying policies.”
- Shishir Sinha, Research Analyst for Asia Pacific

Arham Online, an Egyptian news website, reported currency reserves declining as Egypt’s state grain buyer steps aside:

“Egypt’s announcement that it is running out of wheat reserves is very troubling. Currency has weakened 15% since 2011 and FX reserves are down to US$13.6 billion. So it is becoming more expensive to import wheat and Egypt is running out of money to pay for it. Any significant spike in global commodity prices, a drought in Russia or Ukraine, etc. could lead to a larger economic crisis.”
- Matthew Spivack, Practice Leader for the Middle East and Africa

The Financial Times’ Beyondbrics blog, centered on emerging market news and also frequently read by FSG, posted a potential pulse in the Brazilian economy; the optimistic sentiment is not universally shared with regional executives:

“Though the Central Bank of Brazil is now stating that economic growth came in stronger than expected in 2012, this contrasts substantially from the sentiments our senior executives operating out of Brazil have expressed to FSG over the last few months. Most senior executives continue to see Brazil suffering from a sharp slowdown through the beginning of this year.”
- Antonio Martinez, Senior Research Analyst for Latin America

*Compiled by Hal Olson