Looking to the East

After a lost decade of opportunity, Matthew Sainsbury says forward-thinking boards need to learn from past mistakes and gear up for the Asian century.

Australia’s recent free trade arrangements with South Korea, Japan and potentially China, have further emphasised something that we have known for many years – that being able to do business throughout Asia will be crucial to the future success of Australian businesses.

Within Asia there are three of the four most populous nations in the world – India, China, and Indonesia – presenting a sheer scale of opportunity that dwarfs Australia’s relatively small population.

The region also has five of the 20 largest economies (China, Japan, South Korea, Indonesia and India). These economies are rapidly maturing, while some of the smaller economies in the region, such as Singapore and Malaysia, already present expanding Australian businesses with stable environments to start operating in. And then, for the brave, there are explosive markets of growth opportunities too — Myanmar, Mongolia, Vietnam and other places within South East Asia.

Some might seem like a wild west for business, but the lucrative opportunities in being an early mover are there for those willing to put the time and resources into capitalising on the opportunity.  Unfortunately, many Australian businesses severely misunderstand how to do business in these markets, and this means that the many and varied opportunities of Asia may be passing them by.

“For Australian businesses, one of the biggest impediments to realising the Asian opportunity is the paucity or under-development of critical senior executive and organisational capabilities,” says Rohini Kappadath GAICD (Twitter @Talking Asia), director of cross-border business at consulting firm Pitcher Partners. “This has already resulted in a lost decade of opportunity in Asia for Australian corporates. Forward-thinking boards now need to learn from the mistakes of the last two decades and bring relevant skills and insight to help steer their organisations in the direction of where opportunity will lie over the next few decades.”

Currently just three per cent of directors in the S&P/ASX 100 are Asian-born. For ASX 200 companies, it is six per cent. Kappadath claims that the number of board members with sufficient experience in Asian markets in private and smaller organisations is insufficient too.

Finding the board skills

The Australia in the Asian century white paper, published by the former Gillard government, recommended a quota of Asian executives on Australian boards. This proposal was rejected on the basis that such an imposition would lead to token appointments.

However, Kappadath suggests that organisations should impose soft expectations on their own businesses in order to achieve the experience required to perform in target Asian markets.

“Before you enter a new market, ensure you are well prepared with market research and analysis,” Kappadath says.

“What are the market characteristics, competitive conditions, economic conditions, political conditions, legal implications, the cultural and social environment and distribution systems? How will you build and access networks?”

Understanding a market properly before trying to enter it is critical and often overlooked.

One mistake that directors face in regard to doing business in Asia is developing a sense of complacency as a consequence of the weight of interest and foreign investment in the region.

While mature markets such as Singapore and Hong Kong operate in a very similar business culture to that of Australia, emerging economies often don’t.

And, with corruption and foreign business practices continuing to be an issue in these markets, directors need to be vigilant, because the responsibility for what happens in these markets ultimately remains with them.

“Doing business in Thailand will have different nuances compared to China or Indonesia,” says Graham Bradley AM FAICD, non-executive chairman of HSBC Bank Australia.

“The board needs to set an example by having a firm policy that if the only way to do business in a local country is not acceptable to Australian standards, then the board needs to be prepared to say: ‘We won’t do business in that country’.”

He says understanding the unique cultural and business environment that makes a market tick requires people with knowledge of that specific market on the executive management team. It also requires that the board itself be prepared to spend time physically in the market in order to understand it.

Bradley, who was previously on the board of Singaporean telco, SingTel, says it had a policy where it would travel to each market in which SingTel had a significant interest and take the time to be fully briefed on the conditions of that market.

“We would have an annual strategy meeting in one of the countries where we had a significant presence, including the Philippines, India and Indonesia, and on each occasion we would have local presentations on the political environment from informed commentators and economists,” says Bradley.

“We would also have meetings with key customers and visits to our operations.”

“There’s a range of things a board can do to keep itself informed and aware of the issues so that when recommendations come in from management, the team has a basis for understanding the challenges that the company may be facing.”

According to Bradley, a lack of understanding about the nuances of a market in Asia is the first mistake that many organisations make.

“Assuming all Asia countries are the same is a mistake – they are not,” he says.

“Each has a distinctive market and local competitive environments.”

For this same reason, another common mistake that organisations make is to bring Australian views on consumer tastes, product preferences and product standards to offshore markets, without fully testing such assumptions.

Taking advantage of opportunity

The third mistake Australian organisations often make in Asia is to underestimate just how quickly their local business can take off.

The opportunities in these markets cannot be underestimated and Bradley says that a lack of bravery on the part of Australian organisations in the past has been an issue, although this is something that seems to be changing.

“Australian businesses need to look more closely and courageously at doing business in Asian countries – and my impression is that many are doing so. 

“At HSBC Bank Australia, we are helping many Asian debutante companies to make sound local connections and finance their expansions into Asia.

“Consider Ramsay Healthcare. The private healthcare company has recently expanded into Indonesia and Malaysia where it is seeing significant growth opportunities.

“A few years ago, private hospitals wouldn’t have been on the list of leading opportunities for Australian organisations to expand into Asia, but there’s one of our leading hospital management groups doing exactly that.”

Kappadath agrees, saying that as long as an Australian organisation is able to adapt to a fundamentally different approach to business, the opportunities it will find are significant.

In addition to actively recruiting locals to each market, there are plenty of organisations in Australia that will be able to assist an organisation make that shift in thinking, she says.

“Asian cultures are typically high-context, synchronic and hierarchical. Australian businesses are generally the opposite.

“Being aware of the differences in these systems and consciously adjusting one’s approach is advised.

“Doing business in Asia requires that we shift into the Asian mindset and learn to view the world in the way the Asians do.

“Starting with the understanding that the Asian view of the world differs fundamentally from the Western view is a good way to commence a journey into Asia.”

Kappadath adds: “One thing all organisations should be doing is building partnerships with government bodies such as Austrade and Department of Foreign Affairs and Trade.

“These are organisations that have developed systems to assist expansion into Asia. Austrade has almost 1,000 people worldwide, with 44 offices in 15 markets and over 400 of its staff speak an Asian language.”

Is China’s economy really a problem for Australian business?

A lot has been written about the perceived slowing of growth in the Chinese economy and in the eyes of some, this is an indication that
the Chinese economy is not a sustainable one.

Equally worrying for some, the country has recently found an appetite for debt that some fear is a sign that it is headed towards a similar “lost decade” to that which Japan experienced in the 1990s following its asset price bubble burst. These concerns stem from data that suggests that savings as a percentage of GDP in China sits at 50 per cent, but it is a number that is falling following a take-up of debt and speculative investments.

As it takes more Australian exports than any other country, a slowing China would significantly affect Australia’s economy. So, how should the increasing number of Australian businesses looking to the world’s second largest economy as a new opportunity tread?

A report from research firm East & Partners suggests caution in the short-term. “China has strived to align itself with global regulatory requirements and capital adequacy ratios over the last five years,” it states. “Yet the transition from an economic ‘underdog’ to that of a global leader could become very bumpy as the year unfolds.”

However, China’s target for growth remains at 7.5 per cent. As many pundits have pointed out, China’s growth now occurs off a much higher base than the unprecedented explosive growth that it had experienced previously, so 7.5 per cent is still a significant gain. Analysts still believe that China could overtake the US to be the world’s largest economy in a decade or so.

Thus, while China’s economy might be slowing slightly, it is also clear that it remains a massive growth opportunity, and the rapidly modernising Chinese culture is quickly developing an appetite for “Western” goods and services. Now may be a good time to consider entering the Chinese market!