IMA Asia CEO Dialogues - Issue 1 - Autumn 2013

MOVING STORYViasystems’ Tim Conlon predicts global shift in manufacturing

With the support of

ISSUE 1AUTUMN 2013

Managing growth at VFC Asia

Franke’s regional reorganisation

1

IMA ASIA CEO DIALOGUES

AUTUMN 2013

EDITOR’S HIGHLIGHTS /CONTENT

2 THE PENDULUM SWINGS Viasystems’ Tim Conlon thinks the tide is turning as manufacturers set their sights on North America

once again

5 GROWTH SPURT MANAGEMENT Aidan O’Meara, president of VFC Asia, talks about the new era of rational investment in Asia’s

emerging markets

7 BRINGING DOWN THE SILOS Franke’s Asia President Peter Spirig discusses the company’s new regional management structure

9 MEASURING THE VALUE OF ASIA’S CONSUMERS Global Demographics’ Clint Laurent forecasts major shifts in emerging Asia demand

11 OPTIMISING THE ASEAN FOOTPRINT IMA Asia members identify key issues for multinationals in recent Asia Management Program Plus meeting

12 ESSENTIAL CHARTS AT A GLANCE

Dear Reader,

Welcome to our first issue of CEO Dialogues. We have aimed to capture in print what happens in a live Asia CEO Forum session: the sharing of insights; tips on how to build strong businesses and market snapshots by guest analysts.

THE VALUE OF KEEPING IT BRIEF As in our monthly Asia Brief, we recognise the value of brevity and straight talking. Our members tend to be concise and direct both as commentators and as interviewees. They like to outline the issue and explain how they dealt with it. Likewise, our articles get to the crux of the matter fast. This is also one of the few journals where there is a real likelihood that you will meet and pick up the debate with the industry leaders featured.

IN THIS ISSUEIn our cover story, CEO Dialogues interviews Tim Conlon, president and chief operating officer of Viasystems, on the issues around the growing trend of relocating production from Asia to the US.

Next, we address managing and helming fast growth in an interview with Aidan O’Meara, Asia Pacific president of VF Corporation, who gives us his views on how a branded lifestyle apparel and footwear powerhouse handles rapid expansion.

To round out our manufacturing and growth stories, Peter Spirig, president of Franke Asia, discusses Asia management structures and how he helped moved Franke’s regional business from product silos to a centralised management structure.

There are two more articles in our data and insights section at the back of the magazine: one on demographics in Asia, and the other looking at the issues MNCs encounter when managing their Asean footprint.

Lastly, you will find some key numbers and charts to keep you abreast of broad trends.

So, enjoy the read. CEO Dialogues will be with you again in 2014 as we prepare for our second overnight Asia CEO Forum session in Singapore next May.

Best,

Richard MartinManaging [email protected]

COVER STORY


AUTUMN 2013

COVER STORY

Viasystems’ Tim Conlon, one of the first western executives to set up a factory in China, thinks the tide is turning as manufacturers set their sights on North America once again.

pendulumThe

swings

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AUTUMN 2013

COVER STORY


AUTUMN 2013

TIM CONLON opened his fi rst factory in China 22 years ago. It was a decidedly risky move for a western manufacturer. Only two years had

passed since Tiananmen and foreign businesses were nervous about investing in the mainland.

What he and other trailblazers did back then soon became the norm for global manufacturers. Today, it is hard to fi nd any major brand that does not produce in China at all.

Conlon, 62, has spent the last two decades as a senior executive in charge of operations for numerous US-based electronics manufacturers. His career has given him fi rst-hand knowledge of how China metamorphosed from being almost uncharted territory into the world’s biggest manufacturing hub.

“It’s hard to imagine it today, but 20 years ago, there was a great debate going on; was it going to be China, or was it going to be India?” he says.

The genial American is the president and chief operating offi cer of Nasdaq-listed Viasystems. He splits his time between a home in St Louis, Missouri – where the company is based – and a home in Hong Kong, the Asia Pacifi c headquarters of Viasystems and a car ride away from most of the company’s production facilities in Guangdong province.

