Asian companies are on the move. Once viewed by Western multinationals primarily as a source of low-cost labor and manufacturing, Asian players are now international players in their own right. They are expanding into new markets for a variety of reasons. http://www.ey.com/GL/en/Issues/Driving-growth/Beyond-Asia---Playing-for-high-stakes---the-strategic-challenges Our Growing Beyond program explores opportunities across expanding into new markets, finding new ways to innovate & implementing new approaches to talent. www.ey.com/growingbeyond

1. Beyond Asia Growing Beyond
Strategies to support
the quest for growth
June 2012

2. Introduction
► Asian companies are on the move. Once viewed by Western multinationals primarily as
a source of low-cost labor and manufacturing, Asian companies are now international
players in their own right. This new report explores Asian companies’ expansion
patterns, specifically:
► The differences between global and regional companies’ market expansion patterns
► Why Asian companies are focused on building foundations and acquiring new technology
► How these companies are going about expanding their paths from direct exporting to local sales
and distribution desks and then to joint ventures or acquisitions
► The report identifies four key challenges facing Asian companies that are on a high
growth trajectory and offers Ernst & Young’s recommendations for both globally focused
and regionally focused companies.
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3. About this report
Analysis of the survey identified marked
Beyond Asia: strategies to support the quest for differences in the challenges and approaches
growth is part of Growing Beyond, our flagship
program that explores how companies can grow
to international expansion between two
faster by expanding into new markets, finding groups of respondents:
new ways to innovate and implementing new
approaches to talent management. It is based ► Globally focused (global) companies:
on: 177 companies with operations in two or
► A survey of 617 business executives from more of the following markets: Australia
East and Southeast Asia, conducted by the
Economist Intelligence Unit in March and and New Zealand, Brazil, Eastern Europe,
April 2012. All companies had significant India, Japan, Latin America, Middle East
operations, revenues or profits outside of their
home market. and North Africa, Russia, Sub-Saharan
► Qualitative interviews conducted with Africa, US or Canada, Western Europe
Ernst & Young sector and country leaders and
senior executives from companies across the
► Regionally focused (regional)
region. companies: 316 companies within East
► Analysis of current and projected trade flows and Southeast Asia, operating
among individual Asian markets and between
Asia and the rest of the world, conducted by
internationally
Oxford Economics.
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4. Setting the scene
Where, why and how Asian companies are expanding
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5. Key facts
► Rapid-growth markets from Asia represent the fastest-growing economic region in
the world, with annual growth forecast at more than 6% a year.
► The IMF expects advanced economies to grow by just 1.4% in 2012 and 2% in
2013. The corresponding figure for East and Southeast Asia in 2013 is 7.9%.
► Since 2000, Asia has been the fastest growing source of foreign direct investment
(FDI). Its businesses currently produce a quarter of the world’s exports (US$3.77
trillion in 2010) and form 87 of the Fortune Global 500 largest firms.
► FDI outflows from East and Southeast Asia recorded a compound annual growth
rate of 22.9% in 2005–2011, jumping from US$70 billion to US$242 billion.
► Investors from East and Southeast Asia are major drivers of growth in global FDI
outflows, making up 16% of the world’s total FDI (up from just 7% in 2005) and
driven by increased outflows from mainland China, Hong Kong, Malaysia, South
Korea, Singapore and Taiwan.
► Inter-regional trade is expanding rapidly, reflecting the shift toward higher
consumption in Asia. China leads the way in terms of outflows and destination, with
growth for Indonesia, South Korea, Thailand and Vietnam close behind.
► Trade flows from Asia to the US and Canada, the Middle East, Latin America, and
Africa are expected to increase by over 10% a year up to 2020.
► Cross-border M&A purchases are consuming an ever-larger slice of FDI flows, with
purchases from Asia reaching a record US$94 billion in 2010.
► The China–US trade route is forecast to see the biggest increase in the world,
predicted to rise by almost US$700 billion by 2020.
Sources: UNCTAD, IMF, Oxford Economics.
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6. Where are Asian companies expanding?
Some markets stand out as more attractive than others because of proximity,
lower barriers to entry or favorable business conditions.
For globally focused companies For regionally focused companies
Mainland China 42 Western Europe 32
India 33 Middle East and North Africa 28
Indonesia 29 Brazil 20
Vietnam 25 Russia 18
Eastern Europe
Middle East and North Africa 24 15
(excluding Russia)
Brazil 24 US or Canada 14
Western Europe 23 Mainland China 8
Russia 18 Sub-Saharan Africa 8
US or Canada 18 Singapore 7
Australia and New Zealand 15 Hong Kong 7
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7. Why are Asian companies looking to expand
internationally?
In general, regional companies are focused on building their foundation, including
capabilities and resources, while global companies are concentrating on
acquiring new customers and technology.
