Rising labour costs in China have executives of Venture Corp., a Singapore-based provider of technology services, worried about the company’s expansion plans.
“China is an important market for us, but we have to be very cautious when expanding there because of the significant cost escalation,” Tan Kian Seng, Venture Corp.’s president, said in a new Ernst & Young report about how Asian companies plan to expand globally.
China’s status as a low-cost manufacturer of choice is facing stiff competition from other rapidly growing Asian countries, including Vietnam and Bangladesh. So Asian companies such as Venture Corp., which benefited from being a low-cost competitor, must carefully consider which new markets to target or build new competencies and skills as they expand.
Erosion of the low-cost business model—a key competitive advantage in the past decade—is just one of several potential growing pains more and more Asian companies will face as they pursue a global footprint in coming years, according to the E&Y report.
Annual foreign direct investments by Asian companies doubled to about $200 billion in the past decade and will double again, to about $400 billion per year, by 2020, E&Y projected, based on data from Oxford Economics and the International Monetary Fund.
To find out how Asian companies plan to expand in the face of these challenges, the Economist Intelligence Unit surveyed more than 600 business executives in East and Southeast Asia in March and April 2012.
Globally focused companies
Asia is home to 87 of the Fortune Global 500 largest firms and these Asian multinationals, as well as other Asian businesses operating in two or more markets abroad, are addressing growth challenges in a different way than Asian companies with a more regional focus, poll results suggest.
Globally focused Asian companies have already developed an international infrastructure. More than half of them have operations in Western Europe, China and North America. They seek further expansion, primarily to add customers and sales, and they expect to capture that growth in other emerging markets such as China (42%), India (33%) and the Middle East and North Africa (24%).
To get bigger, globally focused Asian companies plan to establish partnerships (36%), form joint ventures (28%) and acquire businesses (23%) in other emerging markets.
A key challenge that executives of globally focused Asian companies said they need to work on is training to give their leadership a better understanding of global markets (49%) and strategic hiring for international markets (42%).
It’s important to strike a careful balance in new markets between managers recruited locally and expatriates from corporate headquarters, Steve Ferguson, E&Y’s Asia-Pacific banking and capital markets leader, said in the report.
“If you send everyone from [the] head office, they may understand the corporate culture, but they’ll miss the nuances of what is required to operate locally,” he said. “Equally, if you must let the local people run a business, you’ll find that you’ve lost a bit of control. So it needs to be the right blend.”
Thirty-eight per cent of globally focused Asian companies said they recruit locally from new international markets as compared with 11% of Asian companies that are still regional in focus.
Regionally focused companies
An increasing number of Asian companies are planning to establish operations outside the region for the first time, according to the E&Y report. These regionally focused companies want to build an international footprint by expanding to Western Europe (32%), the Middle East and North Africa (28%) and Brazil (20%).
They’re primarily looking to boost direct exports, establish sales and distribution desks and enter into franchise or licensing agreements overseas. In developed economies, their top goal is to recruit skilled workers. In emerging economies, they are seeking to fill market gaps for products and services.
Executives at regionally focused Asian companies are aware that their key challenge is shoring up their operational infrastructure as they expand internationally. Forty-two per cent said the strategic plan will require changes to ensure the success of the company’s international expansion plans. Forty-one per cent expected changes to their company’s financial management and 35% expected changes to internal communications.
“You have to make sure you have an infrastructure that is well set up for global expansion,” Lilliana Choi, manager of corporate strategy and development at Jebsen & Co., a marketing and distribution company based in Hong Kong, said in the E&Y report. “Without the right structure and capabilities in place, expansion is unlikely to be effective.”
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.