silk-spices

ecn.asia

silk-spices

From silks and spices

to dollars and devices

What Asia’s deepening links with other high-growth

markets mean for corporate strategy

A management brief

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

Contents and Executive Summary

I Introduction: Corridors and connections 4

The rise of emerging markets is well-known. But less widely appreciated are the

deepening connections between them. As the flows of trade, investment, and

ideas between emerging markets grow, what does it mean for corporate strategy?

II Mega-trend 1: The rise of emerging markets 6

The poorer parts of the world are catching up with their richer peers and this

catch-up looks set to continue

III Mega-trend 2: Deepening connectivity between emerging markets 8

As emerging markets get richer, patterns of globalisation are changing.

The fastest-growing economic corridors today are the ones springing up

between different parts of the emerging world (the South-South connections)

IV Mega-trend 3: Asia’s centrality to emerging market connectivity 11

New economic corridors between emerging markets are rising in many places,

but Asia has rapidly taken a central role in this growing web of interconnectivity

V What does it all mean for business? 13

These three mega-trends—the rise of emerging markets, the deepening

connectivity between them, and the centrality of Asia to these new connections—

have profound implications. What do they mean for corporate strategy?

a). A world of opportunity is unfolding 14

Executives must work out how to position their companies to benefit from

rising flows of trade, capital and people between emerging markets

B). Increasingly, businesses are growing on a South-South axis 16

Companies operating in emerging markets need to develop appropriate

business models. It’s not easy, but once they hit on a successful formula in one

country, it creates a platform for expansion across the whole emerging world

C). Rising South-South connectivity is creating powerful emerging 19

market networks

As companies expand across the emerging world, they are building new

networks of relationships, finance, talent and experience. Companies must

harness the power of these networks to drive their emerging market strategy

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

D). Asia is driving a wave of innovation across emerging markets 20

Companies have realised that they must innovate specifically for emerging

markets, rather than simply adapting rich-world products and services.

Given the size of its markets and its talent pool, Asia is now the place driving

innovation not only for the local region, but for all emerging markets.

Companies looking for South-South growth must join Asia’s R&D revolution

E). As emerging markets become connected, competition is growing fiercer 23

Early investors often had emerging markets to themselves. But today competition is

rising, especially as emerging market companies expand along South-South lines.

Companies must tone up—and expand overseas themselves—if they are to survive

F). Companies from developed markets are changing the way they 25

are organised

Given the differences between low-growth developed markets and high-growth

emerging markets, firms must think deeply about their management structures

and their human capital strategies. Many companies are separating their teams

according to market maturity

G). Companies in developed markets are moving decision-making to Asia 27

Local companies in the emerging world not only have better understanding

of their markets than Western firms, they are also faster-moving. In order to

compete, Western firms must move more of their senior leadership teams to Asia

H). New nodes are rising to manage emerging market corridors 29

New financial centres are rising in Asia and becoming the management nodes

and gatekeepers of the world’s emerging economic corridors. Cities with a diverse

cultural mix, such as Singapore, Kuala Lumpur and Dubai will grow in demand

I). As emerging market corridors open up, risk management is becoming 30

more important

Emerging markets tend to be more risky than developed markets. To succeed

in these markets, companies need to develop a cadre of managers who are deeply

attuned to managing and mitigating risk in challenging environments

VI Conclusion 32

The emerging markets story will suffer setbacks and crises, but the

underlying structural rise remains solid. Companies must act now if they are to

capture the opportunities of a new phase of globalisation

2 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

Preface

From silks and spices to dollars and devices: What Asia’s deepening links with other high-growth markets mean for

corporate strategy is an Economist Corporate Network (ECN) report, sponsored by Baker & McKenzie. The ECN

performed the research, conducted interviews and wrote the report independently. The findings and views expressed

in this report are those of the ECN alone and do not necessarily reflect the views of the sponsor.

Justin Wood was the author of the report. Pamela Qiu contributed to the research. Wai Lam was responsible for

design. The cover image is by Getty Images.

We would like to thank all interviewees for their time and insights.

October 2013

Interviewees, in alphabetical order:

Vicky Bindra, president, Asia, Middle East & Africa, MasterCard

Jim Bramante, senior vice president, growth markets, IBM

Wim Elfrink, chief globalisation officer, Cisco

Akhil Gupta, deputy group CEO and MD, Bharti Enterprises

Alan Hamzah, executive vice president, group strategy & business development, Sime Darby

Jamie Harper, CEO, South-east Asia, Microsoft

Brian King, president, emerging markets, Covidien

Leung Cheong Tai, president, Asia Pacific, Nielsen

Paul Logan, senior vice president, Asia Pacific, Middle East & Africa, InterContinental Hotels Group

Mike Mitchell, senior director, Mondelez

Jagannath Narendran, senior vice president, Asia Pacific & Middle East, Aspect Software

Grant Powell, MD and head of the Singapore innovation centre, Accenture

Neeraj Swaroop, CEO, South-east Asia, Standard Chartered Bank

Scott Sykes, vice president, international, Huawei

Tan Cheng Guan, executive vice president, business development and commercial, Sembcorp

Shane Tedjarati, president of high-growth regions, Honeywell

Teo Eng Chong, CEO, International Enterprise Singapore

Sunny Verghese, group MD and CEO, Olam International

Neville Vincent, senior vice president & GM, Asia Pacific, Hitachi Data Systems

© 2013 The Economist Corporate Network. All rights reserved. All information in this report is verified to the best of the authors’

and the publisher’s ability. However, the Economist Corporate Network does not accept responsibility for any loss arising

from reliance on it. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in

any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the

Economist Corporate Network.

© Economist Corporate Network 2013

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

I.

Introduction: Corridors and connections

The rise of emerging markets is well-known. But less widely appreciated

are the deepening connections between them. As the flows of trade,

investment, and ideas between emerging markets grow, what does it mean

for corporate strategy?

Patterns of globalisation change constantly. With each successive era, economic

corridors emerge and disappear, trade and investment flows rise and fall, and cultural

connections wax and wane.

A little over two thousand years ago, the world witnessed the first such corridors

appearing. Merchants, monks and adventurers from China forged new trade routes

into India, Central Asia, the Middle East, and beyond. Silk and jade were exchanged

for spices, gold and horses. Language, philosophy, ideas and technology spread as

people grew ever more connected. The lands that lay along these Silk Roads saw their

prosperity fuelled by growing trade and cultural exchange.

Today, the world is once again seeing the rapid emergence of new economic corridors

as the world economy undergoes profound change. The pace of this change is faster

than anything that humans have witnessed before. And the implications for business

will be sweeping.

These new economic corridors and connections are founded on three mega-trends:

• The inexorable rise of emerging markets;

• The growing connections and links between the world’s emerging markets as they

grow richer;

• And the central role that Asia is playing in this new landscape of deepening connectivity.

Consider three seemingly unrelated data points from the year 2010. In Latin America

that year, Chinese banks doubled their lending to US$37bn—so providing more

financing to the continent than the World Bank and the Inter-American Development

Bank combined. 1 Over in Africa, 2010 witnessed the region’s biggest ever acquisition

when Bharti Enterprises of India paid US$10.7bn for the African operations of Zain, a

Kuwaiti telecoms group. Meanwhile in Thailand, tourist arrivals from the Middle East

grew by 17.5% to reach 560,000, many of them seeking healthcare from the country’s

growing medical tourism industry. 2

On the surface, these data points seem unconnected. And yet, together they point

to a significant shift in the pattern of global economic activity. Together, they point to

a set of rapidly deepening links between the world’s emerging markets. Where once the

countries of the emerging world barely spoke to each other, today they are connecting

1

McKinsey Global Institute

2

Thailand Ministry of Tourism

4 © Economist Corporate Network 2013


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What Asia’s deepening links with other high-growth markets mean for corporate strategy

and integrating at breakneck speed. And sitting at the heart of all these connections is

the continent of Asia.

