The prospect of a single Southeast Asian market holds great appeal for multinational companies but not all of them are certain how to best take advantage of the Asean Economic Community in 2015. Executives face tough strategic decisions about the best countries to base activities and the right products and services to offer in the market of 600 million consumers. Kenji Kawase of Nikkei Asian Review profiles three companies that are making those choices.
Citi: ‘Don’t call us foreign’
Chinese yuan clearing is a huge opportunity for Citi, says Michael Zink, head of Asean operations.
In Singapore, Citibank is more than simply one of 117 foreign banks operating in the city-state. Although it is headquartered in New York, it competes head-on with Singapore’s Big Three banks — United Overseas Bank, DBS Bank, and Oversea-Chinese Banking Corp — in virtually all areas of the business.
Firmly ensconced in the financial capital of Southeast Asia, Citi is now looking to enhance its regional in the Asean Economic Community.
“In Singapore, I don’t really like people calling us a foreign bank because we have been there for 112 years. We are older than [the Big Three in Singapore],” said Michael Zink, head of Citibank’s Asean operations, in an interview with the Nikkei Asian Review in Bangkok.
Citi opened its doors in Singapore and some other major cities in Asia, such as Yokohama, Hong Kong, Shanghai and Manila in 1902. A walk along any major street in Singapore or a ride on the subway is enough to demonstrate its strong local presence.
The biggest boon to Citi in recent years has been the 2004 free trade agreement signed between Singapore and the United States. This lifted restrictions on the number of branches the bank could open, helping Citi expand from a single branch and four ATMs before the FTA to 1,600 access points, including 23 branches and 174 Citibank ATMs.
In addition to its aggressive retail strategy, Citibank is now the largest issuer of Visa credit cards in Singapore. Half the credit card holders in the country carry Citibank plastic in their wallets. The company has more than 10,000 local staff, making it the largest employer in the banking sector.
A decade on from the FTA, the Asean Economic Community represents a new frontier for the bank. The community will not immediately end on branch openings or unify regulation in the region.
But the boost to manufacturing likely to come from deeper economic ties will intensify business dealings, both inside the group and between Asean and other regions. This will increase demand for financial services and give Citi an opportunity to strengthen its position as a global bank from its Singaporean stronghold.
One promising area for the bank is Chinese currency dealing. “So much of what is produced here [in Asean] finds its way to China ... either as part of the supply chain [or as] finished goods,” said Zink. “All those flows are priced in yuan, the currency of the ultimate buyers.” Citi leads the pack in Singapore offshore yuan clearing.
Another strength for Citi is mergers and acquisitions. According to Dealogic’s M&A advisory league table, Citi ranks second in the Asia-Pacific, excluding Japan, through June 9. Although the bank does most of its deals in North Asia, Citi was an adviser to Wing Hang Bank of Hong Kong, which was the target of a $5 billion acquisition announced by OCBC in April.
Whatever its advantages, Citbank is in for a fight in Asean’s competitive banking market; international and local players are also hungry for new business.
Australia and New Zealand Banking Group (ANZ) was granted a banking licence by Thai regulators in May. It will now be able to open up to 20 branches and ATMs each, and provide corporate financing services. This will give the bank a footprint to eight out of 10 Asean countries, compared with seven for Citi, which, unlike ANZ, does not have a presence in Cambodia or Laos.
London-based Standard Chartered, meanwhile, has a physical presence in all 10 Asean countries, if one includes representative offices. And HSBC Holdings, although it withdrew from retail banking and wealth management in Thailand in 2012, has strong roots in Asia and a vastly deeper pool of offshore yuan funds than Citi, thanks to its Hong Kong hub. It also has a much more extensive branch network in mainland China to exploit for yuan transactions.
Other regional players are also in the mix. Along with the Big Three Singaporean banks, Malaysian banks are serious competitors throughout key markets in Asean.