He is modest about the profi ciency of his Mandarin. “I can say ‘shui’ (water). I can say ‘hongjiu’ (red wine). I can get by!” he laughs. But he says he feels perfectly at home in an all-Chinese working environment. “I am usually the only ‘gweilo’ in the offi ce and I am often the only westerner sitting in a meeting. And I am totally comfortable with it,” he says.

After years of shifting manufacturing capacity to China, however, he believes the tide is turning once again. Companies with signifi cant business outside of Asia will need to put factories back in the regions they abandoned earlier in favour of China, he says.

“I think the pendulum has swung too far. The world is changing. Transportation costs and time-to-market will become bigger issues. Manufacturers need to get back closer to their clients,” he says.

That need for proximity is a world away from so-called “China-plus-one”, where manufacturers set up another major production hub in an Asian country other than China in order to reduce costs and diversify the risk of disruptions. Conlon’s idea and expectation is that more companies with North American clients will establish factories in the US and Canada, backed up by lower cost facilities in Mexico, after years of just

shipping goods from Asia across the oceans.

This trend is being played out at Viasystems, where the distribution of production sites has come full circle.

When Conlon joined the provider of printed circuit boards and electro-mechanical solutions in 1998, Viasystems was very much a developed economy entity. Its production facilities were mainly in the US, Canada, the EU and the UK, and the only facility in China was a 50-person operation in Nantong, west of Shanghai.

By 2005, it had no printed circuit board production left in North America and Europe at all, having moved its last Canadian factory that year to China. Its global manufacturing footprint was reduced to fi ve factories in China and one in Mexico.

And then the global fi nancial crisis came, and the company started to acquire facilities in North America. Today, it has 10 sites in North America – twice the number in China.

A number of high-profi le companies have ramped up production in the US recently. Apple, for example, is going to start building Macs at a new factory in Texas.

Rising costs in China are often cited as the main reason. After all, the minimum wage in China has been growing at 13% a year under the 2011-15 fi ve-year plan.

Conlon thinks that wages alone cannot explain why factories are being expanded in North America, where factory workers still get paid up to four times more on average than their Chinese counterparts.

Instead, he points to the collapse in global trade in 2008-09 as a trigger. It forced manufacturers to work a lot harder at both winning contracts and meeting the demands of their remaining customers. Those demands included putting factories closer to their own operations.

“For the electronics industry, the global fi nancial crisis meant that orders were down and companies were scrambling. Companies had to start listening more acutely to what customers needed. There’s a sense that some customers in North America felt that Chinese factories were too far away. They said, ‘we want it here and we want it now’,” he says.

This has not changed with the nascent recovery in the global economy, he says. Shipping costs are likely to go up in the long run because of the cost of fuel, insurance and piracy, and time to market can only get more critical. “Customers now want the ability to have a very quick response to either a change in

COVER STORY

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AUTUMN 2013

COVER STORY

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AUTUMN 2013

demand or they want to shorten development time. If an engineer comes up with a new design he doesn’t want to test it in three, four, five weeks. He wants to get a sample of that product in days and that only happens if the manufacturer is local.”

Video conferencing and file-sharing online help to a degree, but nothing replaces the face-to-face interaction between Viasystems engineers on the ground with the clients’ engineers, he adds.

The way western manufacturers shifted production to China en masse happened at “light speed”, he says, and there was no right or wrong about it. “It was what it was. The western world demanded lower cost, lower cost, lower cost,” he says.

And the financial incentives for setting up in China in 1991, when he moved a cable assembly plant from Hong Kong to Shenzhen, were enormous. The average wage was roughly 30 times less than that of a US factory worker, and local governments were very accommodating.

Back then he was a divisional chief at Connecticut-based Amphenol Corporation and he felt like “a stranger in a strange land” in a new city still choked with building dust.

