Adapting to Asean

Adapting to Asean

Businesses pursuing success in Southeast Asia face old problems such as corruption, but adapting to the digital revolution could be their biggest challenge

The appeal of Southeast Asia as a business destination has long been clear, dating back to the spice trade that began centuries ago. While the region has experienced startling economic growth in recent decades, its aspirations to be a developed hub for global businesses remain largely unrealised.

Modern-day Asean holds many attractions, starting with its strategic location, a population of 630 million and a fast-growing consumer class. But longstanding problems such as corruption still deter many businesses, as does slow progress in dismantling non-tariff barriers to trade. Equally challenging, though, is the need to keep up with markets and consumers that are changing more rapidly than many businesses are, mainly because of advances in digital technology.

Countries in the 10 member states of Asean have some of the worst scores in corruption indices, and anti-graft laws are not stringent enough, said Vivek Chaand Sehgal, chairman of the Indian auto parts manufacturing giant Samvardhana Motherson Group.

"There is tremendous pressure against corruption in the US and Europe. That could be one of the reasons why automotive companies are not moving into this region strongly," Mr Sehgal said. "The level of corruption definitely plays an important part. We have to grapple with that."

Motherson Sumi Systems, a joint venture between Samvardhana Motherson and Sumitomo Wiring Systems of Japan, has a presence in two Asean countries: Singapore and Thailand. It is considering further expansion into Malaysia, Indonesia and Myanmar, according to Mr Sehgal.

Despite deterrents such as corruption and language barriers, Southeast Asia remains an attractive market for investment given its geographical location linking China and India. For automobile producers and their suppliers, the appeal is undeniable since Asean collectively is the world's sixth largest automotive market, he said.

According to the 2015 Asean Business Outlook Survey conducted by the US Chamber of Commerce, corruption has consistently been cited in its reports over the years as the most significant challenge to doing business in Asean.

"With the exception of Singapore, the majority of respondents in all countries believe that the lack of effective enforcement of the law will hinder future business operations in their country," said the study.

Singapore was the only Asian nation among the 10 cleanest countries in the Corruption Perceptions Index (CPI) compiled by Transparency International in 2015. No other Asean country even made the top 50. Malaysia was 54th followed by Thailand (76th), Indonesia (88th), the Philippines (95th), Vietnam (112th), Laos (139th), Myanmar (147th), and Cambodia (150th).

Despite the challenges of dealing with corruption in many Asean markets, the German logistics company DHL believes it has made sound investment decisions in the region, guided by a strict investment mandate.

"There are a number of markets that rank high in the global corruption index, but it does not stop DHL from going into these markets because DHL has strong governance principles," said Kevin Burrell, CEO of DHL Supply Chain in Thailand, the Philippines and Vietnam. "If corruption is a problem for you, you do not need to operate in those areas."

As president and CEO of a company that targets twentyfold growth in Asia over the coming years, Hiroshi Ishino said corruption has not been a major issue for Kansai Paint of Japan.

However, he does have some concerns about how corruption could affect bidding for the hundreds of billions of dollars' worth of infrastructure projects that governments in Southeast Asia are undertaking, because "bribery kills competitiveness".


Another challenge for businesses operating in the region is anticipating and responding to the needs of a rapidly rising middle class. In 2012, there were an estimated 190 million people in Southeast Asia who could be defined as middle class -- people with disposable income of between US$16 and $100 a day. But according to the global market research firm Nielsen, that number will more than double by 2020, to 400 million.

One would expect retail store operators to be ecstatic at the prospect of that many new shoppers with higher disposable income, but that is not necessarily the case.

"The middle class is growing, but they are not purchasing in ways we thought they would," said Hiroshi Ohnishi, the president and CEO of the Japanese department store group Isetan Mitsukoshi Holdings.

A "bipolar economy" could be the term that best describes what is emerging, he said. At the top is an even faster-growing group of affluent consumers who choose to shop at luxury boutiques. At the lower end of the middle class are consumers who choose to spend money in fast-fashion stores rather than department stores, with chains such as Uniqlo and H&M the big beneficiaries.

Another factor that is squeezing department stores is the rise of online retailing. "E-commerce accounts for 10% of consumption in Japan, but it is likely to rise to the levels of the US, which is 20% to 30%," said Mr Ohnishi. "As the overall (retail) market size has remained almost unchanged at $1.3 trillion, e-commerce is stealing share from bricks-and-mortar stores."

That has compelled major department store chains across the region to make big investments in building up their e-commerce capacity. "Department stores have to change or we will not be able to operate," he said.

Still, there is no denying the macroeconomic impact that a more affluent population will have, given the knock-on effects in areas such as energy demand. That is cause for optimism for Garibaldi Thohir, the president and CEO of PT Adaro Energy, an Indonesian mining and energy conglomerate.