CIMB Group Holdings operates in eight countries in the region and does 40% of its business outside its home market. The company’s CEO, Nazir Razak, who is the youngest brother of Malaysian Prime Minister Najib Razak, told the media in April, “We are very much geared up for the AEC.”
The scramble for business is just beginning in an Asean that is increasingly without borders.
Honda: Rolling in Indonesia
At Honda Motor’s new Indonesian automobile plant that opened in January in an eastern suburb of Jakarta, unfinished Mobilio cars are nose to tail on the assembly line.
Doors are removed from the bodies of the multipurpose vehicles after painting and sent to the second floor to have windows and electronics installed, then reattached. Two-level plants are rare outside cramped Japan. “It cost a lot to build a two-storey plant, but the reduced need for transport more than offsets that,” said Toshihiko Doke, a coordinator at Honda’s Indonesian subsidiary Honda Prospect Motor.
The new plant, with its intricate layout, is already operating near capacity, thanks to the Mobilio’s brisk sales. In April there were 7,832 Mobilios sold in Indonesia, making it the country’s No. 2-selling model behind Toyota Motor’s Avanza multipurpose vehicle, which had sales of 14,001 units.
In all, 435,382 cars were sold in Indonesia in the first four months of the year, making it the largest market in the Association of Southeast Asian Nations, ahead of Thailand’s 297,431 vehicles. Compact multipurpose vehicles, with 1.3- and 1.5-litre engines and three rows of seats that can carry up to seven passengers, account for more than 30% of Indonesia’s new-car sales.
With 230 million increasingly wealthy people, many taking to the roads, Indonesia’s market is important. Yoshiyuki Matsumoto, executive vice president of Asian Honda Motor, has had to battle complacency in its Indonesian unit.
“It was clear [that multipurpose vehicles] were mainstream in Indonesia, but domestic management did not even question why there were no Honda cars in that segment,” said Matsumoto, recalling a visit to the country three years ago. As soon as he returned to Japan, he approved the development of the Mobilio and the construction of a new Indonesian plant.
Honda, a latecomer to the multipurpose vehicle segment, believes the Mobilio has features that will help it catch its rivals. Typically the third row of seats in these cars is narrow, but the Mobilio’s is spacious and it has trunk space in the rear.
Another plus is the high ratio of local content, at 86%, which helps keep costs down. The base-model Mobilio is priced at 160 million rupiah (430,000 baht), 30% less than the Honda Freed, a similar car built to Japanese specifications that has a local content rate of 50%. The Mobilio is priced competitively with the Toyota Avanza.
Honda’s aggressive moves in Indonesia represent a shift in focus away from North America and toward Asia. Its heavy reliance on the North American market cost it dearly following the global financial crisis of 2008. Honda’s profits took a nosedive, along with the North American market.
Takanobu Ito, who took over as president in the midst of the turmoil, vowed to pay more attention to rapidly growing emerging markets. Asean figured prominently in his plans, making a new model for the region critical.
Honda created the Mobilio for Indonesia by tweaking the length and height of the Brio, a subcompact that failed to take off in Thailand. It also borrows from the Brio Amaze, which had been a hit in India with its diesel engine.
“The existence of the Brio, a car which can be converted according to varying tastes in Asia, was very important in the sense that it cut the development time for models likely to become hot sellers in specific markets, as well as costs,” said Noriaki Abe, president of Asian Honda Motor.
Of the 4.36 million cars Honda sold worldwide last year, 560,000 were sold in the Asia-Pacific, excluding Japan and China. The company aims to sell 6 million vehicles by fiscal 2016, 1.2 million of those in the Asia-Pacific. It also wants Asian sales to reach 20% of the global total, up from slightly under 13% now.
Of that 1.2 million it hopes to sell in the region, it forecasts that Thailand, Indonesia and India will account for 300,000 each and Malaysia 100,000, up by between 50% and 200% from the current sales levels in these countries. To reach those targets, Honda is raising its production capacity in these countries.
The North American market has recovered from its 2008 low. But, said Matsumoto, “Even if we lose North America, we see a growth opportunity in Asia that will more than make up for the loss.”
