This paper captures the discussion at IMA Asia’s Asia CEO Forum Overnight in Singapore, 17-18th May 2017.

Key Takeaways

Strategies in Asia have typically aligned with underlying drivers, such as rising incomes or export manufacturing. Today, several new forces are disrupting Asian markets, offering new opportunities for growth beyond the traditional underlying drivers.

• In part, the transformation pressure comes from new technologies, ranging from ecommerce and industry 4.0 schemes, to India’s national electronic ID scheme.

• In part, regulatory reform is also playing a role, such as India’s introduction of a GST, and the opening of financial, airline, and mobile phone markets in some countries.

• Finally, massive demand/supply imbalances face sectors like shipping and manufacturing, and will drive market transformation.

• While the transformation story differs country-by-country, the overriding strategic challenge is the same: a willingness to think outside existing business structures, and an ability to move quickly.

• Local firms have excelled at spotting and exploiting the transformation opportunities so far, most notably in China. In many cases they have an advantage over foreign firms in breaking the rules that have defined Asian markets. Meanwhile, Western firms are gun-shy on rules, as over-regulation is dominant in the West, and responding to that has become prominent in HQ strategy.

• Nationalism is also at play, particularly in China, with local firms allowed leeway, while foreign firms are strictly regulated.

• In the digital arena, local firms are also less concerned about privacy and are better able to adapt to local cybersecurity rules.

• Finally, China is set to play a key role in transforming Asia’s infrastructure, as well as trade & investment flows. China’s own firms, together with a few select local partners, may do best in this environment, with Western MNCs at a disadvantage.

• That raises the question of where MNCs will have an advantage. Technological innovation is the obvious opportunity, such as the looming introduction of NBIOT.

• So is an ability to transform the way firms operate. Yet, regional CEOs often find their organisations are poor at spotting opportunities, slow at decision making, and unwilling to break away from established plans, technologies, and structures.

• MNCs that want to move faster will have to break down such barriers, and change the way strategic goals are set in Asia. That includes giving greater attention to emerging market trends and more freedom for local innovation.

‘If you can figure out market transformation in this region, you are going to drive your business faster.’

Market disruption… Asia isn’t immune… indeed, China leads in some areas

Business transformation is not just about digital transformation; it is about entire markets, industries, and countries being reshaped by the combination of rapid technological change, a bit of deregulation (or skirting of rules), and lots of cheap cash willing to back disruptors. This is a global phenomenon, with sweeping change underway in industries that include banking, shipping, oil, publishing, and retailing. Worldwide, this disruption has seen the rise of unconventional entrepreneurs taking on entrenched market leaders. Asia isn’t immune to this process. Indeed, China is leading the way, and while many firms suspect it is a unique outlier in the region, its market transformation will find an echo in much of the rest of Asia.

Rules disruption… the big one in Asia was China’s WTO entry

It’s important to recall that market transformation is much more than the current explosion of digital technologies. One of the biggest transformations in the last 50 years was China’s entry into the World Trade Organisation (WTO) in December 2001. The surge in China’s exports that followed transformed global markets, as much as China’s domestic market. Companies that took advantage of it did very well, particularly the HK and Taiwanese manufacturers who quickly relocated production into China.

Will China reshape Asian commerce in the next decade?

With the US withdrawal from the Trans Pacific Partnership (TPP) we’ve lost a new step change opportunity for regional trade and investment flows. China’s One Belt One Road (OBOR) may provide an alternative framework. OBOR’s rail links into Southeast Asia will clearly transform markets like Laos and Cambodia. In 2018, we should find out whether Beijing can replace the US in leading regional trade integration plans. Several regional companies are starting to align their ASEAN growth strategies with OBOR.

Local firms excel at market transformation

The many natural advantages for local firms as disruptors

MNCs tend to focus on transformation in their home markets, and pay less attention to it in their overseas markets. That had little downside risk when Asia’s markets were typically controlled by entrenched local firms. Yet these ossified local competitive structures are now being broken up, and the newcomers doing the disruption are mainly local private firms. Exploring why this is the case highlights some interesting challenges for MNCs.

They are quick at learning skills in the West… and spotting the opportunities to apply them in Asia

Airlines were a classic ossified industry, not just in Asia, but worldwide. Until recently, national carriers dominated, with very restrictive permits blocking almost all new entrants. Yet, the last five years has seen an explosion of small and disruptive carriers across India and SE Asia, led by individuals such as Tony Fernandes, CEO of AirAsia. Mr Fernandes is typical of many of Asia’s transformation champions in having learnt his trade in the west (with Virgin) and spotted the opportunity in Asia (a vast but untapped pool of low-income air travellers). These low-cost carriers have not only transformed the airline business, but have contributed to the transformation of Asia’s low-income consumer market as a whole.

