[Vnbiz] Business in South-East Asia

[Shandon Phan]

http://www.economist.com/displaystory.cfm?story_id=10760174



IT IS easy to forget, now that China and India are all the rage, that until
ten years ago South-East Asia was the world's fastest-developing region,
winning the sort of investor attention and breathless column inches that the
two new giants now enjoy. The region has, slowly, recovered from the blight
of 1997-98. It has recently had several years of strong growth (see chart 1)
and its governments' finances have been greatly improved. Even so, after all
this time the region's five main economies—Indonesia, Malaysia, the
Philippines, Singapore and Thailand—are still notable for the near-absence
of companies that could truly be called world-class.

The region has 570m people and had a head start in economic development over
much of the rest of Asia. So why does it still have no global consumer
brands of the stature of South Korea's Samsung and LG? Where are its rising
technology leaders, like Taiwan's AU Optronics and Taiwan Semiconductor?
Where are its equivalents of India's world-conquering Tata Steel, Ranbaxy
and Wipro? Or China's market-devouring Huawei and Lenovo? Ask an investor in
London or New York to name globally respected South-East Asian firms and the
answer is unlikely to consist of much more than Singapore Airlines.

In a recent book, "Asian Godfathers", Joe Studwell, a journalist, examines
this failure in stark terms.* The region's business scene, he says, remains
dominated by old-fashioned, mediocre, sprawling conglomerates, run at the
whims of ageing patriarchal owners. These firms' core competence, such as it
is, is exploiting their cosy connections with governing elites. Their
profits come from rent-seeking: being handed generous state contracts and
concessions, or using their sway with officialdom to keep potential
competitors out.* If they need technology, they buy it from abroad. As a
result, Mr Studwell says, the region has "no indigenous, large-scale
companies producing world-class products and services."

Similar things were once said of much of the rest of Asia—and sometimes
still are. But somehow other countries' top businesses, even in India, the
home of the licence Raj, have escaped this mediocrity trap. Whereas the
export-led growth of South Korea and Taiwan comes mainly from indigenous
firms making globally competitive goods with their own technology, much of
South-East Asia's high-value exports are made by foreign companies. Thailand
has built a successful motor industry by attracting multinationals. But it
will constantly suffer the risk that these will move to somewhere like
China, with lower costs and a bigger home market.

Look under the bonnet of what seems to be a well managed, local industrial
firm in South-East Asia, such as Astra, an Indonesian carmaker, and you find
that it is assembling Japanese cars under licence and is controlled by a
Hong Kong group. Not many have got far beyond serving the home market. A
recent study by the Boston Consulting Group (BCG) of the 100 largest
multinationals from emerging economies (a category that excludes Singapore)
contained only five from the whole region. By contrast there were 13 just
from Brazil, which has only a third of South-East Asia's population and
which until about a decade ago had no genuinely global firms to speak of
(see chart 2).
Class distinctions

To be counted as world-class, a firm needs to be more than just well run and
large. It should have a globally valued brand, or its own leading-edge
technology, or a genuinely innovative and admired business method. These are
demanding standards: even some of those in BCG's top 100 are really just
plain big. In South-East Asia few companies meet them. Some come close,
especially in Singapore, the region's most advanced country. Singapore
Airlines is the world's fourth-largest international carrier and is perhaps
the region's best-known brand around the world. Keppel and SembCorp, the
world's two largest makers of offshore oil drilling-rigs, dominate their
industry.

However, some of Singapore's tech stars are showing signs of fading, worries
Garry Evans, an equity strategist at HSBC. Chartered Semiconductor and
Creative, for example, are slipping behind rivals in places like Taiwan,
which now has "a critical mass in technology and a very entrepreneurial
culture," he says.

In banking, the region has some impressive contenders, like
Singapore's OCBCand Malaysia's Public Bank, which are expanding beyond
their borders. But
now these must contend with China's huge and increasingly muscle-flexing
banks as well as Western ones with deep roots in the region, such as
HSBCand Standard Chartered. As in other types of business, the
region's local
champions lack scale in a world where critical mass seems to matter ever
more.

Admittedly, the region has some natural handicaps. The ten members of the
Association of South-East Asian Nations (ASEAN) have a huge variety of
languages, religions, political systems and histories. Even the most
populous member, Indonesia, with 230m people, is itself enormously diverse,
being made up of 17,000 islands and a rainbow assortment of cultural and
religious traditions. By comparison, Brazilians may dance the *forró* in the
north and the samba in the south, but theirs is a pretty homogeneous and
monolingual country of 190m, all on one land mass.