Companies have long been aware of the rise of emerging markets. Indeed, many

now refer to them as “High-growth” markets (See “Emerging or High-growth?” below).

But few have recognised the significance of deepening links between these nations. As

companies plan for the future, these connections and Asia’s central role in the emerging

market universe are of critical importance. The purpose of this report is to explore what

these new economic corridors mean for business, and how companies are responding.

Emerging or high-growth?

The term “emerging markets” refers to countries at a relatively lower level of

economic and institutional development compared to rich countries such as the

US or Germany. But in recent years it has become fashionable to refer to emerging

markets as “high-growth markets”. In part this is to avoid giving offense, but mostly

it is about recognising that economic growth in the emerging world is generally

higher than in the developed world.

Shane Tedjarati, president of global high-growth regions at Honeywell, a US

technology group, changed the term emerging markets to high-growth at his

company for two reasons. “The term ‘emerging’ somehow suggested that these

markets will be important in the future rather than now. But the fact is that they

already drive 50% of the growth at Honeywell,” he says. “The second reason for the

change is that inside our company there is a nuanced, subtle difference when you

talk about emerging versus high-growth… when someone talks about an emerging

market they can put it as a second or third or fourth priority. But when we’re beating

the drum every day, telling people these are high-growth, you get them to pay

attention and resource them appropriately.”

Throughout this report, the following terms are used:

• Emerging markets/high-growth markets: The countries of Asia

(ex-Japan), Oceania (ex-Australia and New Zealand), Africa, the Middle East,

Central and Eastern Europe, South and Central America and the Caribbean.

• Developed/mature markets: The countries of North America, Western

Europe, Japan, and Australia and New Zealand.

• North-North trade: The trade that occurs between developed nations.

• North-South trade: The trade that occurs between developed nations and

emerging countries.

• South-South trade: The trade that occurs between emerging countries.

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

II.

Mega-trend 1: The rise of emerging markets

The poorer parts of the world are catching up with their richer peers and this catch-up

looks set to continue

After many decades of under-performance, the emerging world began a remarkable

journey around 2003 when growth rates picked up and overtook those in the

developed world. The reasons behind this turnaround vary. A series of debt crises

during the 1990s prompted some markets to introduce economic reforms. The rapid

emergence of China was important, especially for commodity exporters. A period

of low interest rates in the US lowered financing costs globally. Many countries

transitioned successfully to democracy.

The result was a set of conditions that allowed the emerging world to begin catching

up with the rich world. During the past 10 years, the share of the world economy made

up by emerging markets has almost doubled from 23% to 40%.

(See chart 1.)

Most observers expect this catch-up to continue. While the emerging world makes

up 40% of global GDP, it accounts for 85% of the global population. This imbalance

suggests big potential for the emerging world to grow faster than developed markets

for many more years.

Demographics are attractive, with emerging markets having young, rapidly

expanding workforces. Urbanisation is another powerful force. In India, 69% of people

Chart 1:

Emerging markets * share of global economy^ and global population (%)

100

90

80

70

60

50

40

30

20

10

Population

GDP

1987

1989

1991

1993

1995

1997

1999

2001

Source: Economist Intelligence Unit

* Emerging markets include Asia (ex-Japan), Africa, the Middle East, Central and Eastern Europe, South America, Central America and the Caribbean

^ Measured using market exchange rates

2003

2005

2007

2009

2011

2013

2015

2017

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

Chart 2:

Foreign direct investment inflows (US$bn)

1,500

Developed economies

Developing economies

1,200

900

600

300

1978

1976

1974

1972

1970

Source: UNCTAD

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

still live in rural areas. As they migrate to towns, swapping farms for factories, their

incomes rise.

The middle class is expanding, providing giant new pools of spending power

and creating the conditions for entrepreneurship and innovation to thrive and for

governance to improve. The Brookings Institute, a think tank in the US, calculates

the global middle class will rise from 1.9bn in 2009 to 4.9bn by 2030. The extra 3bn

consumers will be found entirely in emerging markets.

Unsurprisingly, companies around the world are switching the focus of their

investment. In 2012, the value of foreign direct investment that went into emerging

markets exceeded the amount put into mature markets for the first time ever.

(See chart 2.)

© Economist Corporate Network 2013

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

III.

Mega-trend 2: Deepening connectivity

between emerging markets

As emerging markets get richer, patterns of globalisation are changing. The

fastest growing economic corridors today are the ones springing up between

different parts of the emerging world

Looking at globalisation over recent decades, several distinct phases are clear. At the

end of World War II in 1945, the global economy was not only damaged, but deeply

divided. From this low point, the Western nations began to promote global integration

as a way of ensuring peace, and the 1950s, ‘60s and ‘70s saw a flourishing of crossborder

trade and investment.

However, most of these new economic connections were between rich world neighbours.

It was about Europe and North America deepening their relationships with each other. It

wasn’t until the 1980s and 1990s that the emerging world got involved in a serious way.

Trade barriers in the emerging world began to fall. (See chart 3.) At the same

time, communications, IT and transport technology improved markedly, so opening

up new economic corridors connecting the rich world with the emerging world.

While the economic linkages that grew up after World War II centred on North-North

relationships, these new connections were aligned on a North-South axis.

Part of the story was about the West seeking energy and raw materials, but just as

significant were new global supply chains accessing cheap labour. As these North-

South connections grew, they fuelled economic growth in emerging markets, lifting

their wealth and incomes. Emerging markets began to offer not just production

opportunities, but market opportunities too.

“If you think about the

possibilities for digital

connectivity between

emerging markets, it’s going

to be a huge opportunity for

value creation”

– Wim Elfrink,

chief globalisation officer,

Cisco

Chart 3:

Average applied tariff rates* (%)

80

70

60

50

40

30

20

10

1980-1984 2005-2007

India China

Thailand Sri Lanka

Philippines

Source: Asia Development Bank

*Simple averages of most favoured nation rates

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This, in turn, has led to a third phase of globalisation in the post-1945 era, in which

emerging markets are now building connections among themselves. These deepening

South-South connections show up in many ways. Take exports. The share of global trade

that occurs between emerging markets (South-South trade) rose from 11.7% in 1995 to

25.1% in 2012. (See charts 4 and 5.)

Or consider flows of foreign direct investment (which includes mergers and

acquisitions). Globally, most FDI going into emerging markets still comes from

companies in mature countries. In 2012, they contributed 56% of all FDI inflows to the

emerging world.

However, in some regions it is now emerging countries that are the biggest investors.

