UK: TO BE PACIFIC. - Held back by saturated markets and low growth rates at home, western firms are eager to join Asia's booming economy. But breaking into the region is far trickier than some imagine.

by Tom Millward.
Last Updated: 31 Aug 2010

Held back by saturated markets and low growth rates at home, western firms are eager to join Asia's booming economy. But breaking into the region is far trickier than some imagine.

Visitors to the British embassy in Tokyo today will find it nestled in the heart of the city, close to the moat of the Imperial Palace. The embassy's current location is a far cry from the days when visitors to the British Mission in Japan had to travel to a site chosen specifically for the easy access it offered to the sea and a speedy escape via Yokohama.

In those Victorian times, the hostility visitors to Japan expected to encounter was a matter of concern more to Christian missionaries than to British merchants, although the enterprising British did succeed in introducing locomotives and shipbuilding to the Japanese despite a determined insularity on their part.

Nowadays, of course, it is not just Britain's official representation in Japan which has changed. Nor is Japan the only Asian market targeted by western companies encountering saturated markets and low or negative growth rates closer to home. Accelerated by predictions such as trade minister Anthony Nelson's recent forecast that, 'By 2000, half of all world growth is likely to be generated by east and southeast Asia alone,' Asia has become the '90s equivalent of America's gold rush. But like the prospectors of old, would-be fortune-makers are finding it is one thing to know the gold is out there, and quite another to hit upon it. In the newly emerging economies, in particular where rules can change daily and knowing the right official is often more important than presenting the right business proposition, business people are only too aware that fortunes can be sunk as well as made.

Recent rule changes in Vietnam fuelled by political wrangling over the right path for the country's economic reforms illustrate well the difficulties facing foreign investors. Back in 1991, foreign car-makers flocked to set up in the country on the back of a clear indication from the authorities that licences to operate would be granted to only a select few. Five years later, however, 11 car-makers have been given licences, creating major concern that this poor market will rapidly become saturated, should all of these projects proceed.

Meanwhile, the Vietnamese have also managed to exasperate oil giant Total which announced last September that it was to pull out of an £800 million refinery scheme in the country after authorities demanded the refinery be built in the remote and poorly-served city of Dung Quat, rather than in the location of Total's choice.

The inherent risks, along with considerations of the likely volume of business and costs of local production, all influence the degree of any company's involvement in the region. While Malaysia, China and India are popular low-cost production bases, for example, fewer UK companies selling goods in Japan have taken the local production route than might have been expected given the long-established wealth of this market. Despite Japan being the UK's top Asian export destination (the Mini car and oak-matured whisky sell particularly well there), high costs of local production have long been a disincentive for British manufacturers. Far lower labour costs mean British companies selling chocolate bars or engines to India and China are, however, increasingly likely to be supplying the local market from a local base (unless Hindu nationalists in India succeed in blocking consumer goods manufacturers from setting up in the country as they have threatened in the run-up to recent elections).

It is principally in areas such as services (which often by their very nature must be provided locally) that British companies have traditionally made major investments in Asia's high-cost economies. Japan, for example, creates serious money for UK companies in financial services; of all EU countries, Britain is the largest exporter to Japan of finance. Barings Bank, for instance, is a seasoned operator in the country and has seen business steadily grow since setting up in Tokyo in 1980.

British firms have tended to look beyond Tokyo for bases from which to co-ordinate their master plans for Asia Pacific growth. At present the shortlist of favoured regional headquarters options tends to come down to Hong Kong, Singapore and increasingly Sydney (Australia being keener by the day to present itself as part of Asia), but Shanghai and Kuala Lumpur are beginning to attract more serious attention as costs in the old headquarters bases rise, the infrastructure and transport routes in Malaysia and China improve, and the population in southern and coastal China grows richer.

For the time being, however, the triumvirate reigns. Derek Hayes, United Biscuits' director of development operations for the region, explains why the company, when searching for a regional headquarters back in 1986, opted for Hong Kong. 'We undertook considerable marketing in Hong Kong in the '70s,' he says, 'and as a result secured 10% of the market through exports since there were no tariff barriers.' Since Hong Kong was the largest market for UB in Asia, it seemed to be the natural base for United Biscuits Far East Ltd from which the parent wanted to expand into China and build sales in the region. The Hong Kong office now oversees operations in China, the Philippines and Thailand, although the company has a separate executive looking after Japan whose reporting line is to UB's West Drayton HQ.