That said, ASEAN's leaders could do much more to keep their lofty promises
of European-style economic integration, to give local companies a sizeable
home market from which to build world-beating businesses. *Their failure to
construct a genuine single market is shown up by the fact that ASEAN's
members still do three times as much trade with non-members as they do among
themselves. Internal tariffs have been cut, but as McKinsey, a management
consultancy, noted in a report in 2004, product standards and other
non-tariff barriers often differ among ASEAN countries, forcing
manufacturers to make small production runs for each country.*

All this lowers the competitiveness of local firms, as well as multinational
companies operating in the region. *Corruption is another great burden on
business. *That is true elsewhere in Asia too, but several South-East Asian
countries—notably Indonesia—are afflicted by corrupt and unreliable judicial
systems, making it difficult to enforce contracts.
Dicing with relegation

Although it is hard to generalise across Asia, another obstacle to
developing world-class businesses is that the five main South-East Asian
economies do worse than might be expected—that is, relative to their
national incomes—in promoting technology and higher education. Tony
Fernandes, the boss of AirAsia, a fast-expanding Malaysian airline and a
contender for the "world-class" label, laments how South Korea, where the
government has pumped money into research and training, has left his country
trailing in so many ways. "We used to beat them at football—not now," he
groans.

Malaysia has also spent heavily on universities and the promotion of
technology but its efforts have been stymied by the country's messy racial
politics (including preferential university places for the Malay majority)
and by the handing of state contracts and concessions to undeserving
government cronies. Both the lack of fair competition between businesses and
the failure to widen access to education may have a common underlying cause:
that South-East Asian countries remain in the grip of narrow elites.

The problem betrays itself not just in the region's relative lack of
memorable business names but in its basic economic statistics—in particular,
labour productivity, the key to long-term growth. *Productivity in China and
India is growing much faster than South-East Asia's is.* East Asia overtook
the region in output per worker by 2000 and has continued to power ahead.
Now South Asia is closing the gap (see chart 3). Not even hosting the
factories of so many sophisticated multinationals seems to have made much
difference to South-East Asia. With all those Indian and Chinese pairs of
hands joining the global workforce, the region has no option but to seek to
move beyond simply offering low wage costs and produce better-educated
workers and more innovation.

*It is not all the fault of governments.* The region's unwieldy
conglomerates could do more to help themselves achieve global scale by
concentrating on fewer businesses. Some are doing so, but others still seem
unable to resist poking their fingers into another pie. The food-and-drink
arm of Charoen Pokphand, a Thai conglomerate, is in BCG's top 100; but the
group is an unspectacular contender in industries from telecoms to
convenience stores and is now moving into carmaking. San Miguel of the
Philippines, a big beer-to-food conglomerate, recently talked of trying its
hand at generating electricity. Synergy Drive, the absurdly named merger of
three underperforming plantation firms controlled by the Malaysian
government, is taking a stake in the giant Bakun hydro-dam in Borneo.

This dilettantism was once summed up damningly by Michael Porter, of Harvard
Business School: *"These companies don't have strategies, they do
deals."*Gerry Ambrose in the Kuala Lumpur office of Aberdeen Asset
Management
laments that it is indeed hard to find Malaysian companies with "a business
plan that will last ten years". Many firms have improved their profitability
since the 1997-98 crisis but that may not guarantee their long-term
survival. Because even the best-run firms often have boards and shareholder
lists dominated by the founding family and their friends, it is hard to
believe that their thinking will change.

Of the "godfatherish" firms profiled in Mr Studwell's book, one that
analysts say is among the best performers is YTL, a Malaysian conglomerate.
Big in construction, the firm also owns a British water firm, Wessex Water,
operates hotels and upmarket shopping malls, runs a high-speed rail link
from central Kuala Lumpur to the city's airport and owns a chain of power
stations. Its founder, Yeoh Tiong Lay, built a giant construction business
with state contracts in the country's early post-independence period. In the
1990s, when his friend Mahathir Mohamad was prime minister, the firm got
concessions to generate electricity using subsidised gas from the state oil
firm, which the state electricity firm was obliged to buy.

Nice work if you can get it. But the founder's son, Francis Yeoh, who now
runs the firm, insists that it has not just rested on its laurels. It has
delivered, he argues, "a 55% annual compound growth in profits" since the
mid-1980s and it now earns 70% of its revenues outside Malaysia. On February
22nd it declared a profit for the six months to December 31st of 688m
ringgit ($202m), 24% more than a year before. The firm does have a core
competence, says Mr Yeoh, which is to build and maintain infrastructure
assets of first-world quality at third-world prices. Even the group's hotels
and shopping malls should be seen as "unregulated infrastructure", he
argues, stretching the point somewhat.