In the Middle East and Africa, for example, 70% of the FDI in 2012 came from companies

based in other emerging markets. (See chart 6.) It’s tempting to think that these

Chart 4:

Share of global trade between North-North countries, North-South

countries, and South-South countries (%)

60

50

40

30

20

10

North-North trade North-South trade South-South trade

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Source: UNCTAD

Chart 5:

South-South exports as share of total exports for different regions (%)

70

60

50

40

30

20

10

World

Middle East & North

Africa

Asia (ex-Japan)

Latin America &

Caribbean

Sub-Saharan Africa

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Source: UNCTAD

2011

2010

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

Chart 6:

Share of FDI inflows that came from developed markets and emerging markets in 2012 (%)

100

80

60

40

FDI from developed

markets

20

West Asia Africa South Asia Latin America

& Caribbean

Source: UNCTAD

East and

South-east

Asia

Russia

& Eastern

Europe

FDI from emerging

markets

investments are focused on natural resources. But this is not true. In Africa, less than

20% of FDI went into commodities. In the Middle East, the figure was less than 1%.

This picture of deepening connectivity between emerging markets has only just

begun. In the years ahead, the value of trade and investment that flows along

these new corridors will continue to rise. So too will the flow of ideas and innovation

and people.

Of course, many obstacles must be overcome. Trade and investment barriers—such

as tariff rates and foreign ownership restrictions—remain large. But this suggests big

potential for connectivity to rise as the barriers are dismantled. Consider the progress

being made by the Association of Southeast Asian Nations (ASEAN). Not only are trade

and investment barriers coming down within the 10-nation bloc, but ASEAN is also

setting up free trade agreements with its neighbours, such as China and India.

A further barrier to emerging market connectivity is the weak state of infrastructure

such as ports and roads. But again, these deficiencies are likely to be addressed. One

of the most intriguing infrastructure gaps is the digital divide. Cisco, a US telecoms

equipment group, reckons another 3bn people will connect to the internet in the next

decade—all of them in emerging markets.

“If you think about the possibilities for digital connectivity between emerging

markets, it’s going to be a huge opportunity for value creation,” says Wim Elfrink,

Cisco’s chief globalisation officer.

As incomes in the emerging world continue to rise, as infrastructure gets built,

as consumers become digitally connected, and as trade barriers continue to fall, the

momentum behind South-South connectivity will build and grow.

10 © Economist Corporate Network 2013


1993

1995

1997

1999

2001

2003

2005

2007

1990

2009

1992

2011

1994

1996

1998

2000

2002

2004

2006

2008

2010

From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

IV.

Mega-trend 3: Asia’s centrality to emerging

market connectivity

New economic corridors between emerging markets are rising in many places, but

Asia has rapidly taken a central role in this growing web of interconnectivity

Within this landscape of deepening connectivity, not all regions of the emerging world

are equal. The most important part is Asia (ex-Japan), thanks largely to its sheer scale.

Emerging Asia is home to 54% of the world’s population, and made up 20.4% of

the global economy last year. By contrast, all the other emerging markets combined,

accounted for only 31% of the global population, and 19.5% of the global economy.

Chart 7:

Emerging markets share of the world economy* (%)

40

35

30

25

20

15

10

5

Sub-Saharan Africa

Middle East & North

Africa

Russia & Eastern

Europe

Latin America &

Caribbean

Asia (ex Japan)

Source: Economist Intelligence Unit

* Measured using market exchange rates

Chart 8:

Value of South-South trade by destination of exports (US$bn)

6,000

5,000

4,000

3,000

2,000

Sub-Saharan Africa

Middle East & North

Africa

Latin America &

Caribbean

Asia (ex Japan)

1,000

Source: UNCTAD

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

Chart 9:

Value of FDI coming out of emerging markets (US$bn)

350

300

250

200

150

100

50

0

-50

1990

Source: UNCTAD

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Africa

Russia & Eastern

Europe

Latin America &

Caribbean

Asia

(See chart 7.) What’s more, Asia is growing faster than other regions, so its dominance

will continue to rise for some time.

Looking at trade between emerging markets, Asia has long been the dominant

region. Indeed, last year three quarters of all South-South exports went to Asian

destinations. (See chart 8.) Partly this is because many countries in Asia, notably

China, are short on commodities and so must import oil, iron ore and food. Partly too, it

is due to the changing character of global manufacturing.

In recent decades, production chains have fragmented. Rather than make a product

entirely in one country, manufacturing processes have been broken up into ever smaller

parts, with each located in the country where it can be done most cost-effectively. This

fragmentation of manufacturing has been particularly acute in Asia, and now distorts

the region’s dominance of South-South trade because components flow across Asia’s

borders many times before reaching their final destination.

Nonetheless, neither of these factors diminishes Asia’s importance to South-South

trade. With commodities, it means that Asia’s rising demand has become a major

engine for commodity producers such as Brazil. And the fact that Asia’s cross-border

production networks have become so deeply integrated, means the region is now the

dominant centre of global manufacturing.

Asia’s dominance shows up just as clearly in flows of foreign direct investment. In 2012,

Asia (ex-Japan) accounted for two thirds of all the FDI originating from emerging market

companies. This rising wall of money is washing into other emerging markets, making

Asian companies the dominant investors in this South-South story. (See chart 9.)

12 © Economist Corporate Network 2013


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What Asia’s deepening links with other high-growth markets mean for corporate strategy

V.

What does it all mean for business?

The implications of deepening South-South connectivity are feeding into

corporate strategy in profound ways

These three mega-trends—the rise of emerging markets, the deepening connectivity between

them, and the centrality of Asia to these new connections—have profound implications for

business. We live in a new phase of globalisation, where emerging markets are integrating

rapidly, with Asia sitting at their core. New opportunities are appearing and new risks are

rising. Companies will need to change the way they think about the world, the way they

organise themselves, and the way they operate.

We identify nine key implications that companies should consider:

A). A world of opportunity is unfolding

B). Increasingly, businesses are growing on a South-South axis

C). Rising South-South connectivity is creating powerful emerging market networks

D). Asia is driving a wave of innovation across emerging markets

E). As emerging markets become connected, competition is growing fiercer

F). Companies from developed markets are changing the way they are organised

G). Companies from developed markets are moving decision-making to Asia

H). New nodes are rising to manage emerging market corridors

I). As emerging market corridors open up, risk management is becoming more important

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V./A.

A world of opportunity is unfolding

Executives must work out how to position their companies to benefit from

rising flows of trade, capital and people between emerging markets

Rising connectivity between emerging markets presents compelling opportunities for

companies to serve and support these new economic corridors. Shipping companies, for

example, will need to respond to new trade links between emerging markets. Meanwhile,

banks will find opportunities helping their clients to finance these new flows of investment

Focus on finance: South-South integration opens new

opportunities for banks

As emerging markets begin investing in and trading with each other ever more,

so the opportunities for banks are rising, from raising capital for acquisitions to

providing letters of credit.

“We see these deepening South-South links very clearly in our business,” says Neeraj

Swaroop, CEO for South-east Asia at Standard Chartered, a London-listed bank that

operates almost entirely in emerging markets. “Our strategy is to be on both sides of

the flows, to be in Africa and Asia, for example, to facilitate the links as they develop.”

To do this effectively the bank has restructured its business lines so that they

are now organised on a much more cross-border basis, rather than on a countryby-country

basis, with incentive schemes that reward staff for promoting

network business. The bank has also set up 10 cross-border “desks”. For example,

it has a South-east Asia desk in China, and a Korean desk in India.

Importantly, it isn’t only the demand for capital and financial services that

is rising in emerging markets, it is also sources of capital too. Sovereign wealth

funds in places such as China, Singapore and the Middle East are a powerful new

source of global funding. But so too are the rising savings of the people, especially

those in Asia, that are rapidly creating deep capital markets. As companies expand

along emerging market corridors in search of high-growth opportunities, they will

increasingly draw on these sources of capital. Indeed, places like Singapore and Hong

Kong are already challenging the financial supremacy of Europe and the US. (See

“New nodes are rising to manage emerging market corridors” on page 29.)

