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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Kung Fu Pepsi

Before reading this post, take a minute to watch the video:

To a Westerner, this is a pretty “safe” ad campaign.  But, would it be successful in Asia?  In the west, monks are interesting, but even though some Eastern religions are growing in popularity and acceptance in the West is continuing to expand, you can safely use monks as a punch line.  But what about in the East?  Given the traditions of Buddhist, Hindu and Jains, would this ad campaign still work?  Could you modify it somehow either by swapping out the monk for another analog, or would this not work in Asia in general?  It’s an interesting question and one I’m curious to hear your thoughts on.


Finding Bandwith

Over the last two days I have had a number of meetings with various state officials who are active in trade development for Washington State.  With the broad array of industries at their disposal and the very rich vein of manufacturing and technology expertise across the area, they are in a unique position to see patterns in how the local and global economies are changing.  In particular for a state as reliant on exports as Washington (fifth in the country for 2011), they see the unique role international sales and marketing plays in the growth strategies for the industries and companies they serve.  What struck me in our conversations was that no matter which industry was the purpose for our meeting – agriculture, composites, pharma or medical devices – the same issue came up when we started talking about developing an international sales strategy:  bandwidth.

Obviously the smaller the company, the more bandwidth overall is a problem.  But even in mid-sized companies, finding the time to develop a strategy for selling into, or finding partners within emerging economies can be so great that it never makes it onto the organization’s list of priorities.  Similarly, few companies have staff members who are willing to be dropped off in an emerging economy with little in the way of guidance (how about telling your product manager to “go figure out how to sell into India” – having been on the receiving end of that sort of conversation myself a time or two, I can appreciate how that goes over!).  Even more problematic for staff members is being tasked to do this with little in the way of local support.  It takes a unique individual who is willing to get off a plane in Accra with no one waiting for him.  Developing an international sales strategy for emerging economies is something almost every company knows it needs to do, but the problem of bandwidth continues to prevent them from pursuing it.

This is obviously building to a bit of shameless self-promotion, but the larger point is this:  never before have American companies been more in need of crafting strategies to get their products and services into emerging economies than now.  While the American economy appears to be righting itself, the compelling high growth economies are those outside our borders, and it is only by carving out the time, energy and capital to build strategies for working within these countries that we can hope to have a healthy and vibrant domestic economy.  It was encouraging to hear from so many well-placed people within the state that the need for these services is greater than ever.  For SMEs, the challenge is finding the time and selecting someone like Rubicon to take the lead in the early-stage missionary work that is always the most ambiguous and poorly defined stage in the process for becoming a proficient export company with a solid international sales strategy.  Hey, I said this was going to end up being a shameless self-promotion, so I’ll wrap up by pointing you to our contact page!  Hope to hear from you soon …


Is This the End of Vietnam as a Hedging Strategy?

In many ways, Vietnam is a great object lesson on how emerging economies transition from being poor and under-developed, then to a nascent emerging economy, and hopefully ultimately to a country with a viable middle class.  All sorts of challenges present themselves to a country in the midst of this transition, not least of which is escaping the classic “middle income trap” that so many pundits are concerned China might be ready to fall into; however, looking at Vietnam today offers companies the opportunity to reflect not only on what they should be / could be doing in the country, but also whether they are managing the transition other emerging economies they are working within are in the midst of as well.

Vietnam’s impressive GDP growth owes much of its success to the transition from agriculture to manufacturing.  Sounds familiar, right?  After all, that’s what drove much of China’s impressive growth as well.  Today, Vietnam is fighting off terrible inflation (check out the chart below showing December 2011’s published inflation rate of 18.1% – ouch).  Not unlike the omnipresent worries about inflation in China between 1994-1995, when the country’s CPI was running between 20-27%).  Today, Vietnam is struggling to deal with problems in its banking system where its state-owned banks have lent money to state owned enterprises (SOEs), in many cases making investments that aren’t going to be paid back.  Again, a similar problem China has faced, and one that keeps many government planners in Beijing up at nights even today.

We see in Vietnam many of the same growing pains that China has in some cases already gone through, and in other cases is still in the midst of itself.  For companies that were early into Vietnam, much of what animated their decision was the belief that they could use Vietnam as a hedge against wage inflation coming out of China.  Now, as Vietnam’s labor force growth dramatically slows, this hedging strategy may be nearing an end unless the country can dramatically improve its manufacturing productivity, a topic of note in the February 2012 report on Vietnam from McKinsey Global Institute titled “Sustaining Vietnam’s Growth:  the Productivity Challenge.”