Others have chosen to adopt a different approach, as David Carruthers, deputy executive chairman of automotive components manufacturer T&N, explains.

He takes issue with the very notion of setting up regional headquarters, and says he regards setting up an Asian HQ as 'a dangerous idea', given the speed of globalisation. 'We are looking (instead) at global co-ordination,' he says, 'you cannot isolate a region.' He adds that regional headquarters inevitably create 'heavy overheads'.

T&N has been operating through several joint ventures (JVs) in India for decades but has significantly stepped up expansion in Asia Pacific over the last 10 years. Its first Korean JV celebrates its 10th anniversary this year while a new plant making friction materials opened this year in Thailand. The company has also started to attack the Chinese market in a big way: three JVs in the country are well-advanced, with at least another three planned for the future. It also has a stakeholder relationship with two companies in Japan.

T&N has preferred to expand through JVs for a number of reasons. In some of the markets it has been accessing, government policy has dictated this route. 'Originally in India, it was just not possible to have majority ownership,' explains Carruthers. But elsewhere the company has chosen to take the JV route to avoid competing head on with local firms in unfamiliar markets.

Like T&N, Cadbury Schweppes has also been focusing on China. In August 1993 it announced it was building a £20 million greenfield plant on the outskirts of Beijing and began to transfer domestic production to the Chinese capital after the 1995 start-up. 'We chose Beijing,' says Kevin Hayes, chairman of Cadbury Schweppes Australia, 'because it is a large population centre with a good communication network and distribution system.'

Cadbury also chose to take the JV route into China, linking up with the state-owned Beijing General Corporation for Agriculture, Industry and Commerce, a useful partner, given that it controls the milk supply and dairy processing facilities in the Beijing municipality. Entering the country through a joint venture, 'was not a requirement of the authorities,' says Hayes. 'It just would have been extremely arrogant for us to have gone in alone.'

United Biscuits originally gained access to China in the mid-'80s through the purchase of Hong Kong's number two biscuit-maker, Pacific Biscuit Company. The move meant UB acquired both production capacity across the border in Guangdong province and the distribution channels it would need to export some goods back to Hong Kong, essential since the Chinese authorities were imposing foreign exchange requirements on the new owners. UB has since set up a joint venture in China and even negotiated a wholly-owned plant at Hangzhou, south of Shanghai, which will open early next year.

UB's Asian activities began when it established a marketing JV in Japan, a country of which Derek Hayes says: 'There are cash tariffs and non-tariff barriers where the rules are constantly changing.' While the approach taken by neighbours to market entry differs from country to country, most Asian nations are lowering their tariff barriers but keeping in place an array of non-tariff barriers relating to customs, specifications, subsidies and the like. It will be a long time before customs procedures are harmonised, a delay which serves to encourage foreigners to set up operations in countries where they wish to make significant sales.

Ironically, however, the pulling down of tariff barriers, although good for exporters, can cause real headaches for foreigners already producing in a country. A case in point is BP Chemicals which opened its Indonesian chemicals plant back in February 1993. An import duty and import surcharge of 20% ensured BP could sell its chemicals at the right price to justify the massive investment needed for the project. Of the £300 million spent, around 40% went on providing infrastructure such as housing for workers, a fire station and a mosque.

'Tariff protection was critical in the decision to make such an investment,' the company's chief executive for polymers and olefins Mike Buzzacott told the Financial Times earlier this year, adding that the same logic applies for a planned £100 million expansion.

But tariff cuts in other countries such as Thailand are placing Indonesia under pressure to fall in line. Unfortunately for Indonesian employment, since Indonesia offers foreign investors nothing else by way of financial incentives (unlike Malaysia or Singapore, for example), its charms are distinctly diminished by the tariff reform.