“South-South links are

extremely important for our

business… They present great

opportunities to link and

leverage our existing presence

across emerging markets”

– Sunny Verghese,

group MD and CEO,

Olam International

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

and trade. (See “Focus on finance: South-South integration opens new opportunities for

banks” on page 14.)

Commodity companies have equally exciting opportunities. “South-South links are

extremely important for our business,” says Sunny Verghese, group MD and CEO of Olam

International, a Singapore-based agricultural commodity group. “They present great

opportunities to link and leverage our existing presence across emerging markets.”

By way of example, Mr Verghese highlights rice—one of 16 commodity “platforms”

that Olam operates. Currently, Asia produces almost 100% of the world’s rice exports,

while Africa accounts for around one third of global rice imports. Olam has long been

coordinating and linking its sources of rice in Thailand, India, Vietnam, Pakistan, China

and Myanmar, with sources of demand in Africa.

But as demand in Africa soars on the back of rising incomes, Olam is bringing more

than just rice to Africa, it is also bringing rice-growing technology. At present, ricegrowers

in Africa produce around 1.7 tonnes of rice per hectare per year. In China,

farmers produce 6 tonnes per hectare. So Olam is now importing Chinese rice technology

to African growers in order to improve their yields. Not only will Olam buy the rice

that Africa produces, it will also sell fertiliser and other inputs that these new farming

techniques require.

InterContinental Hotels Group (IHG), a UK-based hospitality company, sees

possibilities in the increasing flow of tourists between emerging markets. In particular,

Chinese travellers present a big opportunity, and last year overtook Germany as the

world’s number one source of international tourist revenues.

“China is now number one in the Maldives, number one in South Korea, number two

in Thailand, Singapore and Australia,” says Paul Logan, senior vice president for IHG in

Asia, the Middle East and Africa. “The China outbound opportunity is huge, and we’ve

already changed the way we operate in response.”

That has meant, for example, designing new guidelines for how staff engage with

Chinese customers. Everything has been re-modelled, from the welcome when Chinese

travellers arrive at a hotel, to the set-up of the room, to the toiletries provided, to the

type of food offered at the buffet breakfast, to the language skills of hotel staff.

© Economist Corporate Network 2013

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./B.

Increasingly, businesses are growing on a

South-South axis

Companies operating in emerging markets need to develop appropriate business

models. It’s not easy, but once they hit on a successful formula in one country, it

creates a platform for expansion across the whole emerging world

Every market is different, with its own character, nuances and idiosyncracies. However,

emerging markets do share common traits. For example, incomes are relatively low.

Infrastructure is patchy. Human capital with the right qualifications can be in short

supply. And risk is often higher, be it political instability, economic volatility, or legal

and regulatory uncertainty.

Companies that want to do well in emerging markets must develop products,

services, business models and management systems that are appropriate to these

conditions. It’s not easy to get it right, but once a company has developed a

successful business in one emerging market, there is a strong incentive to push that

formula into other, similar markets. Growth then flows along these emerging

market corridors.

This is most obviously true for companies based in emerging markets. Such firms

grow up in emerging market conditions—it is their natural environment. Having

proven their success at home, it makes sense for them to take that model into

other similar markets. Bharti Enterprises in India is doing exactly that with a

major push into Africa with its telecoms business. (See “Focus on telecoms: Asia’s

low-cost business models are driving South-South expansion” on page 17.)

Expanding along South-South lines makes sense for emerging market

companies if they are looking for top-line growth. Increasingly, it will make

sense when they are looking for other things too, such as natural resources or

intellectual property.

Commodities, for example, have in the past been easier to access in

developed markets such as Australia because of greater political stability and

better infrastructure. But this is likely to change as emerging markets get richer

and more stable.

Equally, when seeking to acquire R&D assets or consumer brands, companies in

the emerging world have traditionally looked to the West as the place to find

them. Increasingly, though, this will change. As the emerging world continues to

rise, so a growing share of new brands and new technologies will be sourced along

South-South routes.

“We developed a very efficient

low-cost business model in

India designed for people

with low incomes… we are

confident we can apply the

same model we developed in

India across a wide range of

other emerging markets”

– Akhil Gupta,

deputy group CEO and MD,

Bharti Enterprises

16 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

Focus on telecoms: Asia’s low-cost business models

are driving South-South expansion

The experience of Bharti Enterprises is typical of a growing number of

emerging market firms. Having developed a highly successful telecoms

business in India under its Airtel brand, Bharti felt confident in pushing

into Africa with a US$10.7bn acquisition of Zain in 2010 that gave Bharti a

presence in 15 African markets. It was the biggest acquisition that Africa

has yet seen.

“We developed a very efficient low-cost business model in India designed

for people with low incomes, which is really what defines an emerging

market,” notes Akhil Gupta, deputy group CEO and MD of Bharti Enterprises.

“We have a deep understanding of the needs of low-income consumers, we

understand the politics in emerging markets, we understand the regulators.

So we are confident we can apply the same model we developed in India across

a wide range of other emerging markets.”

He acknowledges that markets differ within the emerging world. But, he

stresses, “Fundamentally, what is appropriate for one emerging market is

equally appropriate for another.”

Making the mobile telecoms business appropriate to low-income markets

has many parts to it, such as using pre-paid sim cards rather than post-paid

billing, and allowing sim card values to be topped up in tiny, affordable

values from a giant distribution network of rural kiosks and “mom and pop”

stores. Innovations such as these arose in Asia and have rapidly flowed

into Africa. Today, the innovation flows are more evenly balanced. For

example, Africa has made giant strides developing low-cost mobile payment

systems. At Bharti, the company’s Indian engineers are improving these

African payment technologies, for example by upgrading their security.

These innovation flows are yet another example of deepening links between

the emerging world.

And what about developed markets? Mr Gupta says Bharti is unlikely to

invest in them in the near future. “We know emerging markets best, so we feel

we need to stick to our knitting.”

© Economist Corporate Network 2013

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

The same story is true of manufacturing, where investment is also moving along

South-South lines. China, for example, has developed a giant manufacturing capability

based on cheap labour. But wages have risen rapidly and it is no longer the best place

to produce certain goods. For example, a lot of Chinese manufacturers in textiles are

moving to Cambodia and Bangladesh. Huajian, one of China’s biggest shoe makers,

opened its first factory in Ethiopia in 2012 as an antidote to rising labour costs at home.

The company plans to employ 100,000 factory workers there when its operations are

fully established. 3

Growing along South-South lines is intuitively obvious for emerging market

companies. However, the same logic applies just as much to companies from the

developed world. Given the differences between developed markets and emerging

markets, it often doesn’t make sense to transplant a rich-world business model into an

emerging market context. Instead, companies need to spend time developing a new

approach that is appropriate to emerging markets. Once a new product or service

has been proven in one market, it then creates a platform for expansion into other

emerging markets.

Consider the case of Honeywell, a US technology group that makes equipment

and materials for industries ranging from aerospace to energy and transportation.

The company has spent the past 10 years refining and improving its business in

China to make it appropriate to the market. The result has delivered not only local

success, but also created a platform that Honeywell is using to push into other

markets. Not only are the products that have been developed in China proving a

big hit in other emerging markets, but so too are the relationships the company

has developed.