They excel at breaking regulations – Go-Jek

Go-Jek, Indonesia’s motorcycle taxi service, which started in 2010, now has over 200,000 drivers and provides a host of transport, retail, and personal care services to the country’s vast and underserved informal economy. Like many disruptors in Asia, Go-Jek spotted the market transformation opportunity, came up with a novel strategy, and was willing to break the rules. Western MNCs might do well at the first two of those tasks, but they are poorly positioned to be rule breakers. As it is, Go-Jek almost failed when established taxi firms encouraged a minister to ban its operations in late 2015, and only a quick call to President Jokowi saved it.

It’s harder to break rules in financial services… except in China, where AliPay and WeChat lead

Asia’s banking sector is a different story, as fintech mostly faces bigger challenges in rule breaking and pushing past the entrenched banks. The exception is China, where AliPay and Tencent’s WeChat have claimed 95% of a US$6tr mobile payments market by 2016. Like Go-Jek, they too broke the rules, by spotting opportunities that weren’t explicitly regulated, but ruled existing financial players from developing. B2C and even B2B businesses are now scrambling to realign their payments systems with these two players. Companies that fail to respond to the payments transformation in China will likely lose ground fast. AliPay and WeChat have both been called in by Beijing’s regulators, but have somehow found the wriggle room to continue with their explosive growth strategies, which challenge both SOE banks and UnionPay.

Yet, MNCs can move fast when the rules change unexpectedly

Outside China the fintech transformation is slower. India stands out because of several recent developments. The first was the introduction over the last few years of Aadhaar, a 12-digit unique identity number issued to all Indian residents based on their biometric data. This has enabled a new form of secure payment, even for those who are illiterate. Then came a surprise cancellation of 500 and 1,000 rupee notes last November, which forced millions of Indians to open their own bank accounts as they scrambled to pay for goods and services without cash. That set the stage for banks to make a quick jump into digital banking, which was in high demand, as bank branches and ATMs were shown to be ineffective.

… digital banking by DBS in India… while most Western banks sit in their bunkers

Singapore’s DBS bank grabbed the opportunity, as it was already in the process of rolling out mobile-only banking services that operates without paper, signatures, or even branches. DBS’s cost of opening a personal bank account in India is 90 cents, versus $26 for accounts opened through bank branches. The time needed to open a new account is 90 seconds, with the last element being the customer’s thumbprint, which customers provide at their first purchase at coffee shops or other points of sale. DBS has been able to secure a foothold in India at a completely different price point than would otherwise be possible. So, in this case we have a regional MNC moving fast enough on technology and marketing change to gain an edge by leading market transformation. That no Western bank has taken the same path reflects a “bunker mentality” that has swept Western banking in the last eight years, along with a lack of commitment to the region.

Privacy, cybersecurity, nationalism, and over-regulation

The constraints on Western MNCs… Privacy isn’t an issue in large parts of Asia

Apart from an unwillingness to break rules, another reason that Western MNCs are slow in chasing growth through market transformation is that it has lots of risks. Digital platforms are particularly prone to privacy issues and cybersecurity risk. The notable lack of privacy issues in China has helped Chinese internet companies capitalise on the data they’ve gathered to deliver more customised services. Other emerging economies like India and Vietnam are also less worried about privacy, and that may allow them to leapfrog some of Asia’s more advanced markets. One Forum member noted that in terms of cloud technologies, India is already moving ahead of Korea.

… yet it is becoming one in advanced Asia, creating a patchwork of rules

Meanwhile, some Asian governments are moving in the Western direction on privacy, so the region is becoming a patchwork of often conflicting rules. That also helps local players in each market, as Western MNCs will always reach for a global rule on privacy and cybersecurity, and modifying that on a country-by-country basis becomes grit in the gearbox. Countries to watch include Korea, Japan, and Singapore.

… while the West heads towards even greater regulation on privacy

In the West, most governments are currently moving to stricter rules on privacy, even though that trend may reverse several years from now as technologies and popular concerns evolve. As one participant noted,

‘We are all going to have to make a choice about privacy. Now, we get a lot of stuff for free because companies are allowed to gather a lot of data. There could be future scenarios where if you want it for free, you need to allow data about yourself to be collected. If you don’t wish to provide it, then you will need to pay for the item.’

Cybersecurity and nationalism… another can of worms for any MNC

Cybersecurity law looks like being an even bigger challenge. Again, local firms appear to be adapting to this faster than Western MNCs, which are struggling with yet another patchwork of rules. Moreover, tough new cybersecurity laws, like the one recently announced in China, appear intended to limit foreign firms and foster local champions.