Honda is revamping its business model as drastically as it has any of its cars. Instead of putting all of its chips on the table in North America, it will be spreading its bets to Asia in hopes of a payoff.
Universal Robina: Hungry heart
Many Asean businesses are baffled by what’s in store for them when the region’s economy further integrates next year. But the Philippines’ Universal Robina is not among them.
The company has been a pioneer in expanding abroad since the 1980s. Now the food processor looks set to capitalise on the Asean Economic Community, which promises to knit the economies of Southeast Asia even closer together.
“We are making an early investment because we think it is important to be early,” said CEO Lance Gokongwei in an earnings call late last year when asked about prospects for Myanmar. The once-isolated country, which is now busy reforming its economy, is the latest market Universal Robina wants to conquer.
“I think the potential of Myanmar in terms of population, resources and tourism is quite attractive,” Gokongwei said, likening the country to Vietnam, where the company began operating 10 years ago. The company is building a $30-million cookie and confectionery plant in Myanmar, which is scheduled to be up and running later this year.
“We do think one of the reasons we were successful in Vietnam is we were quite early, and [we] hope to [do] the same in Myanmar,” Gokongwei said.
“It is not going to be easy. But we do have some experience in entering really underdeveloped markets.”
The Filipino of Chinese descent pointed out that it took four years for Universal Robina to turn a profit in Vietnam, which it considers a major international market, along with Thailand. It has decided to build a third facility in Vietnam later this year.
Universal Robina started out under Lance’s father, John Gokongwei, in the 1950s as a cornstarch maker. He is the Philippines’ fifth-richest man, according to Forbes magazine.
Later, the company expanded into coffee, poultry and sugar. Its reach now extends to Indonesia, Malaysia, Singapore, Hong Kong and mainland China. And as the consumption-driven Philippine economy has improved, the company has grown rapidly in recent years.
For the fiscal year ending September 2013, its net profit expanded 29% to 10.04 billion pesos ($230 million). Sales climbed 14% to 81 billion pesos, while international sales at its branded food business rose 9% to 22.05 billion pesos.
The company speaks of becoming a leading player in the region, a goal that was reaffirmed by Lance Gokongwei and his uncle, Chairman James Go, in their message to shareholders in May.
The executives vowed at the meeting to make the company one of the region’s leading snack food and beverage companies, focusing especially on its Jack ‘n Jill, C2 and Great Taste brands, and marketing new products.
They assured shareholders that Asean integration would be a boon rather than a bane for the company, arguing it would give Universal Robina new opportunities to invest and optimise its supply chain.
Gokongwei, in an interview with reporters in May, said Universal Robina was considering opening a plant in Cambodia, where it already has a distribution network. That would leave Laos and Brunei as the only two Asean countries where it does not have a presence. In the Philippines, it is the market leader in snacks, candies, chocolate, canned beans and ready-to-drink tea, and No. 2 in instant noodles and instant coffee.
Abroad, the company competes with global giants including Mondelez International, Nestle, Coca-Cola and PepsiCo, and emerging players in Southeast Asia such as Indonesia’s Mayora Indah and Singapore’s Super Group and Petra Foods.
Despite the stiff competition, Universal Robina has the top spot for cookies in Thailand and is in the top two in Vietnam’s ready-to-drink tea segment, where its C2 brand is strong.
Universal Robina’s aggressive regional expansion is a way of hedging against downturns in individual markets. Gokongwei told shareholders in May that sales in Thailand had been affected by economic weakness brought on by the country’s political crisis.
The company knows when to cut its losses. It pulled out of the beverage business in Indonesia due to cutthroat competition, while in China, it was forced to scale down operations and focus on particular parts of the country.
“We would like to reduce [our] dependency on a single brand or geography. That is always our strategy,” Gokongwei said.
Go and Gokongwei say an integrated Asean will make the company more competitive, with regional sourcing guaranteeing the company’s survival as trade barriers fall.