“Our success in China means that when local Chinese firms want to expand they ask

us if we will partner with them in their new markets,” says Shane Tedjarati, president

of high-growth regions for Honeywell. “They want a company that they trust in China

to help them move into places like the Middle East, Africa and Iraq where they need a

partner with a global presence like our own.”

3

“China shoemaker thinks on its feet with Ethiopian expansion”, The Financial Times, June 4th, 2013

18 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./C.

Rising South-South connectivity is

creating powerful emerging market networks

As companies expand across the emerging world, they are building new networks of

relationships, finance, talent and experience. Companies must harness the power of

these networks to drive their emerging market strategy

As businesses expand along South-South lines, they win relationships with new

customers and suppliers, and gain access to rich new pools of finance and human

capital. These expanding connections gradually build into broad networks that glue

together disparate places and resources across emerging markets. As these emerging

market networks grow wider and deeper, they help companies to expand in new

directions and into new markets. They become powerful accelerators of South-South

growth. Sembcorp, a Singaporean company with interests in industrial parks, energy

and water utilities, and marine and offshore engineering, is a case in point.

In the power sector, Sembcorp began building its business in China 15 years ago. The

main reason was to seek growth within China itself, but there were other benefits too.

In particular, Sembcorp built strong relationships with local Chinese manufacturers of

power generation equipment. Then, when the company decided to expand into India,

those relationships proved critical to winning business in this new market because the

Chinese manufacturers were able to provide equipment of the right quality, price and

performance for the Indian market.

In turn, Sembcorp’s push into India exposed the company to new pools of human

capital with technical expertise. In Singapore, the labour pool is limited, so Sembcorp is

now hiring Indian labour and using that labour to expand elsewhere.

Sembcorp’s experience in China also presented it with additional sources of funding

to back its push into other emerging markets. For example, when it expanded into Oman

in 2009, the involvement of Chinese banks was a crucial factor in its successful bid to

build a US$1bn combined power and desalination plant. The investment was made in

the aftermath of the global financial crisis when capital was hard to come by, but the

Chinese banks were happy to get involved.

The results are clear. Sembcorp went looking for growth. As it began investing in

China, this experience contributed supplier relationships that enabled Sembcorp

to move into India, which in turn contributed new labour and skill sets. The China

investment also provided the finance to invest in Oman. Sembcorp and many others like

it are building innumerable bridges that are linking and binding the emerging world

together, and in so doing they are strengthening their own capabilities.

© Economist Corporate Network 2013

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./D.

Asia is driving a wave of innovation across

emerging markets

Given the size of its markets and its talent pool, Asia is now the place driving innovation

not only for the local region, but for all emerging markets. Companies looking for South-

South growth must join Asia’s R&D revolution

Given that emerging markets have different needs and spending power relative to

mature markets, companies are investing heavily in innovation focused on the emerging

world. Many of these ideas are being produced in Asia, which has become the centre

of innovation for emerging markets. These ideas are then spreading to other regions.

The result is not only a surge in investment in R&D focused specifically on emerging

markets, but also a process of cross-fertilisation as ideas and innovations flow into and

out of Asia along South-South corridors.

The appetite for emerging market innovation shows up clearly in the number of

R&D centres that global multinational companies have set up in China and India. Back

in 2000, just 361 such facilities were in operation. By 2010, that number had risen

to 2,009. (See chart 10.) While some of these investments were first made to avail of

cheaper wages, today they are far more focused on producing innovations that are

relevant to low-income environments.

Cisco from the US has set up R&D centres in both China and India, as well as in

other countries such as Korea. Mr Elfrink says the purpose is to design products

that are appropriate for emerging markets. “We realised that our products weren’t

relevant for many markets. They were ‘over-specced’. So we had to re-design them

with the needs of the local market in mind. We started designing around the idea of

“Asia is where the global

middle class will be biggest.

It has the greatest unmet

needs, so we have to [put our

R&D] there”

– Wim Elfrink,

chief globalisation officer,

Cisco

Chart 10:

Number of R&D centres operated by multinational companies

2,500

2,000

China

India

1,500

1,000

500

2000 2002 2004 2006 2008

2010

Source: Zinnov Management Consulting

20 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

‘good enough’, and creating products that were smaller, consumed less energy and

were more affordable.”

But the focus wasn’t only about re-designing existing products. It was also about

developing entirely new ones based on local market conditions. For example, Mr Elfrink

points to the challenges of managing urbanisation, which is a feature of almost every

emerging market. In Bangalore, where Cisco’s Indian operations are based, there is

a net inflow of 600 people every day. “That means the city needs a new school every

four weeks, and a new hospital every three months,” says Mr Elfrink. “Seeing this, we

began to work on new ideas for the virtualisation of healthcare and the virtualisation of

Focus on healthcare: Asia drives South-South integration with medical innovation

The deepening South-South links in the pharmaceutical and healthcare industries are already imprinting themselves

on corporate strategy. And once again, Asia is central to this South-South story.

Take medical tourism. As the middle class in emerging markets grows, they start to demand medical services. Often

these are of poor quality in their home country and so they travel to places that offer better care. Yet the developed

markets are expensive. As such, countries like Thailand, Malaysia and India are developing thriving medical tourism

industries built around providing affordable services for patients from Asia, Africa and the Middle East.

Comparisons of costs show just why this trend looks set to stay strong. Patients Beyond Borders, which supplies

information on medical tourism, calculates that costs for surgery in India are 65% to 90% cheaper than in the US. In

Thailand, the costs are 50% to 70% cheaper.

One reason why costs are so much lower is because companies in Asia are developing world-beating new innovations.

Take heart surgery. In Bangalore, Dr Devi Shetty, a cardiac surgeon, has built a 25-acre health city called Narayana

Hrudayalaya that houses numerous hospitals catering to heart surgery, cancer treatment, organ transplant, eye-care

and other conditions. The principle behind all of the hospitals is to employ economies of scale and specialisation to

slash the costs of providing healthcare, much as Henry Ford did in the auto industry in the US 100 years ago. The heart

hospital, for example, has 1,000 beds (compared with 160 in an average American hospital) where Dr Shetty and a team

of 40 cardiologists perform 600 operations every week. (The cancer hospital has 1,400 beds.)

The sheer number of patients, and the narrow specialisation of the surgeons, means they quickly become experts—

Dr Shetty has performed more than 15,000 heart operations. The scale of the operation drives down the cost,

especially as the heart hospital shares central facilities such as administrative services, laboratories and a blood bank

with the other hospitals. Meanwhile, the specialisiation of the surgeons, and the fact that they perform the same

operation so many times, means that success rates for surgery are better than in the West. The cost of open heart

surgery at the facility is around US$2,000, against costs of at least 10 times as much at a hospital in the US.

In the years ahead, Asia will continue to produce medical innovation, and those ideas will not only draw patients to

Asia, but will cause Asian companies to expand into other emerging markets too.

© Economist Corporate Network 2013

21


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

education. Rather than build schools and hospitals, could these services be delivered

over the internet?”

Cisco placed its emerging market innovation centres in Asia partly because of the

size of the talent pool of engineers and scientists in the region, but mostly because

Asia represents the biggest opportunity. “Asia is where the global middle class will

be biggest. It has the greatest unmet needs, so we have to be there.” As the company

addresses these unmet needs in Asia, its products will also be rolled out to other

countries at similar stages of development.