He went on to set up factories in various Chinese and other Asian locations for companies such as Berg Electronics Corporation, where he was president and

Today’s trend to diversify away from China does not mean a reduction in Chinese production capacity, he says. Costs are still considerably lower than in the US and more importantly, the Chinese market itself has become so significant that multinationals are required to establish full-service local teams to serve the domestic market.

But he thinks that companies will start “normalising” their portfolio of factories around the world to suit customers’ needs. For example, electronics manufacturers may have to deal with clients who insist on keeping production within the US because of concerns over the security of intellectual property in China, he says.

Another benefit of producing in the west is higher productivity. On that, Conlon has an interesting theory.

“As the Chinese go through cycles of learning they become more productive but the western workers haven’t stood still either. There’s still a significant productivity gap. In the US, for example, it’s to do with generations growing up thinking mechanically,” he says.

He explains that there’s more of a do-it-yourself culture in North America. “I like to do work around the house so I have lots of tools. But that’s not the culture in Asia,” he says.

“It’s getting to be different but, up until now, a lot of factory workers in China do not know how to care for machines. Here, you have to have a maintenance

team for every time a button doesn’t work. In the west, maintenance people are mainly involved in bigger projects or crisis management, not small issues that the machinery operators would handle themselves,” he says.

For that same reason, productivity in Mexico is generally higher than in China. “Workers in Mexico are still not as productive as US workers but they tend to have more of a mechanical background,” he says.

Looking beyond the next few years, Conlon expects manufacturers to set up new manufacturing hubs to feed into the underserved markets in Europe, the Middle East and the Asean regions.

“Nothing is forever. People will just have to accept that change always happens,” he says. But he adds that for now, he will continue to split his time between the US and China, the two countries that he calls home. ■

chief operating officer until 1998, the year he joined Viasystems. By his reckoning, it was the Asian financial crisis that prompted the large-scale migration of manufacturing capacity from the west to the east.

“The world was changing very quickly right after the Asian currency crisis in 1997. As a result of the problems here, Chinese electronics manufacturers started looking outside of the region for the first time because Asian demand had dropped so much.

“The first market they went to was Europe – it was closer, relatively, than the US and the time difference was more manageable. When European clients started buying from Chinese manufacturers, the industry saw it as a sign that western customers had accepted products made in China. So we all started to sell off or shutter our own European factories and moved them to China,” he says.

“AS THE CHINESE GO THROUGH CYCLES OF learning they become more productive but the western workers haven’t stood still either. There’s still a significant productivity gap”

INTERVIEW

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AUTUMN 2013

Q: Is the period of manic expansion over in Asia?

A: The market here is still very strong, but it’s not what it was. There is a palpable change in

sentiment. Before, brands – especially local brands – had a “land grab” mentality; short-term return on investment was not a concern. We have always been very disciplined so it wasn’t a level-playing fi eld when it came to relationships with franchisees, for example. The franchisees like the strength of our brands but they've been offered some very good terms by some of our less well-established competitors. The good news is that there is some consolidation happening. Some of these companies have had to change their models or they are no longer viable. We think we are well positioned as a company to benefi t from this consolidation.

Q: VFC’s new fi ve-year plan targets a 300 basis point improvement in gross margin

to 49.5%. How are you going to achieve that?

A: In general, operating costs continue to rise but infl ation still remains low, so your ability

to price that on to consumers is constrained.

VFC's planned expansion of gross margins is predicated on a number of factors. Business mix is an important driver of margins with higher margin businesses – namely international, our outdoor/action sports brands and direct-to-customers – growing at a faster rate than the group as a whole. We also have the scale and knowhow to mitigate the impact of infl ationary pressures on product costs. Innovation is another key dimension.

Fundamentally, we believe that consumers are always willing to pay for new and innovative products. So this summer we announced plans for three global innovation centres.

Innovative designs have helped the revenue of our Vans brands in Europe grow at a rate of 40% last year. If you've got a brand with that kind of strength, it allows you to leverage your fi xed costs and that translates into operating margins.