The question now becomes more pressing for companies operating in Vietnam:  why are they going to stay in the country?  If in fact the country’s wage rates are likely to dramatically increase in the near term – both as a function of the ongoing problems the government is having controlling inflation as well as a function of diminished workers in the labor pool – can you afford to stay in Vietnam given its other challenges?  The McKinsey report makes note of the problems several multinational executives with facilities in Vietnam shared; namely, that basic problems with infrastructure (including the country’s power grid) and logistics remain challenging.  What once was a bet you could afford to make – staying in Vietnam to hedge against risks in China – now appears to be less relevant.  And, if you have to deal with fundamental inadequate infrastructure issues, a lot of manufacturing heavy industries are going to get serious about going elsewhere (and, I would put good money that many will move back into China).

Consequently, companies will have to revisit why they are in Vietnam in the first place.  Many will ask, as they did years ago in China, whether they can sell to the Vietnamese consumer.  Others, like the McKinsey report notes, will use Vietnam as a staging point to sell into other countries such as Laos and Cambodia.  Others will turn their attention to what I found absolutely fascinating in the McKinsey report:  developing Vietnam as a source for attracting and selling to Chinese tourists.  They note “Vietnam’s location and its long coastline give the country a strong starting position from which to become an early mover in the growing Chinese middle-class market.  The elimination of visa requirements for tourists intending to visit the southern island of Phu Quoc, Vietnam’s largest, where plans for major resorts and casinos are being actively discussed, is one such opportunity to attract a new segment of tourists.”

Perhaps the days of Vietnam being a hedging strategy for your company are over.  That’s unfortunate not only for the country, but also given it throws up in the air the next part of the undeveloped world where you need to start thinking about finding a supply chain (if that even remains a possibility).  But just maybe Vietnam can play another role for your firm:  possibly as a target market for you to talk to or take care of Chinese middle-class consumers on some of their first foreign excursions?  Few opportunities to more dramatically shape purchasing decisions of Chinese consumers exist than grabbing their attention while on vacation.  Regardless, your company’s strategy in Vietnam is going to have to change.  That is part of what makes the transition Vietnam is going through so important:  yes, initially making product in and exporting from the country was what drove companies in.  But it was those companies with an eye towards more than just that – to selling to Vietnam’s domestic consumers, or to using Vietnam as a platform to sell into other small regional economies – that may ultimately benefit the most.  It’s a similar pivot a lot of SMEs are struggling to make in a much bigger economy – China – as the days of easy and cheap sourcing are coming to an end and the larger question of how to sell into the market becomes increasingly important.


A Reminder of Why Emerging Economies Matter

Over at The Atlantic, Steve Clemons has a great post up about the current state of the world’s emerging economies.  As part of his analysis, he includes two graphs that should be front of mind in every CEO’s strategy, regardless of industry.  The first follows below, which shows the projected growth of what he calls the “density and breadth” of the middle class in various countries around the world.  Projections this far out are terrible specific predictors, but valuable as general indicators of where current trends are likely to take us.  As he notes, problems with a prematurely aging workforce for China in particular, could well undermine these projections for China, as could political instability in countries like India where the necessary economic reforms the country will need to make in order to empower the middle class are anything but certain.

Homi Kharas, whose work Cohen references, notes in his work for the Centre de Development (OECD), that some of these countries will need to prove they can escape the “middle income” trap:

There is also a group of middle income countries which appear to have become trapped and are either not converging with the rich countries or converging very slowly. The “middle income trap” is a name for countries that appear squeezed between low wage, poor developing countries that can outcompete them in standardized manufacturing exports, and high-skilled, rich countries that grow through innovation. Countries in the middle income trap have yet to find a growth strategy that can navigate between these other competitors.

As powerful as the earlier graph is in its projections about how the middle class is going to change from being a uniquely Western phenomenon to one shared by those in China, India and Southeast Asia in general, the following map from the OECD’s Development Centre Working Paper 285 is of more immediate interest.  Note that the neon green countries (Mexico and Brazil are of note) are currently “stalled” in terms of economic development for the middle class and that the dark green countries are heavily concentrated in the Asia-Pacific region.