Benefits of expansion into developed markets Benefits of expansion into rapid-growth markets
New customers and sales growth 40 New customers and sales growth 66
Access to new technology or Tap a gap in the market for products
innovations 39 and services
34
Access to new distribution channels 31 Access to new distribution channels 34
Tap a gap in the market for products
29 Access to low cost labor 27
and services
Spreading risk across different markets 25 Spreading risk across different markets 25
Access to natural resources and raw
Access to skilled workers 22 materials
25
Access to skilled workers 41 Tap a gap in the market for products 38
and services
Access to natural resources and
raw materials
40 Access to new distribution channels 36
Access to low-cost labor 39 New customers and sales growth 35
Access to intellectual property Access to natural resources and
37 34
raw materials
Access to new technology or Access to new technology or
36 33
innovations innovations
Tap a gap in the market for products Access to intellectual property
35 32
and services
Globally focused Regionally focused
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8. How are Asian companies expanding?
Companies typically follow an expansion path that progressively deepens their
involvement in new markets, going from direct exporting to local sales and
distribution desks and finally to joint ventures or acquisitions.
In East and Southeast Asia In developed markets In other rapid-growth markets
Local sales/distribution/ 46 35 Local sales/distribution/ 40
42 Direct exporting 24
sourcing desk sourcing desk 47
38 Local sales/distribution/ 35 37
Direct exporting Direct exporting
26 sourcing desk 46 45
36 24 Partnership/alliance 36
Partnership/alliance M&A
40 2 8
28 24 Joint venture 28
Joint venture Partnership/alliance 10 6
26
24 Outsourcing agreement 23 25
M&A 19 Outsourcing agreement 12
4
23 Joint venture 21 24
Outsourcing agreement 6 Franchise/licensing
24 24
Franchise/licensing 20 23
Franchise/licensing 21 M&A
34 7
29
Minority equity 12 18
19 Greenfield investment
Greenfield investment investment 9 5
19
Greenfield investment 12 Partnership with gov't- 16
Minority equity investment 18 6 owned enterprises 2
36
Partnership with gov't- 8 Minority equity 15
Partnership with 18 owned enterprises 5 investment 5
gov't-owned enterprises 27
Globally focused Regionally focused
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9. Achieving global growth
A look at the key challenges and recommendations for global and regional
companies
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10. Four key challenges companies should be prepared for
1. Moving up the value chain could erode a critical advantage – low cost. Climbing
the value chain is an aspiration that all our respondents share. They highlight leading
technology and the quality of their products, services and workforce as their key
advantages. Having a low-cost business model comes toward the bottom of the list.
2. The nuances of local markets are difficult to understand or control. This includes
political instability, sudden regulatory shifts, varying consumer preferences and
questions of local autonomy versus global control.
3. Top management teams often lack an international outlook. Asian companies say
their leadership teams need a better understanding of global markets and a more
strategic approach to international hiring.
4. Expansion requires shoring up infrastructure and capabilities. This means
spending considerable time and resources on building such functions as strategic
planning, financial management, tax planning and risk and control frameworks, as well
as collaborative relationships with partners.
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11. Recommendations for globally focused companies
Recommendations Comments Business implications
► Need for greater focus on due diligence
► A more diverse international footprint and the need for
Put in place ► Need for local knowledge to appropriately assess risks
greater autonomy at the local level emphasize the need
robust risk for a robust risk management framework. ► Political and regulatory risk can have material impact on valuations
management ► Our research has shown that companies with more ► Need for effective risk management processes
mature risk management frameworks can outperform
► Partner due diligence is critical
their peers financially.
► Robust dispute resolution processes
► Clear expectations regarding ROI
► For many globally focused Asian companies, the priority How and where to introduce greater efficiency to benefit from increased
Make the remains investment and growth.
►
transition from international scale
► As these investments mature, they will require a greater
investment to ► Need for robust financial management and reporting systems to build
focus on process, a consideration of where economies of
scale can be derived, detailed tax planning and more confidence
profitability
sophisticated finance functions. ► Increased competition for assets in developed markets, potentially
driving up valuations
► Companies need a management team and corporate
Take steps to culture that reflect the diversity of their customer base
► Balance of local resources and expatriates
and operations.
make the ► Provide managers with experience in different markets
► By recruiting managers with experience of different
corporate markets, reducing reliance on expatriate workers and ► Cultural awareness and sensitivity
culture more putting in place global talent management programs that
► Building the right skills and capabilities
international enable the flow of key talent around the world, companies
can create a more international workforce.
► Autonomy for local managers helps to ensure that
► How to combine local relevance with global scale
products and services are relevant to the local customer
Choose which base, but not everything needs to be decentralized. ► Local versus central decision making
functions ► Companies need to think about where they can derive ► Integration; what and how quickly
should be global economies of scale without compromising local
► Valuation and integration considerations
or local relevance.