Q: What changes are you making to the Asia supply chain?

A: It is well documented that companies like ours have been gradually moving production

INTERVIEW

Aidan O’Meara is president of VF Corporation’s Asia division, a job which puts the Irishman in charge of dozens

of iconic American brands in the region such as Lee, Wrangler, The North Face and Timberland. He has spent 21

years with the world’s largest apparel company and has been at the helm of the group’s Asia Pacifi c headquarters

since 2007. Annual Asian sales have increased tenfold to hit the $1 billion mark under his leadership. Sitting

in his waterfront offi ce in Hong Kong’s old factory district, he tells CEO Dialogues about the new era of rational

investment in Asia’s emerging markets, as well as issues that are keeping him awake at night.

VF CORPORATION’S ASIA BACKGROUND FILE > Roughly half of VFC’s $1 billion sales in Asia come from China, including Hong Kong> In North Asia, most major brands are owned and operated by the company directly> In Southeast Asia, India and Australia, it relies on distributors and licensees> The group’s new fi ve-year plan aims for a 17% compound annual growth rate in Asian sales

GROWTH SPURT MANAGEMENT

INTERVIEW

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AUTUMN 2013

out of China because of the decline in the Chinese labour force and emphasis on other industries. That trend is occurring, though slowly, because China has competitive advantages such as well-established skills and infrastructure that are not easily replicated in other markets. But we are moving more into Southeast Asia, to Bangladesh and Vietnam in particular, but also to other markets. No individual country represents more than 22% of our total production.

We have certain initiatives in place to mitigate rising production costs. For example, our company owns a lot of our own factories, mainly in the Caribbean, Mexico and the US. We sell 486 million items every year, 30% of which is manufactured in our own facilities.

We are now using that intellectual capital to help our sourcing partners become more efficient. Previously, the relationship with a source was much more transactional: “Here's the product, make it for me, what's the price? “ Now, we are providing a lot of expertise to our sourcing base.

Q: Has inventory management become a major challenge now that your brands

are producing more seasonal products and facing competition from “fast fashion” companies?

A: We spend a lot of time on inventory management. It is a critical driver in the

apparel industry because of the obsolescence issue.

We are looking at how we can bring excitement to customers more frequently, as we compete with companies like Zara. In general, we are trying to get closer to market and part of that is getting the development cycle shorter.

If we take a look at The North Face for example, we have technical products, which are hard to emulate. But we also do a lot of casual, sportswear-type products, which are more seasonally influenced. So we look at a long cycle time for some of the more technologically-advanced products, and a shorter cycle for the more fashion-inspired ranges. That’s part of driving down inventory levels. If you do everything on the same cycle time, then you have more inventories and a higher risk of obsolescence.

Q: Has the recovery in the US market stolen the limelight from Asia recently? How do

you manage HQ expectations in general?

A: A better market in the US is good news for the whole company. To have Asia or

anywhere else in the world make up for challenges

in mature markets is never a welcome act. But the US hasn’t really stolen the limelight. There is recognition about the need to fund the business here appropriately. Marketing spend ratio in Asia is double the rate in the rest of the world.

I think HQ is well informed about what is happening in Asia. The CEO comes to Asia twice a year and used to be based in Australia, so he is familiar with the international market. We have also had a delegation from our board of directors visit for a week this year and hosted a conference for the international investment community in Shanghai in 2012. So, we are very much on the radar now and this is very helpful in terms of getting the support and investment we need to maintain strong growth momentum.

Q: What are the new management challenges now that your operations here are

generating $1 billion in annual sales?

A: Among the things that keep me up at night is talent management. There’s still

a shortage of qualified talent, especially at the more senior level here. That is more pronounced in mainland China, but it is a general problem across Asia.