"Between 2013 and 2040, average per capita income in Southeast Asia will almost triple in size, from $10,000 to $27,000," he said. "This economic growth will also be followed by a rapid increase in population. Asean's population will grow from 616 million to 760 million."

For someone who has an income of $30,000, doubling that income might not be easy. "But for someone with only $3,000 to $5,000, it could double and triple in the next 10 to 20 years," he said.


In any case, companies that want to stay relevant and prosper in the region will need to do more to adapt to the huge economic and social changes being wrought by the digital revolution. Technological change and the pressure to control costs are profoundly affecting how businesses operate as well as how they interact with suppliers and customers.

A company planning a move toward digitisation must be willing to "dematerialise", develop the requisite talent and transform itself into a real-time enterprise, according to Natarajan Chandrasekaran, the CEO of India-based Tata Consultancy Services (TCS).

"First and foremost is to appreciate the importance of digital and the importance of this transformation and the willingness to dematerialise the business," he said.

"It requires the business and the technology people to come together, unlike in the earlier world where technology was supporting the business. But in the digital era, technology is the business, or in other words, technology is embedded into business and this requires a very collaborative culture."

Established in 1968, TCS today is one of the world's largest providers of information technology services, digital and business solutions with operations in 46 countries. Most of its growth, from $1 billion in revenue in 2004 to $16.5 billion last year, has been generated in the past decade. Mr Chandrasekaran said talent development, investment in new technology and research and development (R&D) had been the main contributors to success.

"Our key focus in the past 10 years has been the following: First is investing and developing capabilities in talent. Not only in India but as we expand, it has become really important to build a local talent pool in every market in which we operate," he said.

"Second, investment in technology and innovation ahead of time so that we can be totally customer-centric in the sense that we can deliver ahead of any disruptions [in order to] partner up with our customers. Third is to focus on R&D and build very close customer partnerships in every market and help them transform into the new technological world."

Digital disruption, Mr Chandrasekaran said, has been very significant because it affects every industry and every company. Digital is about transforming an enterprise to be a "real-time corporation" so that there can be "real-time visibility" of data and information which is needed in order to become a "smart and intelligent" company.

"Once we become smart and intelligent, we can respond on a real-time basis so that we can provide a better experience for our customers. It is about agility, speed, efficiency and being intelligent. This is the journey that we are on and every company has to go through this journey," he said.

"Digital makes globalisation very different because in the digital world, access is irrelevant as we are all already connected. It is extremely easy today to build a business sitting in any part of the world, addressing the market in any other part of the world."

Mr Chandrasekaran notes that digital is heavily software-driven because in a digital world everything becomes "dematerialised data". Consequently, every business, no matter whether it is in manufacturing, finance or retail, has to dematerialise assets and knowledge into digital form. At that point, advanced data analytics takes over and can allow a company to better manage its assets, control operating costs, enhance efficiency and better serve customers.


Still, even the most progressive and best-run businesses can struggle to gain a foothold in markets where other barriers to entry remain. And while free trade in Asean has brought many benefits, the region has yet to reach its full potential because some countries continue to use non-tariff barriers to protect local incumbents, even if they are inefficient.

Governments in Asean need to lower non-tariff barriers in a tangible way by concentrating on areas where removing such barriers is actually possible and realistic, says Mohd Munir Abdul Majid, president of the Asean Business Club in Malaysia.

"In Asean there is a lot of discussion and a lot of meetings about harmonisation, centralisation, non-tariff barriers and opening up of the financial market, and they have sucked up a large amount of time without actual results or solving problems," Mr Munir said.

"We should focus on certain sectors and solve problems such as non-tariff barriers in those specific sectors and not talk about harmonisation across the border in an abstract way."

He has identified priority sectors -- healthcare, agri-food, retail and logistics -- where non-tariff barriers need to be addressed. He also proposes setting up e-commerce and e-payment systems for small and medium businesses in these sectors.

"You need to do it when you can, without addressing conceptual issues, and you start with the countries that are willing to do it and if there are benefits in terms of what you do, other countries will see it and they will join in," he said.

"Asean should move in a way that can make it happen."

Mr Munir said this kind of realistic business integration would be crucial to reinforcing the perception of a single Asean market. For that market to evolve, he added, it will depend on businesspeople and not just on what officials say the final form of regional integration should take.

One of his main concerns for Asean is how to optimise its potential, and not just at the macroeconomic level, which tends to dominate the discussion. He offers a timely example by pointing to Myanmar, where almost no one had access to mobile communication five years ago, but where today the mobile penetration rate is 85%.

Nevertheless, more than 90% of Myanmar citizens are still not served by the banking system today and that percentage was the same five years ago.

"Why is the progress so different? The difference is policy, especially in the financial system and regulatory requirements in Myanmar," he said. "This synaptic junction must be jumped."

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