Numerous other companies have chosen Asia for the same reasons. Covidien, a US

producer of healthcare products and medical devices, has also set up R&D centres

in China and India. “Today, the fundamental ability to pay for healthcare makes the

emerging markets different to developed markets, so we are designing products

specifically for them,” says Brian King, Covidien’s president of emerging markets. Given

the scale of opportunity that Asia affords, the region sits at the heart of Covidien’s

innovation strategy. The same is true for a growing number of pharmaceutical and

healthcare companies. (See “Focus on healthcare: Asia drives South-South integration

with medical innovation” on page 21.)

The flow of innovation out of emerging Asia into similar markets is helped

by the fact that many of them are greenfield sites. “In developed markets it can

take a long time to displace legacy investments in earlier technology,” says

Jagannath Narendran, senior vice president for Asia Pacific and the Middle East

at Aspect Software, a US call centre technology business. “There’s also the fact

that populations in emerging markets tend to be younger and more willing to

experiment.” The result is an environment that makes the transition of appropriate

innovation across emerging markets especially potent.

Of course, innovation doesn’t have to mean products and services. It can just

as easily be business models and operational processes. Nielsen, a US business

that gathers information on consumer behaviour, found it hard to measure

spending patterns in rural India because the retail sector is made up of millions of

unorganised stalls, kiosks and kirana stores, rather than chains of supermarkets.

To solve the problem, the company developed new ways to gather information,

including using simple mobile phone handsets to record data. The model has proved

highly successful and is now used in many other markets, such as Indonesia, where

similar conditions exist.

22 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./E.

As emerging markets become connected,

competition is growing fiercer

Early investors often had emerging markets to themselves. But today competition is

rising, especially as emerging market companies expand along South-South lines.

Companies must tone up—and expand overseas themselves—if they are to survive

“Competition is definitely

increasing in emerging

markets… People used to think

of emerging markets as risky

markets, now they see them as

growth markets and everybody

wants to get in.”

– Tan Cheng Guan,

EVP of business development

& commercial,

Sembcorp

The rise of emerging markets, and the deepening connectivity between them, presents

not only opportunity, but also risk and challenge. In particular, businesses are

experiencing rising levels of competition.

“Competition is definitely increasing in emerging markets, we can see it

everywhere we operate,” says Tan Cheng Guan, executive vice president of business

development and commercial at Sembcorp. “People used to think of emerging

markets as risky markets, now they see them as growth markets and everybody

wants to get in.”

For a start, the number of transnational corporations around the globe has risen

dramatically, from 35,000 in 1990 to 104,000 in 2010. Of these companies, the number

that comes from emerging countries has risen from 4,200 to 31,200. 4

What’s more, the size of these emerging market companies is growing. The number

of emerging market firms in the Fortune Global 500 has risen from 61 in 2006 to 141

in 2013. (See chart 11.) And they are becoming ever more sophisticated too. Huawei,

a Chinese maker of telecoms equipment, employs 70,000 scientists and researchers

spread across 16 R&D centres around the world, and last year spent US$4.7bn on R&D

(13.5% of its revenues that year).

Chart 11:

Number of companies from emerging markets that rank among the world’s 500 biggest

firms (measured by revenues) in 2013

150

120

90

60

30

Middle East & Africa

Russia & Eastern

Europe

South America &

Caribbean

Asia Pacific (ex-Japan

& Australia)

Source: Fortune

2006 2013

© Economist Corporate Network 2013

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

Having more players naturally leads to more competition. Having more sophisticated

players adds to the pressure. And as the links between emerging markets deepen, so the

routes that companies can take into new markets become easier and more established.

Competition in the emerging world is growing, and South-South connections are

opening up the playing field to ever more combatants.

A further factor comes from deregulation. Many companies in the emerging world

have enjoyed relatively protected home markets. But these natural defenses are

gradually being dismantled. The only way to survive such a shock is for companies

to venture out into the world and build scale and efficiency, and that usually means

looking to new emerging markets.

“If companies want to compete effectively in their home market, they don’t have

any choice but to expand internationally,” says Grant Powell, managing director

at Accenture, a management and technology consultancy, and head of the firm’s

innovation centre in Singapore. “They have to get their company up to global

standards if they are survive. It’s about going global, in order to become a global

company at home.”

4

“Growth Journeys: Helping Asian companies realize the value of their international expansion strategies”, Accenture, 2013.

24 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./F.

Companies from developed markets are

changing the way they are organised

Given the differences between low-growth developed markets and high-growth emerging

markets, firms must think deeply about their management structures and their human

capital strategies. Many companies are separating their teams according to market maturity

“Putting all high-growth

markets under one leadership

really allows me to see the

bigger picture…

Issues like energy efficiency

and urbanisation are common

to every high-growth market,

so we want to leverage

our solutions across all

of them.”

– Shane Tedjarati, president,

high-growth regions, Honeywell

This fast-changing picture of global connectivity has profound implications for

companies in the developed world. For many of them, growth in their traditional

rich-world markets is anaemic. By contrast, the emerging world is exciting and

full of potential.

But, as discussed, these companies can’t simply take what they do in the

developed world and expect it to work just as well in the emerging world. Products,

services, business models, and operational systems need to be refined and made

appropriate to the conditions. Just as important, the goals and targets that

companies pursue in emerging markets are very different. Given low growth in

developed markets, the priorities are often about defending market share and

reducing cost to protect the bottom line. In emerging markets, the focus is much

more on top-line growth.

A growing number of companies are recognising these differences and are

introducing major changes to the way they are run and organised. One important

trend at many firms is to separate their management into a developed market group

and an emerging market group. Each is given greater leeway to run their operations

in a way that is appropriate to the environment. In effect, companies are organising

themselves according to market maturity. By clustering markets at a similar level

of development, companies can concentrate on what works and then replicate that

across other, similar markets.

Honeywell of the US, for example, has grouped together 70 countries across the

globe into a “high-growth region” under the oversight of Mr Tedjarati, who sits in

Shanghai. “Putting all high-growth markets under one leadership really allows me to

see the bigger picture,” he says. “Issues like energy efficiency and urbanisation are

common to every high-growth market, so we want to leverage our solutions across

all of them.” In other words, Honeywell is organising itself to grow along a South-

South axis.

In healthcare, US-based Covidien has done the same, creating an emerging markets

unit within the company in 2010. IBM, an American IT services company, set up its

growth markets unit in 2008. Some 149 countries are included in the unit, which

© Economist Corporate Network 2013

25


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

together contributed 24% of IBM’s global revenue in 2012—up from 15% when it was

established. Once again, the leader of the group, Jim Bramante, sits in Shanghai. He

sees the world bifurcating into “parallel universes”.

“The universe of emerging markets increasingly look to each other rather than

to North America or Europe. They are boosting trade and links of all kinds with

each other—the so-called South-South links. In China they ask you about Brazil, in

Brazil they ask you about Africa, in India they ask you about the Middle East,” he says.

“The goal of our growth markets team is to create differentiated strategies to serve

this environment.”

At InterContinental Hotels Group, Mr Logan runs a unit that includes Asia, the Middle

East and Africa. While the region contains huge diversity, he believes it also displays

important commonalities, such as the path that consumers take as markets get richer

and tourists move from unbranded accommodation into branded accommodation.

Experiencing this development path provides lessons that can be applied right across

the region.