China’s role in Asia’s market transformation

China’s rising ability to set the agenda for Asia’s transformation

The elephant in the room on any discussion of market transformation in Asia over the next five years is what to expect during President Xi Jinping’s second five-year term as China’s paramount leader, which starts later this year. While it’s still unclear how much his OBOR plan will transform Asia over the next decade, the potential is there. That potential is anchored in the stability of China’s leadership, China’s dominance in regional trade, its massive wealth, and the rising offshore ambitions of its firms. Just as aligning with the US was a good idea over the last 50 years, aligning with China might work well for the next decade. Moreover, it’s unlikely to be a binary choice. Much of SE Asia will find the best path lies in playing off US and China, with Japan as a third contender for ASEAN’s affection. The Philippines and Malaysia have already moved in this direction. This will likely lift the flow of funds into these countries, reshape national construction markets, and change investment and trade flows.

… will Western MNCs find a role?

In our May Overnight debate, we couldn’t explore how well Western MNCs will do in playing to this transformation. Firms like Siemens and GE have made clear in public their support for OBOR and their desire to be involved. Yet, it may turn out that it is Chinese firms and a few selected local partners that get the lion’s share of the business. Meanwhile, local property developers and real estate firms are scrambling to figure out the most lucrative positions on rail networks that China will build from Kunming through SE Asia to Singapore and ports in Vietnam, Thailand, and Myanmar.

Governments in India and SE Asia are mostly MIA

Governments in India and across SE Asia are playing less of a role in transforming their own markets or regional markets. PM Modi has promised voters and corporates that he’ll deregulate India, but it’s a slow and piecemeal process. ASEAN governments are doing even less. While countries like Singapore and Malaysia have digital strategies, it’s far from clear they’ll allow any disruption to their rather rigid domestic markets.

Can Western MNCs lead transformation in Asian markets?

So far, our debate had focused on various reasons why Western MNCs have been at a disadvantage in leading market transformation in Asia: Appropriate caution on breaking regulations, Privacy and cybersecurity concerns, Nationalism, A swing to a China-led Asia. Our debate then turned to areas where Western MNCs can lead in market transformation.

Have Western MNCs lost their technology mojo?… some argue China’s firm now lead

Technological innovation. One of the big lessons of the last five years is how fast local firms have been in jumping on technological innovation to capture growth through market transformation or disruption. Yet, this is an area where Western firms should still have an advantage, although in a China CEO Forum meeting last year, Edward Tse advanced the thesis that Western firms were too wedded to single-track technologies, and often missed the jumps opening up in other fields (that was a central theme in our Singapore debate on innovation in April this year).

Yet new technologies from the West look like reshaping markets… watch NBIOT

An example of where Western firms might still get a technology jump on the market came up in an April 2017 Asia CEO Forum debate in Hong Kong. Part of that discussion focused on the emerging narrow band broadcasting technology to enable the “internet of things” (so, NBIOT). Basically, IOT will fail when power is lost or things are put in the basement. Firms like AT&T are working a narrow band broadcasting device with a 10-year battery life, which can broadcast from the basement, and costs $1 a piece. Put that on any consumer durable or machine sold to a customer and business is transformed by a live IT link from an end customer to a thing maker.

At that point, a company can move from selling things (capex) to selling the service of things (opex). It could also gut the entire distribution chain worldwide and across Asia, where third party distributors have often delivered 50% of sales. For such distributors – who have essentially lost control of the customer – to continue in business they’d need to integrate their IT systems (and likely finance reporting) with the manufacturing firm. That is massive market transformation and it is likely within the next five years.

Organisational transformation… Western firms hate it… yet, the pain may be worth it

Organisational innovation. This is an area where Western MNCs can be bad, but know how to be better if they are ready to bite the bullet. Transforming organisations has a high cost. As one participant noted,

‘Companies don’t break the pieces that don’t work; rather they try to stick the pieces back together. The problem is that when you shut down pieces of your business due to business transformation, your revenue numbers go down. Because senior executives must be concerned about quarterly earnings and stock prices, it’s very hard to shut down a part of the business and rebuild it.’

Yet, in our debate one participant with a leading Western MNC outlined exactly that strategy in his business this year. The transformation will likely decimate the current sales team, but it is essential to realign with fast evolving technology and customer trends.

MNCs often win employer of choice awards… and that may be a problem

People management. Finally, parts of our debate turned to people management, as is often the case. This is a classic soft skill developed over decades in Western MNCs. It is partly how MNCs successfully operate across fragmented markets with patchwork regulations. It is also one of the big stumbling blocks for Asia’s fast-emerging local firms. While they may excel at it in their home market, making it work across many foreign markets is much more complex. The key issue that emerged in this debate was whether Western MNCs, which have done well in the last few decades at this (often dominating local employer of choice awards), have the right people to lead in market disruption. The whole thrust of HR development has been to turn them into good corporate soldiers, and that often means sticking within the tramlines on planning, structure, and innovation.