20 Apr How to (not) fail in ASEAN
Next time when you pick up a breakfast sandwich and chai latte at a Starbucks in Indonesia, spare a thought for the vanishing old Subway or the once fiery Nando’s. Western fast-food chains have consistently been unsuccessful in either changing local taste buds or adapting themselves to local palate in ASEAN. Vietnam has increasingly seen western fast-food chains like McDonalds and Burger King fading into oblivion. Failing to cater to local ideas of “fast” and “flavour”, western retail giants have had to withdraw from ASEAN with a bitter taste in their mouth.
And the story doesn’t end here. Similar narratives can be found in every sector and industry across all ASEAN countries. Take for example Uber’s notorious exits in Asia; General Motors wrapping up of operations from Thailand and Indonesia; eBay’s dismal performance in many Asian markets; and Walmart bowing out of Indonesia. Most recently in 2020, French supermarket chain Auchan retracted from Vietnam and the British grocery retailer Tesco too pulled back from Thailand and Malaysia.
While many of the world’s biggest companies may be in the West, the biggest markets are increasingly in the East. And this attracts western executives who have done well at home, to think they will easily succeed in ASEAN. Unfortunately, some have learnt the hard way that may not be the case. So, what makes some western firms thrive in ASEAN while others fail so drastically?
The answer is both simple and complex just like the region itself.
Why does ASEAN matter?
In 2020, ASEAN, with a land mass covering a larger area than Germany, France, UK, Switzerland and Spain put together, emerged as the world’s fifth largest economy with an estimated total GDP of over US$3 trillion. ASEAN already is the world’s third most populous region with 650 million people, and has the world’s third largest labour force, behind only China and India. Additionally, over the next decade, ASEAN is estimated to see 140 million new consumers, representing 16% of the world’s new consumer class. Over 60% of ASEAN population is below the age of 35, internet literate, digitally aware and hungry to consume more.
While the decision to enter ASEAN is a no-brainer, the skeletons of failed companies are can be seen everywhere. So, what must companies do to succeed in this market?
It is essential to understand that the ASEAN customer thinks, behaves and buys differently from the average western customer. The range of parameters that they use to evaluate the value of a product is different from the West. Take the case of Uber. They by-passed the fact that Asian consumers are not very comfortable with credit card payments, and the company lost out to local competitors like GoJek and Grab. SaaS (software- as-a-service) find it hard to work in Asia as subscription models tend to be unsuccessful with users. A lot of digital insurance firms have dismal sales in Indonesia, where most people are suspicious of insurance as a risk mitigator.
Which is why, it is important to ask the right questions. What are the customer dynamics of the market? What is the competitive landscape like? Are you a first entrant? What is the attitude of the people and the government to your sector? Investing in extensive consumer research to understand consumer patterns, market insights and trend analysis can go a long way, but some firms are shy of going that extra mile to save cost. Research and analysis may seem like unnecessary steps to seasoned marketing firms, but they will save you a lot of pitfalls later.
Understand the culture
More often than not, many western managers enter with a rigid mindset of “this is the right way to do things”. The fact that Asian culture is different, is well documented and widely accepted. But it is not enough to memorise the courtesies and participate in the wining and the dining. Softer aspects need to be paid attention to such as – the Asian hesitancy to say an outright no, understanding that silence in a meeting is not consent, accepting that this is a culture wherein things are usually left to interpretation and adopting a new outlook to the concept of time. Patience is a virtue here. Asian businesses do not work towards the next quarter, they tend to play the long game.
If you invest at the granular level, respect the culture and are keen to learn, you earn the right to be part of the thriving ecosystem. Look at Unilever’s story in Indonesia, where they first entered in 1933 and remained through political upheavals, policy u-turns and even the financial crisis of 1997-98. While many other multi-nationals were exiting the country, Unilever adapted its business model to ensure that products remained affordable, re-negotiated supply contracts, forged new joint ventures and developed a strong local talent pool.
Remember that ASEAN is not a homogenous market
It is pertinent to accept that there is no “single ASEAN”. Just like the diverse European Union, ASEAN countries differ greatly in their views on etiquette, social norms, religion, business ethics and legal framework. Hence, a consistent strategy across the region may not be the answer. What may be the accepted culture in Vietnam may not be reflective of those in Cambodia, or the legal landscape in Singapore will be vastly different to that in Myanmar. Take for example the huge popularity of 7-11 stores in Thailand and its failure in Indonesia. Colgate is popular in the Philippines but never took off in Indonesia. This makes it imperative to wisely choose the destination country for your investment.