MasterCard, an electronic payments company, has a similar business unit covering

Asia Pacific, the Middle East and Africa. Part of the rationale for combining all these

territories together is because, individually, some of them are small. However, the

deepening linkages are also important. Vicky Bindra, president of MasterCard for

the region, highlights innovation flows, such as a cashless payment technology

embedded into a biometric identity card that was developed in India, but is now

growing swiftly in Nigeria and South Africa. He also points to the cultural links:

“There are obvious synergies between the banking systems of Malaysia, Indonesia

and the Middle East.”

Within these emerging markets teams, a big part of what makes them different

from their peers in the developed world is the way they recruit, retain and manage

talent. Given the high growth rates of emerging markets it is often the case that the

supply of qualified and experienced workers fails to keep up with demand. As such,

companies have to develop human capital policies that are appropriate for high-growth

environments. This often means a strong focus on training and development, and

working closely with universities to help shape curricula.

As Mr Bramante at IBM notes: “Our biggest challenge in growth markets is to ensure

we have the necessary skills to capture the opportunity.” Having a growth markets unit

dedicated to emerging countries helps him to set up policies that differ from slowergrowing

regions and so contributes to addressing that challenge.

“Our biggest challenge in

growth markets is to ensure

we have the necessary skills to

capture the opportunity”

– Jim Bramante, senior vice president,

growth markets, IBM

26 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./G.

Companies in developed markets are moving

decision-making to Asia

Local companies in the emerging world not only have better understanding of their

markets than Western firms, they are also faster-moving. In order to compete, Western

firms are moving ever more of their senior leadership teams to Asia

“Asian companies do tend

to be nimbler and more

entrepreneurial than developed

market firms. We don’t suffer

from analysis paralysis or

excessive processes”

– Akhil Gupta,

deputy group CEO and MD,

Bharti Enterprises

Given the growing importance of emerging markets, Western companies are

re-locating ever more of their senior decision-makers into their high-growth regions.

And given the growing importance of Asia to the emerging market opportunity, it is

Chart 12:

Western companies operating in Asia that have at least one member of their main board of

directors based in Asia (%)*

60

50

40

30

20

10

2008 2009 2010 2011 2012

Will have at least one

Source: “Asia Business Outlook Survey 2013”, Economist Corporate Network, January 2013

*Survey of 500 multinationals from Europe and North America

board member based in

Asia by 2017

Chart 13:

Western companies operating in Asia that have at least one global head of a business unit

based in Asia (%)*

80

70

60

50

40

30

20

10

2011 2012 Will have at least one head of a

global business unit based in Asia

Source: “Asia Business Outlook Survey 2013”, Economist Corporate Network, January 2013

by 2017

*Survey of 500 multinationals from Europe and North America

© Economist Corporate Network 2013

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From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

only natural that this is where companies are choosing to put their leadership teams.

This migration of senior talent shows up in a number of ways. For example, more

and more Western companies are deciding to put board members into Asia. (See

chart 12.) Equally, they are also moving the global heads of some of their business

units to Asia. (See chart 13.)

Because emerging markets grow so rapidly, they change at enormous speed. It is

only by having decision-makers living and working in the midst of this change that

developed market companies can react quickly enough to be competitive.

Mr Gupta at Bharti Enterprises believes that many emerging market companies

are more agile, responsive and fast-moving than their Western peers. Partly this is

because many companies in Asia are family-run and so can take decisions without

having to obtain shareholder approvals, or getting bogged down in due diligence and

onerous governance requirements. “Asian companies do tend to be nimbler and more

entrepreneurial than developed market firms. We don’t suffer from analysis paralysis

or excessive processes. As long as the fundamentals are right, we push ahead and do

things at speed,” he says.

Just as important, Asian firms move more quickly because their decision-makers

are on the ground, living and breathing the market conditions. While Western firms

may not be able to escape some of their process and governance constraints, they can

compete more effectively and make decisions more quickly by having their leadership

team on the ground. And by being on the ground, they will not only make faster

decisions, but better ones too.

28 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./H.

New nodes are rising to manage emerging

market corridors

New financial centres are rising in Asia and becoming the management nodes and

gatekeepers of the world’s emerging economic corridors. Cities with a diverse cultural

mix, such as Singapore, Kuala Lumpur and Dubai will grow in demand

5

“The Rise of the “Redback” and China’s Capital

Account Liberalization: An Empirical Analysis on

the Determinants of Invoicing Currencies”, Hiro

Ito and Menzie Chinn, July 2013

As the world’s centre of economic gravity continues to tilt in favour of emerging markets,

so the centres of power in this new landscape are shifting. The financial order is already

changing markedly, with global entrepôt cities such as Hong Kong and Singapore now

challenging the old supremacy of London, New York and Switzerland.

Shanghai is rising too, and as China continues its gradual process of

internationalising the renminbi, the city’s influence will only grow. Currently, only

around 1% of global trade is invoiced in the RMB, versus close to 40% for the US dollar.

However, its use is rising rapidly. In the fourth quarter of 2012, 14% of China’s trade

was invoiced in its own currency, up from 0% in 2009. 5 While nobody is predicting it

will displace the US dollar as the world’s reserve currency in the near future, it will keep

chipping away at the global pre-eminence of the greenback.

In the world of Islamic finance, Kuala Lumpur has rocketed to prominence, becoming

an important centre for the global Muslim community, from Indonesia to India to the

states of the Gulf Cooperation Council.

These centres are fast becoming the new nodes on the global economic map, the

places where companies go to raise finance, and where individuals manage their wealth.

They are becoming the gatekeepers and management centres of the world’s new South-

South economic corridors. As they rise, global companies will locate ever more of their

management teams into these new centres of financial power. In the energy sector,

for example, both Shell and BP, two British energy companies, have moved the global

headquarters of their natural gas trading teams to Singapore.

One important factor that will differentiate these new power centres will be the cultural

and linguistic mix of the domestic residents. Emerging markets are enormously diverse, and

thriving in this unfolding world will require companies to harness an array of managers with

different nationalities, language skills and religious and cultural sensitivities. Cities that can

provide a labour force with such diversity will do best of all.

In this context, Singapore and Kuala Lumpur stand out. Both are well-connected, modern

cities, and both have large populations of Chinese, Indians and Muslim Malays living side-byside.

Dubai is another contender, with its native Arab population, large expatriate community

of Indians, Pakistanis, and Filipinos and cultural links with Africa.

© Economist Corporate Network 2013

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What Asia’s deepening links with other high-growth markets mean for corporate strategy

V./I.

As emerging market corridors open up, risk

management is becoming more important

Emerging markets tend to be more risky than developed markets. To succeed in these

markets, companies need to develop a cadre of managers who are deeply attuned to

managing and mitigating risk in challenging environments

Expanding into new markets is always an inherently risky proposition. Companies

are investing in an unfamiliar environment and the certainties, knowledge and

relationships of home no longer apply. But pushing into emerging markets is

especially risky because these markets are prone to greater economic volatility, to

greater political uncertainty, and especially to greater legal and regulatory risk than

found in developed markets.

As companies exploit the opportunities that come from deepening South-South

links, and as they see the emerging world account for an ever bigger portion of their

global revenues, so the risk profile of many companies is changing. To manage this new

risk profile, businesses need to develop skills appropriate to emerging markets.

At Olam International, Mr Verghese identifies risk management as foundational to his

firm’s success. For example, he practises diversification, never allowing one market to

account for more than 8% of his assets. And he avoids any kind of political allegiance.