*As Asia continues to grow vertiginously, it will need a lot more
infrastructure, regulated or not,* and YTL, says Mr Yeoh, has shown it can
provide it. In particular, he foresees juicy contracts from applying Wessex
Water's skills at cleaning up rivers to the continent's murky waterways.
This indeed sounds like a promising growth business. But there will be
others—not least some sizeable Chinese water-treatment firms—which will be
after those same contracts. So far Wessex Water is making decent profits in
western England, but its potential to become a global leader is untested.

Hitherto, Malaysian companies have had a remarkable record of picking duds
when they buy foreign firms. Laura Ashley, a fashion designer; Costain, a
builder; Lec, a fridgemaker; and Agusta, a motorbike-maker: all were bought
by Malaysian firms with less than glorious outcomes. Even so, if they
continue to improve, YTL and the region's other conglomerates may yet break
the mould. Other Asian world-beaters also began as divisions of sprawling,
family-run groups but eventually escaped their orbit sufficiently to thrive.
An executive at India's globally expanding Tata Steel, for instance, says
that Tata Sons, from which it sprang, maintains its minority stake in the
firm but these days leaves it to be run by professional managers.

*Another hopeful sign for South-East Asia's corporate future is that it
seems to be getting easier for those outside the closed circle of the
politically well-connected to set up new businesses and challenge the
incumbents.* Mr Fernandes's AirAsia is the prime example. Started only six
years ago, the airline now criss-crosses the region with a huge network of
low-cost flights. Mr Fernandes, a former music-industry man, is still
frantically adding routes: he expects to be allowed to start domestic
flights in the Philippines and Vietnam soon. He has started a separate,
low-cost, long-haul airline, AirAsiaX, which is flying from Kuala Lumpur to
Gold Coast airport in Australia and Hangzhou near Shanghai. Flights to
Melbourne, Amritsar and eventually London are on the way.

Though ASEAN has been slow to lower its barriers in some areas, in aviation
they are coming down. Singapore and Malaysian Airlines' duopoly on the Kuala
Lumpur-Singapore route has just been scrapped and, says Mr Fernandes,
incumbent firms across the region are finding that their home governments
are no longer protecting them. It could be said that, by linking the
region's cities with cheap and frequent flights, Mr Fernandes has done more
to turn South-East Asia into an integrated economic block than any
ASEANministerial summit. In other once-coddled industries, too,
governments are
starting to dismantle monopolies. YTL's Mr Yeoh says there will soon be "no
hiding place" for firms trying to live from old-fashioned rent-seeking.

The rise of China and India, with their huge home markets, may mean that it
is too late for South-East Asia to become big in manufacturing. *But it does
still have the prospect of producing world-leading firms in other areas
where it has an edge. Tourism and hospitality are obvious examples,
especially as the region's neighbours become richer.* South-East Asia could
become both "the Mediterranean and the Caribbean of Asia", enthuses YTL's Mr
Yeoh.
Playing to your strengths

Apart from YTL, well regarded companies that could use tourism growth as a
springboard to global greatness include hotel groups such as Singapore's
Banyan Tree, casino operators like Malaysia's Genting and even hospital
firms like Thailand's Bumrungrad, a growing competitor in "medical tourism".
However, as HSBC's Mr Evans points out, such firms have yet to demonstrate
that they can transfer their vaunted "service mentality" to other parts of
the world that do not have an abundance of cheap labour.

*Natural resources are another promising source of future
world-beaters.*Following Brazil and, closer to home, Australia,
South-East Asia is
beginning to build global businesses by making the most of what nature has
provided. Palm oil, of which most of the world's supply comes from Malaysia
and Indonesia, is one example. Some plantation firms are simply hitching a
ride on the boom in prices but IOI, a Malaysian plantation owner, is about
50% more efficient in terms of yield per hectare than its local rivals. If
the government could push Synergy Drive, its new behemoth, to the same level
of productivity, it would boost the economy.

The region already dominates some types of agricultural produce: *Thailand
and Vietnam are the world's two largest rice exporters, for example*. Since
the region has so much coastline and so many rivers, there is *much scope
for expanding fish-farming and seafood production.* Thai Union, a giant
tuna-packer, is already in BCG's top 100. Vietnam, the region's rising star,
has several big seafood firms which, if they can resist the regionwide
scourge of diversification, may one day reach similar heights. But to make
the most of its fertile land and waters, the region needs more sophisticated
food-processing industries and stronger brands, instead of exporting bulk
commodities.

The reasons why South-East Asia has been slower than other regions to
produce world-class businesses are complex and open to debate. *But they do
seem to be linked to the perseverance of narrow elites and to the countries'
sluggishness in overcoming old rivalries and building an integrated regional
market.* As a handful of promising companies are showing, not all is
lost. *Even
in today's fierce jungle, South-East Asia can still breed tigers.*
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