We are also looking at a very young labour force in Asia, which is particularly true in mainland China. The policies that serve VFC well globally don’t always work as well in a situation like China, where we increasingly compete for talent particularly with local companies that have a more flexible approach. Take the remuneration policy, for example. The usual practice is that at a more senior level you get equities-based compensation which vests over time. But the idea that you have to wait a number of years for something to vest doesn’t appeal as much here as it does in more mature economies. It’s all about now; it’s all about cash. There may also be regulatory difficulties in implementing some of these measures.

So we are looking at alternative approaches which can work in a way which is not highly disruptive to our global policies. One example of this is our benefits programme, where employees can pick and choose what they want. A fixed health insurance programme may be less important to an employee of 25, for example, so they can choose to join a health club. Some other companies have also rolled out family healthcare covering parents of employees, which is a very progressive approach and can be very attractive to employees in China. This is how I think a multinational company has to think. ■

INTERVIEW

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AUTUMN 2013

Q: What prompted the reorganisation?

A: We realised that the original structure of Franke Group focused on sales in Europe

and also, to a certain extent, North America. Managing our presence in Asia had become convoluted and rather difficult. Asia is too far away in terms of time zones and culture to be managed out of Europe and North America.

That’s why Franke decided earlier this year to create the Asia president role – a management board position based in Hong Kong to take care of all Franke’s business interests in the region. The central idea is to have faster decision-making and to provide an operational backbone in this part of the world. Essential services such as finance, HR and logistics used to be run out of Europe or the US and managed separately for each of the three main business divisions here.

Q: Could you explain why Franke Asia was managed out of both Europe and North

America before?

A: Franke is basically a divisional setup. Besides washroom solutions, its new

business in Asia, there are three divisions in operation here. Take the biggest one – foodservice systems – for example. The business manufactures and consolidates entire kitchen packages for commercial use, focusing on quick service restaurants run by McDonald’s and Yum!.

I headed that division in Asia before I was promoted to Asia president. I used to report to the global head of foodservice systems based in Nashville, Tennessee. The Asia head of domestic kitchen systems was reporting to his own divisional chiefs sitting in Switzerland.

Under the new management structure, I have the same seniority as the global divisional chiefs. The

INTERVIEW

Peter Spirig is president of Franke Asia, a privately-held Swiss

company specialising in domestic kitchen equipment, food

services equipment and solutions, as well as bathroom fittings.

He was promoted to this new role earlier in the year as part of

a reorganisation of the management of the Asian businesses.

Previously, each product line was run by a different manager

in Asia who reported to divisional presidents based in either

Europe or the US. Now, all managers in Asia report to Spirig.

He tells CEO Dialogues the background and implications of his

new responsibilities.

BACKGROUND FILE > Peter Spirig is a Swiss national. He was previously the Asia divisional manager for Franke Foodservice

Systems, which makes equipment for commercial kitchens. Major clients in include McDonald’s, Yum! and Burger King. He moved to the Franke’s Hong Kong office five years ago from Colombo, where he ran Holcim’s Sri Lanka operations.

> Franke Group made $2.2 billion in revenue last year. It has three main divisions in Asia: foodservice systems focusing on quick service restaurants, kitchen systems for domestic use, and coffee machines for commercial environments. A fourth, washroom systems, is expected to be launched next year. For the first time in its 100 years of history, the company is run by a professional chief executive officer with no ties to the owning family.

BRINGING DOWN THE SILOS

INTERVIEW

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AUTUMN 2013

Asia heads of each unit now report to me and I talk to the global heads of divisions as a collaboration in a matrix structure.

Q: What is the target for Asian sales for the next few years?

A: Asia makes up around 12% of group sales today, or 25%, 8% and 10% of global sales

of foodservice systems kitchen systems and coffee systems division, respectively.

The target, by 2020, is 20% of group sales.

Q: Is it difficult being the only person in Franke Group who has a regionally-defined

position? Wouldn’t it be better if you only reported to the CEO instead of having to talk to divisional chiefs all the time?

A: That wouldn’t be better because I’d lose out on important developments in terms

of key accounts and product development. I need my colleagues to incorporate Asian feedback for the group’s R&D activities and understand what’s needed for Asia.

