For decades, people in Asian countries moved to the United States to make their marks on the business world. But those seeking opportunities today should make their homes in Asia, where economies are likely to continue outpacing growth in the U.S. and Europe, keynote speakers told students attending Wharton’s Asia Business Conference.
“Forget Latin or French, take Asian languages. Learn Chinese and go to Asia. That’s the future for growth,” said Silas Chou, president and chief executive of Novel Enterprises, a Hong Kong-based textile and clothing maker.
But Chou and other speakers said Asian countries and businesses must make dramatic changes to maintain their current momentum toward global dominance. To achieve their fullest potential, societies must give people freedom to make money, to govern themselves and to choose their mates, Chou said, adding that many Asian nations lack one or more of these freedoms. India, for example, still has a caste system that limits people economically. Indians also have arranged marriages, so they do not choose their spouses freely. “We still have a totalitarian regime in China,” so Chinese people are not free to govern themselves. “Who has all the base elements? Only the United States of America is so free that [it will] allow gays and lesbians to get married.” He also cited the recent election of Barack Obama as the nation’s first African-American president as emblematic of the kind of freedoms developing nations are missing.
Even so, business opportunities abound. For instance, many Asian countries lack water and suffer from pollution because of overcrowding, he noted. Scientists in the United States are already working on technologies that can help solve these problems, such as clean coal and desalinization of water. A savvy business person can take technology developed in the United States back to Asia to develop it and then sell it to solve environmental problems, he said. “Whenever you see best technologies in the United States, bring them to Asia. Asia will develop them and then bring them back to United States.” He cited the iPod as one example: Today, “most [of them] are made in Asia.”
The global economic downturn already has hit China, Japan and India hard, Chou said, and it may hinder progress in the short term. He predicted that government intervention in China would help, but not enough to compensate for declining exports.
Another speaker, Soomin Kim, leader of the private equity and mergers and acquisitions practice in the Seoul office of consulting firm Bain, said that despite the downturn, much of Asia is on stronger economic footing than the United States and Europe. “There is a high savings rate in Asia compared to the United States and Europe. In China, it’s sometimes upwards of 20% [of income]. Compared to the West, Asia has run large trade surpluses. Most Asian banks have well-funded balance sheets with a high proportion of deposits. Compared to the late 1990s, their capitalization is pretty good. Generally, Asian corporate balance sheets are in good health, better than those in the United States and Europe.”
But the global economic crisis will certainly put pressure on Asian economies. Declining exports to Europe and the United States will slow growth, Kim said. In China, exports contribute 30% of gross domestic product. “China is especially important because the country is the trade engine of the region.” The stalling international economy is a big reason that 67,000 companies in China filed for bankruptcy in the first half of 2008, most of them small- and medium-sized exporting businesses.
Three Pillars of Good Strategy
Even so, Asia’s strength relative to Western countries will continue to drive investments into China and other countries on the continent, Kim said, citing Goldman Sachs’ prediction that the economies of the 15 largest emerging markets will surpass those of the Group of Seven (United States, Germany, Japan, France, United Kingdom, Canada and Italy) by 2030. But even companies in rapidly growing economies will have to be able to shift capital and plans quickly to cope with a business environment where changes are occurring rapidly. “Ten or 20 years ago, when you developed a strategy, you could use it for years. Now you must revise it every five or six months. Sometimes, competitors are [emerging] in a very disruptive way, from a place you would have never thought about,” Kim said.
The average Standard & Poor’s 500 company is expected to increase earnings by 12% a year through 2012. But companies must aim to grow more quickly than that because investors expect them to outpace competitors, Kim said. “You have to think about growth, such as [through] acquisitions, and you have to think about investing in higher-growth industries and economies. We believe there will be continuing flow of investment into Asian countries, especially China. By 2015, one third of the global 500 will be from emerging countries as measured by market capitalization.”
Successful Asian companies must build what Kim calls the “three pillars of good strategy” to compete in the changing world order. Companies must “drive full potential from the core, expand into adjacencies with a repeatable formula, and then redefine [their] business model fundamentally.” He used Hyundai, the auto company, to illustrate these points. The company’s core market was in South Korea, but in the 1990s, it began an aggressive global expansion. By 2007, 70% of sales came from outside Korea. The company then expanded its products, adding SUVs, for example, to its traditional small, inexpensive cars. Recently, Hyundai launched its Genesis sedan “to take share from BMW, Mercedes and Lexus.”
All opportunities come with risk, Kim said. Asia is filled with strong merger and acquisition opportunities, but maintaining the discipline necessary to improve profits becomes more challenging as deals become more global and complex. Companies must choose acquisition targets wisely, focusing on deals where integration will enhance profitability. Mergers also require a Plan B, Kim said, to enable a quick reaction when a deal goes off track.
Like Chou, he urged students to come to Asia to capitalize on the growth opportunities there. “For those of you interested in working in Asia, come to Asia ASAP. In the 1990s, there was an advantage in working in the United States. But now, a lot of Asian companies are [examples of] best practice.”
Building M&A Skill
Sarena Lin, a principal in McKinsey’s New York office and leader of the consulting company’s Asia Center, noted that Asian companies need to continue to develop their mergers and acquisitions strategies in order to compete globally. “We have seen an explosion in cross-border mergers and acquisitions. A lot of the growth really started in the last five years.” But many of those mergers failed to pay off, she said, especially for mainland China companies. McKinsey research suggests that acquisitions by mainland Chinese companies on average generate a negative 3% return two years after a deal is completed. That compares to 2% for Taiwanese companies and 7% in Hong Kong. Lin pointed out that returns for mainland China companies may lag because they have less experience in doing cross-border deals; many companies fail to start with a clear idea of why they are acquiring a company. Often, “if you ask 10 different executives in the same company, you get 10 different answers” about the strategy behind an acquisition.
Sometimes, “we see a company buy another company [just] because it is becoming available, and that is very dangerous because what you tend to do is justify your strategy after the fact.” Working with the wrong partner on foreign soil can also be risky, she said. Chery Automobile, a Chinese car manufacturer, signed an agreement in 2004 to import its cars to the United States with Visionary Vehicles LLC, the company that brought both the Subaru and the Yugo to Americans. But the deal broke up after one year when Visionary accused Chery of going behind its back and signing distribution deals with other companies.
Lin advises executives to consider doing serial acquisitions over many years as part of a larger-picture strategy. “Often times, you will not find one company that you need to acquire and that will get you where you need to be,” she said. “We tell CEOs again and again, you need to see this as a journey. You need to go through this in a multi-year way.” Companies also need an acquisition team in place “to be able to do business and deal development, sourcing, execution and integration. A team needs to get better and better at doing it over and over again.”
Asian companies must solve other problems to achieve global dominance, she said. “One of the biggest challenges for a lot of the Asian companies is that Chinese brands are still less recognized outside China. Chinese goods still have the image of low price and low quality,” which is a major barrier to achieving fast growth and explains why no Chinese companies have built a global brand yet, she said.