Tariff changes are only one of many potential problems for newcomers to any Asian marketplace. In Japan, for example, the difficulty of establishing distribution networks is a common complaint. Such problems are caused by the complex system in place, by Japan's oligopolistic market and by the stranglehold many domestic firms exercise over distribution in their sector. The high cost of land to set up the network also plays a role as do higher shipping costs, duties, taxes and more expensive marketing than elsewhere in Asia. It all means that foreigners continue to be left with a tough arithmetic to make Japan work for them. China's distribution system is also generally recognised as pretty deficient, largely as a result of poor physical maintenance. Hewlett-Packard, for example, relies heavily on air and sea transport in China for the distribution of its high-value, low-volume goods, so bad is the road system there.

UB's varied history in Asia illustrates another frequent problem for newcomers: establishing sufficient acquaintance with prospective partners.

The company saw in Korea, as in Japan, a good potential market and teamed up with a local company under a technical assistance agreement that was intended to grow into a full-blown JV. 'Then the chairman of the company suffered a severe stroke and we found out that the body of management there was not of the same mind,' explains Hayes. The relationship soon went cold with the Korean partner blaming regulations for a series of delays. 'Our lawyers said, "If the partner wants that venture they will be able to solve those problems; we can't do it alone".'

Even once a suitable partner has been found, Hayes points out that Asia throws up logistical challenges to working there. Not only has UB encountered 'a ponderous network of wholesalers and distribution' which is 'not efficient, and is expensive', it has also found a reliable power supply to be a stumbling block. The problem is widespread. For years, Manila was famous for its 'brown outs'. One firm, located in Taiwan's hi-tech showcase Hsinchu science park has placed a cost of £67,000 on every half hour of power cuts it suffers. And Bangalore, India's Silicon Valley, has power cuts about twice a day.

While such problems are an inconvenience to some investors, for others, such as PowerGen, British Gas and BT, however, they are a welcome business opportunity. British Gas, for instance, has around 40 projects on the front burner in Asia Pacific, including gas-fired power stations in the Philippines, Thailand and Indonesia.

Carruthers at T&N believes China's infrastructure will develop faster than elsewhere in the region: 'The Chinese are more ruthless about building infrastructure because there's no environmental movement to get in the way.'

Certainly telecoms have been improving in China, says Hayes, in areas 'of full industrial support' which is why UB has preferred to set up in special economic zones in China.

The easier operating conditions become, however, the more foreign investment is likely to increase and the more investors are likely to encounter labour shortages, already a common complaint among managers in Asia working across a variety of industry sectors, jobs and countries. A significant lack of low-cost assembly workers in Taiwan and Malaysia, for example, is well-documented, one reason why investors are now eyeing up more recently reformed economies such as Vietnam with real interest.

The biggest shortages, however, are for skilled workers, with salaries for the likes of engineers and computing analysts rising fast. General managers who know about local finance and marketing are in greatest demand. In Hong Kong, UK trading houses Swire Pacific and Jardine Matheson have complained of new investors arriving and trying to poach their hard-recruited staff.

'It is becoming increasingly apparent that the key to business in China will not be capital but manpower,' says Hayes. 'The availability at all levels of skilled, experienced manpower is a problem,' he continues, 'and it is not likely to get easier with the speed of economic development and overheating in the region.' UB has suffered, in particular, from losing newly trained salespeople who are not poached but who leave to set up their own businesses. Wages in the most popular countries have also risen very considerably and sometimes unpredictably. It now costs more to recruit and retain a secretary in Singapore than in Sydney, for example, while T&N's Carruthers claims that, 'It costs us more to employ people in Seoul than in London'. The positive spin to such wage inflation, of course, is that although Asia's huge populace may cost more to employ, it subsequently has far more to spend.

Chart 1

Top Visible Export Destinations by UK companies to Asia (in millions of pounds) - 1995

1. Japan - 3,786

2. Hong Kong - 2,657

3. Singapore - 2,070

4 India - 1,685

5. Malaysia - 1,197

6. South Korea - 1,173

7. Taiwan - 962

8. Thailand - 838

9 China - 823

Source: Office for National Statistics

Overseas Direct Investment (in Asia by UK companies) 1994 - Total stock (millions of pounds)

1. Singapore - 4,392

2. Hong Kong - 3,308

3. Japan - 2,461

4. Malaysia - 2,108

5. Thailand - 505

6. India - 503

7. Philippines - 430

8. Indonesia - 342

9. South Korea - 180

10. Pakistan - 160

Source: Business Monitor MA4; Office for National Statistics

(Figures for China not available).

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