Q: Franke has made two acquisitions recently. Tell me about those companies.

A: We have acquired a Swiss and a Chinese taps and bathroom fittings manufacturer.

The Swiss company is a tap-maker called KWC. The Chinese company is called Nokite, which is based in Shunde, Foshan. Franke first invested in Nokite around ten years ago and we have gradually increased our stake over time. When we noticed that the Chinese founder of Nokite was getting closer to retirement age, had no successor in mind and was hoping to continue the business, we got into a conversation and agreed to take over majority ownership of his business. He still retains a 10% stake. The acquisition added about 350 people to Franke Asia’s original headcount of around 1,000.

Q: Are your Asia divisional heads all based in the same office?

A: We are in the process of looking into whether divisional heads in Asia should all

move to the Asia headquarters here in Hong Kong. But there are family considerations which make that difficult. Currently, we have one business unit manager here in Hong Kong, one in Singapore and a business head in Shanghai. I can live with that to a certain extent. I also need to give those guys

their own freedom, without me interfering every day. Another benefit is having their on-the-ground expertise in strategic parts of Asia.

The drawback is that we need to really work on communicating with each other using all means available. I also schedule a lot of visits to clients together with the divisional heads, so that I have my ear close to the market too.

Q: How does your new role change the dynamics of the Asian operation?

A: We are in the middle of drawing up the first budget for all divisions across Asia. Before,

budgets were set in Europe and the US for each division. I can ask much more detailed questions and challenge underlying assumptions. There is also much less of a blanket approach to budgeting. We are not going to say that Europe is cutting 5% of its headcount, so Asia has to do the same to share the pain.

In terms of how the different divisions work together, I make sure the Asia business heads all get my love and attention and focus on competing in the marketplace and not against each other. That sort of negative competition basically means too much time spent on showing their feathers internally which, to a certain extent, happened before. If you’re so far away from headquarters you have to bluster much more to be seen. Otherwise, out of sight, out of mind.

I am definitely looking at the business in a holistic manner.

Q: A new group CEO was appointed earlier this year. What broader changes is he

bringing to the business?

A: This year, our owner Michael Pieper retired from day-to-day operations and handed

things over to Alexander Zschokke, a professional CEO hired from outside the company. This is the first time Franke has been run by someone who is not part of the owning family.

What he brings is a re-ignition of a focus on enticing our customers to own our products. Before, Franke was probably a rather production-centric company: let’s make this and then someone will buy it. Now we are focusing on becoming a more customer-centric company. We are vigorously reassessing how to better serve the different customer segments we deem important. In general, we are targeting upper and aspiring middle-class customers and companies servicing those customers, which suits the Asia growth story perfectly. ■

DEMOGRAPHICS

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AT PRESENT, consumers in the older and more affl uent markets represent just 18% of the world’s population, but they account for

70% of global consumer spending. The big change in the decade ahead is faster growth for the non-affl uent 82% of the world’s population.

Today, they represent 30% of the global consumer market. Yet, they are set to deliver 55% of the growth in consumer demand. The underlying reason for changes in Asia’s consumer market is a rapid shift in both age and wealth.

THE RISE OF THE OVER-40 AGE GROUP IN ASIACompanies should start thinking now about how they can reposition products, marketing and brands to appeal to a consumer market that is shifting from youth to middle and old age. In general, growth will be driven by the 40+ age group. Even India,

where the population is much younger than China’s, is going to be transformed. Growth for Indian households in which the youngest member is under 25 will slow to 2-3% over the next decade, while individuals in households with the youngest at 40-64 years of age jumps by 26%. For older households, the increase is 47%.

THE GROWTH OF ASIA’S MIDDLE CLASSAs the region becomes wealthier, there will be an extra 440 million people in emerging Asia’s middle class by 2022. On a semi-factual whim we’ve set the starting point for Asia’s middle class as households with incomes that are over $20,000 a year. This group is 10% of the total population in emerging Asia today and will rise to 22% by 2022.