Given that political regimes frequently change in emerging markets, he believes that

such affiliations are more of a hindrance than a help.

Olam also has a policy of never investing in a market until it has been deregulated.

“That’s why we haven’t invested in Kenya, for example, where the coffee and sugar

markets are still heavily regulated,” says Mr Verghese. “But once a market is deregulated

and there’s a level playing field for everyone, then we will enter.”

After Olam has taken all the precautions it can to manage its business risk, it then

turns to the insurance markets. It is here that it transfers the risk of nationalisation of

assets by governments, and tries to protect itself against the risk of war, coups, civil

disturbance and other events that would force it to abandon its operations.

Fundamentally, though, Olam believes the best risk defence is to have a cadre of

managers who are deeply attuned to emerging market environments. (See “Focus on

commodities: Emerging markets demand special skills” on page 31.) For Western firms,

this view reinforces the need to have separate management teams that truly understand

the vagaries and nuances of investing in difficult places.

Take infrastructure investments. In markets like the UK and Australia, the regulators

are independent of politics and neutral in their oversight of sectors such as power, water

“[Investing in Liberia] was

a greenfield project, which is

much harder than buying an

existing asset… There are big

execution challenges around

different cultures, different

languages and different

expectations”

– Alan Hamzah, EVP,

group strategy & business development,

Sime Darby

30 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

and telecoms. When it comes to setting prices, for example, they aim to strike a genuine

balance between the interests of infrastructure owners and operators on the one hand,

and infrastructure users on the other.

However, in many emerging markets it is difficult to get transparency and certainty

around infrastructure policies and regulations. Regulators are often not independent,

and frequently change when a new political regime comes to power. Given that

infrastructure investments are usually planned over long time horizons of as much as 50

years, this regulatory uncertainty calls for a different approach to managing risk, and

higher discount rates applied to investment appraisals.

Focus on commodities: Emerging markets demand special risk skills

“We live in an information-surplus world, but an insight-deficit world,” says Sunny Verghese, group MD and CEO at

Olam International, a Singapore-based agricultural commodity group. “Companies can write a seemingly very good

market entry strategy for a new emerging market just by using Google. But though they may have the information,

they don’t have the understanding and they won’t succeed.”

At Olam, Mr Verghese has installed a crack team of emerging market managers through a rigorous requirement

that all the senior leaders spend five to six years living and working “in a tough local emerging market environment”.

These managers then become members of a 750-strong global talent pool, who “all speak the same business

language” and understand emerging markets intimately.

While Mr Verghese himself currently runs his company from the relative comfort of sophisticated Singapore, he

also spent four years living in a portacabin in rural Nigeria dealing with groundnut farmers in order to learn the

fundamentals of the industry. He believes it is only by being at the sharp end of emerging markets that managers

truly understand how they work and what it takes to succeed in them.

Alan Hamzah, executive vice president of group strategy and business development at Sime Darby, is equally

adamant of the need for deep market understanding in order to understand risk. Sime Darby is a Malaysian

conglomerate with interests ranging from plantations to car dealerships to property developments, and recently

began investing in Africa, by setting up oil palm plantations in Liberia. Though the company has much experience in

emerging markets such as Indonesia, it struggled initially in Liberia.

“This was a greenfield project, which is much harder than buying an existing asset,” says Mr Hamzah. “There are big

execution challenges around different cultures, different languages and different expectations.” In particular, Sime

was caught out by vigorous campaigns from non-governmental organisations (NGOs) in Liberia that encouraged local

workers to press for “unrealistic” demands.

“We’ve spent a huge amount of time building schools, homes, infrastructure and communities for our workers

there, but everyone wanted to get rich overnight. The expectations from the NGOs were unrealistic, so it has taken us

some time to build good relationships with the local communities.”

© Economist Corporate Network 2013

31


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

VI.

Conclusion

The emerging markets story will suffer setbacks and crises, but the underlying structural

rise remains solid. Companies must act now if they are to capture the opportunities of a

new phase of globalisation

Cross-border trade among what are today known as emerging markets has ebbed

and flowed over the ages. Asia’s old Silk Roads and the caravan trails of Africa

and Arabia were once glorious corridors funneling goods and wealth and ideas

across the globe. More recently, the activity along these ancient connections

stagnated and became meagre in comparison to the flourishing integration seen

in the West.

But today, we stand on the brink of a new era of globalisation when these

corridors are reopening and thriving once again. The title of this report, “From

silks and spices to dollars and devices”, hints at the new life flooding through

these economic arteries. Today, the trade is about smartphones, financial services,

pharmaceuticals and commodities, all being shipped on an unprecedented scale

as incomes in emerging markets rise at tremendous speed. Companies thinking

about their strategy can’t afford to ignore the opportunities that come from these

connections, nor the risks that they present.

Without question, local companies in emerging markets are best placed to exploit—

and build—these new economic linkages. They have a natural advantage in that they

have grown up in emerging market environments. They are attuned to the unique

challenges and risks that emerging markets present, be it weak infrastructure, low

incomes, or difficult and uncertain regulatory regimes. These firms are also attuned to

the speed of emerging markets. High-growth environments demand agile management

and rapid decision-making.

Western firms, by contrast, can often get bogged down by stringent internal

controls, lengthy project appraisal processes, and onerous governance and shareholder

requirements. None of which is to say that Western firms can’t do well, but they do need

to adopt a different management style and approach. And that often means setting up

a separate team for emerging market operations and putting that team out in the field—

especially in Asia.

At the time of writing this report, some observers are questioning whether the rise of

emerging markets will continue into the future, or whether the story will come unstuck.

Certainly the first half of 2013 has proven far tougher for emerging markets than many

32 © Economist Corporate Network 2013


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

were expecting. The strong performance of recent years in countries like Indonesia,

Brazil and India has diminished somewhat, and perhaps exposed these nations as

having failed to implement the reforms and investments needed to support the next leg

of their development.

But volatility is a feature of all economies, and particularly of emerging markets. It

is unrealistic to expect growth to proceed in a smooth line. Setbacks and crises will be a

constant feature of the emerging markets story. Indeed, developing risk management

capabilities that are in tune with an emerging markets environment is essential if

companies hope to do well.

But while emerging markets face challenges in the short-term, the underlying

structural story remains intact. The demographics, the urbanisation, the productivity

catch-up, the influence of a growing middle class, the flow-through from improving

education—all will see the emerging markets continue to rise. And as they rise, so too

will the economic corridors connecting them.

© Economist Corporate Network 2013

33


From silks and spices to dollars and devices

What Asia’s deepening links with other high-growth markets mean for corporate strategy

About Economist Corporate Network

Economist Corporate Network is The Economist Group’s advisory service for senior

executives seeking insight into economic and business trends in their key growth markets.

Independent and thought-provoking, Economist Corporate Network provides

clients with the information, insight and interaction they need to succeed. It is led by

experts who share a profound knowledge and understanding of business issues. It has

regional business groups across Asia Pacific, Central and Eastern Europe, the Middle

East and Africa.

Through its tailored blend of interactive meetings, high-calibre research, and private

client briefings, Economist Corporate Network delivers country-by-country, regional,

global and industry-focused analysis on both current and forecast conditions.

Follow us on Twitter @ecn_asia

34 © Economist Corporate Network 2013


Insights through interaction

Economist Corporate Network Asia

Beijing, Hong Kong, Kuala Lumpur, Shanghai, Singapore, Tokyo

For enquiries, please contact us at cn@economist.com

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