A year of getting serious?

By The Economist Intelligence Unit

Western multinationals face a tough future. Home markets in Europe and North America are stagnant at best and look like staying so. Technology advances are threatening to disrupt several industries. And competition from emerging market multinationals with lower costs and more agile management is growing ever stronger. Now, there is the added prospect of multinationals missing out on what they’ve all been talking up since the financial crisis—the great tilt in economic power towards the East. Asia continues to drive global economic growth in 2013 and could be the potential saviour of many Western multinationals’ bottom lines – but only if they give it the priority and resources it deserves.

Yes, sales are growing…but not as much as they should
Asia continues to represent a growing share of companies’ global revenues. According to a recent Economist Corporate Network survey of MNCs in Asia, the region’s share of respondents’ global revenues rose to 22% from 19% in 2011, closing the gap on the potential as measured by Asia’s share of the world’s GDP. By 2017, executives expect Asia’s share to rise to 32%. That will be shy of Asia’s expected 35% share of the world’s economy in 2017, but it represents a much smaller gap than last year, when Asia’s share of GDP was 31.4%, or nearly 10 percentage points higher than its share of global revenues.

To make sure they get the most from the region, MNC management needs to change the way it manages “Asia”. The traditional way of thinking about managing from a single regional – or even global–HQ is already changing. Japan and Australia have long been stand-alone centres reporting directly to headquarters outside the region because of their level of economic development, but increasingly China, India and South Korea operate as global sub-divisions as well. Although 55% of companies in the Economist Corporate Network survey continue to operate regional hubs, China in particular has reached a critical mass where it needs its own management team. Indeed, companies are now beginning to think of how to manage within China—Philips, for example, has already opened a second headquarters in Chengdu to focus on the emerging central and western regions of the country.

But management change needs to extend back to headquarters, too. It should start with a realization that unilateral cost-cutting is not the best way to grow in the world’s most economically dynamic region. Many of the companies surveyed by the Economist Corporate Network have found that their sales growth does not stack up against the impressive economic growth figures around the region. The survey shows the gap last year was most acute in India, China, and Australia. Nominal GDP growth in India, the most extreme case, was 12.6% in 2012, compared to average nominal sales growth among survey respondents of only 6.3%. Protectionism and obstacles to doing business are no doubt partly to blame. But some 44% of survey respondents say they are both under-investing and under-hiring in Asia. Anecdotally many attribute this to the fact that executives back at headquarters tend to view the world through the lens of their own weak economies.

There are signs that this out-of-touch thinking is beginning to change. Some of the biggest of the big—including GE, IBM, Caterpillar, Bayer and Ford—have begun to move very senior global executives, or indeed global business heads, to Asia, notably to greater China. The theory is that executives with a track record at board level can more easily and credibly convince others of the real opportunities in Asia. We expect this trend will accelerate. While only 46% of non-Asian companies in the Economist Corporate Network survey said that they had a global head of an individual business unit in Asia in 2011, that percentage rose to 52% in 2012, and companies expect it to be 68% by 2017. Could global conference calls soon be taking place during Asian business hours?

Preparing for hyper competition
Another matter that multinationals must get their heads around is the fact that their traditional strengths—superior technology, brands and general know-how—are rapidly disappearing. As more companies turn to Asia for growth the competitive environment is intensifying. And the biggest threat is not from other Western multinationals but local companies. Nowhere is this truer than in China, where competition in many segments of the consumer goods market has gone hyper, and slower economic growth is being felt. In recent months competition (in combination with rising costs) has led at least two leading global FMCG players with relatively long histories in China to pull out of some product lines and markets such as Shanghai, and reassess their strategies (including the number of products they offer). Yum! Brands, which owns KFC, Taco Bell and Pizza Hut, and is often held up as an example of the potential of the China market, shocked investors in December 2012 by announcing that its China sales were expected to decline 4% in that quarter based on slower economic growth.

In response to this threat, larger multinationals are investing more in genuine market research and R&D in Asia, notably China, in an attempt to create products that are more attuned to local tastes and budgets. For some companies the challenge is huge. For example, the “battle for breakfast” – the challenge western fast food retailers have to get Chinese and Indian consumers to tuck into non-traditional offerings instead of their daily congee or idli—is a marketing, R&D, and creative challenge all in one. It is not just marketers who have a problem: HR consultancies in China report a growing preference among Chinese professionals to work for local emerging multinationals where they find it easier to negotiate terms and can advance more rapidly.

Getting mobile

Senior executives—and not just in marketing and communications—also need to get to grips with the rapid spread of mobile communications in Asia. Internet penetration is growing enormously and the uptake of smartphones is creating permanently accessible consumers and companies. But just what kind of businesses are going to be long-term winners in this environment is not yet clear – not in Asia or indeed in the world. The landscape for retailing, marketing and brand engagement is changing at bewildering speed. In retail, local online giants such as Rakuten and Taobao (owned by Alibaba) would seem to be stealing the show. But bricks and mortar incumbents are fighting back with online offerings of their own. The business model is not yet clear. Can Amazon’s focus on free cash flow really take over from previous CFO thinking about the sanctity of margins? Whatever the answer, the rest of the corporate world needs to be aware of a player which looks at things differently and makes e-commerce as much a challenge of concept as of execution. For old bricks and mortar retailers, can management cope with two business models in one house? With this question unanswerable for now, major Western retailers seeking acquisitions in Asia to expand their local reach will face an even more daunting challenge.

The social frontier
Social media is also emerging as a powerful force, both for better and for worse. It certainly engages – but it also has a mind of its own and a powerful tendency to bite back. Corporate leaders must somehow exploit the potential and also manage the risk.

A recent McKinsey survey of Chinese internet users found that 95% of those living in Tier 1, 2 & 3 cities were social media users, while India and Indonesia are two of Facebook’s biggest markets. Yet – amazingly–according to a recent poll by Ipsos, senior executives across Asia are not yet paying much attention to social media’s potential. While one-third of the 153 respondents in the survey believe social media is of primary business importance, 60% reported spending less than 5% of their marketing budget on it. If the amount of thinking on social media follows the amount of spending there is a lot to be done, and given the amounts companies pay for client acquisition, retention, engagement and management, it seems that this is an area ripe for expansion. A major challenge will be to devise a credible way to measure return on investment from spending on social media campaigns.

As for the corporate downside of social media, in the same Ipsos poll 22% said that social media had aggravated a crisis and one-third said staff had created unauthorized social media properties. Perhaps it takes a crisis for companies to get moving on managing social media. Having learned of the dangers of social media following an attack from Greenpeace over its sourcing policies in 2010, Nestle has created a global command centre to “listen” to all social media and spot potential crises in real time. Recognizing the dual purposes for which social media may be used, the company’s global head of digital marketing and social media reports into both the corporate communications head and the consumer lines.

Much ado about everything
Multinational executives have much to get to grips with if they are to tap Asia’s full potential. The challenges and opportunities outlined above exist against a backdrop of more fundamental change as many of Asia’s economies, notably China, try to lessen their dependency on exports by stoking domestic demand. With official blessing, wages across much of the region are rising rapidly, increasing buying power but also requiring companies to rethink their operating models. In other surveys conducted by the Economist Intelligence Unit, multinationals have ranked productivity as extremely important over the next three years, especially in China, and many have said their current operating models are uncompetitive. Indeed, for many companies it may be time for a complete overhaul of Asia strategy.

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