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12. Recommendations for regionally focused companies
Recommendations Comments Business implications
► Over the next few years, Asia will remain a dominant ► Increased market competition from non-traditional players
Prepare for recipient of inbound foreign direct investment. This will ► Formation of new Asian MNCs
increase competition – for assets, talent, resources and
greater customers. ► Competition is changing; focus on product and service quality,
competition ► Regional companies need to consider whether they need
not low cost
to join other regional companies in looking outside Asia ► Companies need to re-think how and where to compete giving rising
for new opportunities. wages and input costs
► Regional companies seeking to build a global footprint ► Access to management skills a key driver of overseas expansion
Build the must make sure that they get the basic capabilities in
capabilities for ► Building brands a key area of focus
place before making bold moves.
international ► Need for relationships with regulators and government officials
► They will need managers who have an understanding of
expansion international markets, as well as core functions, like ► Ability to transfer acquired capabilities, brand and IP back to Asian
finance, HR and IT, that can support multiple markets. markets
► Greater geographic scale makes it more difficult to control ► Local versus central decision-making
Rethink from the center. Regional companies should therefore ► Integration; what and how quickly
organizational consider devolving greater autonomy to regions, but do
► Taxation and compliance seen as a strategic issue
so within a set of parameters and risk frameworks.
design to enable
► This devolution, with its consequent upswing in local ► Clear governance and controls frameworks in place to identify and
greater local empowerment, is particularly crucial for establishing an resolve issues
autonomy effective and optimized supply chain. ► Valuation and integration considerations
► Increased competition means that regional companies will
be under pressure to ramp up their innovation, product
► How to combine local relevance with global scale
and service mix and talent pipelines.
► By building partnerships with companies outside Asia, or ► New opportunities for partnerships and strategic alliances
Leverage global acquiring companies with the right resources and ► Partners with the same values and objectives
resources expertise, regional companies can leverage global
► Diverse international experience to understand these issues
resources to make sure that they remain globally
competitive.
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13. Appendix
Supporting survey results
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14. Challenge 1
Moving up the value chain could erode a critical advantage – low cost
What are your company’s most relevant strengths and advantages as it
targets international markets for sales or investment?
Globally focused Regionally focused
Quality of your workforce 44 Leading technology 41
Product or service quality 44 Product or service quality 39
Leading technology 31 Global supply chain 39
The cost competitiveness of
30 Speed of execution 33
your workforce
Brand strength and reputation 28 Ability to innovate 32
Global supply chain 25 Value of intellectual property 31
Ability to innovate 20 Brand strength and reputation 25
Speed of execution 20 Quality of your workforce 22
The cost competitiveness of
Low-cost business model 12 19
your workforce
Access to low-cost
Value of intellectual property 8 7
capital/ funding
Access to low-cost
7 Low-cost business model 3
capital/ funding
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15. Challenge 2
The nuances of local markets are difficult to understand or control
How effective do you consider your company to be at the following
aspects of international business?
Understanding the political and 27
regulatory environment 46
20
Building a rationale for investment
31
16
Choosing the right mode of market entry
4
Tailoring strategy to specific markets 15
27
Implementing product/service innovation for 11
individual markets 7
Empowering local decision-making 10 Globally focused
9
Regionally focused
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16. Challenge 3
Top management teams often lack an international outlook
Where does your organization’s top management team need more
knowledge or insight to be successful in today’s global marketplace?
Understanding of global markets 49
Strategic hiring process for international markets 42
Local culture and ways of doing business 41
Global supply chain issues 41
International taxation and compliance 41
Ways to incentivize employees in different markets 39
International accounting and reporting standards 14
Regulatory compliance in global markets 10
Note: Scores shown = percentage of respondents
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17. Challenge 4
Expansion requires shoring up infrastructure and capabilities
Which of the following functional areas will require the most significant
changes to help ensure the success of your company’s international
expansion plans?
Globally focused Regionally focused
Sales and marketing 47 Strategic planning 42
Strategic planning 44 Financial management 41
Risk management/ERM 34 Internal communications 35
Financial management 34 Financial reporting 33
Supply chain (including demand
27 Sales and marketing 29
planning and distribution)
Internal communications 23 Public relations 29
IT 22 Risk management/ERM 27
Supply chain (including demand
Financial reporting 16 planning and distribution) 22
Regulatory compliance 11 IT 17
Public relations 7 Regulatory compliance 10
Global tax compliance and reporting 3 Global tax compliance and reporting 4
Tax planning 2 Tax planning 0
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18. Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
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Growing Beyond
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opportunities still exist for growth. In
Growing Beyond, we’re exploring how
companies can best exploit these
opportunities – by expanding into new
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taking new approaches to talent. You’ll
gain practical insights into what you need
to do to grow. Join the debate at
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