As China and India — the world’s 1 billion-plus population markets — both sit in Asia, it is often

Clint Laurent, founder of Global Demographics Ltd., has shared his insights with IMA Asia

members for over a decade. Here is a summary of his recent presentation on the emerging

market consumer story, packed full of hard numbers to back up predictions up to 2022. You

will fi nd the full report at www.imaasia.com. (All values are in US dollars, fi xed in 2011)

MEASURING THE VALUE OF ASIA’S CONSUMERS

POPULATION CHANGE BY 2022 (ABSOLUTE, %)

Japan China IndiaAffl uent Asia (x-Japan)

Dev Asia (x-Malaysia)

-20

-10

10

20

30

40

50

60

0

(Age groups)■ All■ 65+■ 40-46■ 25-39■ 15-24■ 0-14

DEMOGRAPHICS

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AUTUMN 2013

thought that Asia will account for the great majority of the rise in EM consumers. That’s not the case. Some 60% of all EM growth will be outside of Asia, with Latin America a notable contributor. In the Global Demographics’ forecast the growth delivered by EM (collectively 55% of global growth) over the next decade comes from:

from China (this is 14% of global consumer demand growth with the strongest growth in the $20K+ household spending group)

from India (4% of the global total)

from the rest of Developing Asia (3% of the global total)

from South America (this is 12% of global consumer demand growth with a signifi cant group rising above $50K in household spending)

from all other EM (21% of global consumer demand growth)

China will dominate the wealth transition in Asia’s emerging markets, especially couples earning a dual income with no kids living at home. Growth in incomes for Asian EM consumers from households earnings over $20,000 a year is expected to total $5.8 trillion by 2022. Of that total, some 78% will come from these older Chinese couples.

Two-thirds of Chinese will still be poor (households earning less than $10,000 a year) or earning a low income (under $20,000) by 2022. By then, China will have lifted the number of people in households with incomes over US$20,000 a year by 322 million to 483 million (36% of the population).

India is on a different trajectory that leaves a much more diverse market than China.

Three quarters of Indians will still be poor by 2022. India’s poor population (in households with incomes under $10,000) will grow by 4% (44 million) to 1.1 billion over the next decade but as a share of the population, they drop from 82% to 76%.

India’s middle class (in households with incomes above $20,000) almost doubles from 81 million (6% of the population) to 158 million (11%). The low income group (in households with incomes of $10-20,000) will account for another 13% (180 million).

The number of poor households in the Asean region will fall, apart from Myanmar and the Philippines. But 27% of the region’s population will remain in the low-income category by 2022 (double India’s 13%), suggesting the potential for strong growth as households from this sector move into the middle class in the decade after 2022. ■

CHANGE IN POPULATION PER HOUSEHOLD INCOME CATEGORY BY 2022(ABSOLUTE, %)

■ Total■ $50,000+■ $20-50,000■ $10-20,000■ $5-10,000■ $0-5,000

Indonesia

Philippines

ASEAN EM 6

Malaysia

Thailand

IndiaMyanmar

Vietnam

TOTALChina

100

40

-20

80

20

-40

60

0

-60

Companies need

to start thinking

now about how

they can reposition

products,

marketing and

services that

appeal to this

demographic shift

REGIONAL ORGANISATION

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AUTUMN 2013

1. Asean’s new prominence at HQ A decade of consistently better growth, political stability, and declining country risk has seen Asean climb

higher in the priority list at HQ. For a few managers it may feel like HQ expects Asean to fill the slack from slower growth in India and China.

2. No one expects a full FTA to emerge anytime soon in Asean While many members aim to build integrated Asean operations, few expect much help from Asean’s

promised single market planned for end-2015. 2016 will be the start of a slow evolution into a more uniform operating environment that will take another decade at least.