Choosing the right country
Before western firms jump on the eastern bandwagon, they need to do their homework and find answers to questions such as – is the country welcoming of your sector? Is the political system conducive to building a sustainable business over the medium to long term.
Within 60 days of a successfully conducted election in Myanmar, the military ousted the democratically elected government and declared a one- year state of emergency, a move that came as a shock to the foreign investors in the country. The ever-evolving geopolitical relationships between Asia and the West and within ASEAN, can leave businesses facing potential risks, especially in terms of supply chain disruptions and governing policies. Diversification of trade partners, routes, supply chain firms and liaising with trusted intermediaries and partners who can help you navigate troubled waters, can help mitigate risks.
Understanding local regulations and legal framework
Every ASEAN country plays host to a myriad set of rules and regulations, often conflicting and sometimes purposefully opaque. Treading through this web of regulations can make even the most native of businessmen, timid to proceed.
In ASEAN, many sectors continue to be strictly regulated, negative investment lists for many countries run for pages, local shareholding requirements are common, even the first step of registering a company is often tedious. ASEAN can represent differing financial regulations to the West, making legal compliance a very real risk for foreign companies, particularly under the lenses of UK Bribery Act or the US Foreign Corrupt Practices Act (FCPA.) It is important to understand that Asian central banks may have a different risk appetite compared to the Fed. Telecom regulators in Indonesia may have varying tolerance to market competition than those allowed in the EU. Food and drug standards are vastly different as is the intertwining of religious diktat and commerce laws in Malaysia and Indonesia. Failing to thoroughly learn about local regulatory landscape could hamper future prospects and end up causing not only financial loss but even reputational damage.
Vet your partners carefully
Partnerships are important in ASEAN because they help you to build scale and presence in the market quickly, riding off the backs of established players. They can understand the legal framework, the sensitive geopolitics and help navigate through the complex regulatory web. Additionally, local regulations sometimes require you to operate with a local partner in terms of ownership and shareholding. This is sometimes acutely uncomfortable for western firms, who want to retain autonomy in their business management dealings and decision making but yet need to accommodate local partners.
The first step is to identify trustworthy third parties who have the sectoral experience and who can highlight the realities. An immediate second step is to vet them. Many enterprises fail due to the wrong choice of partner and having an insufficient understanding of the integrity and reputation of their counterparts. While in Asian countries business introduction by mutual acquaintance is important, so is conducting due diligence.
Invest in the right people
Once you have decided to be here for the long haul and accepted that basic cultural lessons will not suffice, you will need to build a strong and professional local management team. Just hiring a translator or flying in expats is not enough.
Experienced local professionals bring with them the crucial know- how of the industry, culture, business practices, network and access to resources. Language fluency can also be a huge asset in helping to manage teams on the ground and in liaising with partners and government stakeholders. This should extend beyond the immediate internal organisation. Hiring local legal counsel and external consultants may also be necessary to help navigate complicated laws.
Focus on local competitors
Dismissing local/regional competition is one of the gravest mistakes western companies can make. Price advantage often helps local competition as ASEAN markets are price conscious. Competition from domestic players is often lacking in quality and service standards as compared to international offerings, and just produced at cheaper costs. However, Asian consumers are sometimes happy to accept low quality at bare minimum prices. Some global companies have resorted to innovative methods to combat the price barrier, such as reducing serving sizes or offering steep discounts. Others need to innovate.
The bright side
There are many triumphant stories of western firms who have been able to cater to Asian demand, tailor to consumer behaviour and navigate the regulations successfully. The Coca-Colas, Unilevers and Starbucks have successfully combined global strategies with local solutions. They have all been able to build huge businesses by winning local hearts, without losing their international USP.
ASEAN has the potential to become one of the largest and fastest growing markets in the world. Every internationally minded company looking to build a sustainable business has to find a way to succeed in ASEAN. Invest now before the ship sails.
Note: This article is authored by ASEAN Business Partners and published in the Investing in ASEAN 2021|2022 guide. The publication is the ninth in the series by Allurentis and highlights the huge trade and investment opportunities in the rapidly expanding and exciting region of Southeast Asia.