3. Asean’s trade integration efforts are a starting point Customs departments and tax offices have some Asean-based procedures for removing barriers to

trade, although there is great variability by country. We guess that 50 or so MNCs (Japanese auto firms and Western FMCG companies) have adopted these procedures for their Asean production and sourcing operations to improve their competitiveness.

4. Tapping Singapore’s global city advantages Singapore stands at the geographic centre of Asean. It has formal ties to its Asean partners and even

stronger informal ties as a regional haven. The city’s excellence provides a compelling logic for an Asean management structure although most firms quickly acknowledge that a Singapore RHQ should not undermine country growth plans.

5. Is Asean a sensible focus for planning? If Asean is moving slowly on forming a trade bloc, might it be more efficient to cluster countries in other ways,

such as South Asia (Asean + India)? A consensus view emerged that there was a good case for some cost and product solutions on an Asean basis. One of the strongest points favouring an Asean focus was team building, with a direct tie into driving financial performance. By contrast, back office support may work best on a larger time-zone basis (all of Asia) and some firms have globalised production/sourcing operations.

6. Should Asean be a sub-region? About a quarter of members at the meeting had an Asean sub-regional structure. This is, however, a live

debate in many firms.

7. Is Asean different from other EM regions? Nearly all EM regions that reach globally significant scale can claim the need for local product and

marketing solutions. Most MNCs are learning how to balance these claims. The emergence of large Asean customers with big orders but demanding Asean pricing suggests the region has moved over the tipping point for regional product solutions.

8. Responding to pressure from Indonesia to end fly-in/fly-out operations Indonesia, long serviced out of Singapore, is erecting a tangle of restrictions aimed at forcing a local

presence. While this won’t help firms optimise a regional structure, managing this challenge may best be done within an Asean framework.

Asean’s ten member states have 600 million people and $1.8 trillion in GDP. While the

Southeast Asia region has a favourable growth outlook, it is, in many ways, still ten

different operating environments. Members of our Asia Management Program Plus met in

Singapore recently to discuss how MNCs can optimise their presence in the region. Here

are the key issues identified:

OPTIMISING THE ASEAN FOOTPRINT

CHARTS

12


AUTUMN 2013

Source: IMA Asia

ESSENTIAL DATA AT A GLANCE

REGIONAL EXPORT GROWTH % per annum

35

30

25

20

15

10

5

0

-5

-10

-15

-20

2000

2008

2004

2012

2002

2010

2006

2014

2001

2009

2005

2013

2003

2011

2007

201520162017201820192020

US DOLLAR Exchange rate to major currencies

140

100

120

80

60

40

20

0 1980-85

1985-90

1990-95

1995-00

2000-05

2005-10

2010-15

2015-20

0

4

2

6

3

7

8

1

5

HOURLY MANUFACTURING WAGEUS$ (IMA Asia estimate)

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

■ India■ Vietnam■ Thailand■ Philippines■ Indonesia■ China

0

8

10

12

4

6

2

GDP REAL GROWTHUnit: %

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

■ NICs (HK, Korea, Taiwan, Singapore)■ Asean 6 (INCL. Singapore)■ Developing Asia (EX-Japan, Aust & NZ)■ Regional total (14)■ China

Shanghai Hong Kong Singapore Sydney Melbourne Shanghai Hong Kong Singapore Sydney Melbourne

IMA Asia

Cut through the noise

Listen

With so much written everywhere, it’s tough to absorb it all. Asia’s markets present unique and complex challenges. The best insights on how to tackle these challenges come from those confronting and solving them daily - your peers. IMA Asia’s Asia CEO Forum provides access to peer group briefings across five cities that promote regular, high-level interaction amongst CEOs leading Asia Pacific operations. Our briefings encourage open, candid discussion, informed by the help of key outside speakers who join us to guide discussion. Identify issues before they’re picked up by the media and join the debate as to how to tackle these operational and strategic challenges.

IMA Asia CEO Dialogues - Issue 1 - Autumn 2013

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Transcript of IMA Asia CEO Dialogues - Issue 1 - Autumn 2013