All of this reinforces the singular message that American and European businesses need to be pivoting more and more towards Asia, including India, with an eye towards the handful of countries in Africa that are struggling to evolve a middle class, but who if they are successful doing so could create some of the most meaningful economic development these regions have seen in decades.  Many businesses, especially those in the SME sector, have been successful working in China in particular with supply chain projects, but selling to Chinese consumers (whether B2C or B2B) remains a problem area.  Now more than ever, building strategies for selling into these emerging economies remains essential.


Start-Up Asia

Today while traveling I had the opportunity to read Start-Up Asia:  Top Strategies for Cashing In On Asia’s Innovation Boom.  More widely known for her book Silicon Dragon:  How China is Winning the Innovation Race fame, Rebecca Fannin’s most recent book is recommended reading for two groups.  The first, and perhaps most obvious group, are those internet and clean-technology entrepreneurs and investors who want to understand and participate in the burgeoning technology markets of Vietnam, India and China (or what Rebecca calls “VIC”).  The book will give some great insights into the challenges of raising capital and deploying products in these countries.


But I found the book interesting for a second group, namely companies struggling to understand why they are not as successful with their emerging market strategies as they might hope to be.  As you read Fannin’s book it is impossible to miss the point that more highly funded and technology-rich companies continue to fail in emerging economies where smaller more nimble start-ups succeed.  The classic example of this is the failure of Google in China versus the success of Baidu.  Answers to why this has happened range from China’s censorship policies to what I find more compelling, and what Fannin’s book highlights:  local entrepreneurs almost always have the upper hand over transplanted ideas from successful companies outside of their culture.  It’s a powerful lesson that should inform both big companies when they elect to either acquire an existing player in a new market or organically develop their own product for an emerging market; the lesson holds equally well for SMEs facing similar choices.


Why is Facebook taking so long to get into China?  Maybe it is because they are negotiating with the Chinese government or perhaps they are trying to find the right partner already operating in China and maybe – and I would suggest hopefully – it is because Facebook is trying to determine if it has the culture, context and local knowledge necessary to beat out existing Chinese social media companies.  Facebook might find it doesn’t need to be in China now if it doesn’t feel it can really compete with local start-ups.  It is a difficult train of thought because, if the internal conversation is managed properly within the company, it sets out the possibility that not going into China for Facebook might actually be the right decision.  Reading Fannin’s Start-Up Asia I was left with the idea that even for a nimble company like Facebook, being successful in China will require an extensive de-nuding of what it is they need to transplant into their China model from their North American business.


So much of what makes companies from developed economies find success in emerging economies are learning to master the intangibles within foreign cultures and believing that whatever their success in North America might have been based on, they cannot afford to be wedded to much of these past successes when they enter a new country.  In fact, the best advice they will get is to divorce themselves from almost any part of the tangible aspect of what they do when they make the move into an emerging economy.  This is a fuzzy process with a lot of gray and is best managed by having as much local insight and strategy input as you can afford, while also having many outside eyes looking at how you plan on building, marketing and deploying your idea into your target market.  The latter insight may not have been one Fannin intended to make, but her book certainly makes the point that when trying to be successful in emerging economies – even in the high technology space – you simply cannot afford to be too local.


Should You Be Thinking About Vietnam?

This past Sunday while in Hong Kong I had the opportunity to sit down over dim sum with an old friend from Duke.  He’s a senior executive at a large multi-national and has factories spread all throughout Asia.  The business he is in – chemicals that go into consumer durables – is highly sensitive to tariff structures, fluctuations in raw material prices, and overall global economic demand.  Because his end customers are consumers purchasing durable goods that can be pushed off to a future date, he tends to see economic contractions well in advance of other industries.


What his business is experiencing suggests the American and European economies have already started to dramatically slow down (no surprise there); however, he is also seeing a fairly substantial relocation of labor intensive manufacturing from China to other parts of southeast Asia:  Vietnam, Bangladesh and Indonesia specifically.  What is particularly interesting is that many – if not most – of his customers in Asia are actually Chinese owned factories that are turning away from China as the location for their factories.  The one exception to this are the Chinese owned factories whose demand is primarily driven from the domestic Chinese market.


In fairness, many of these Chinese owned businesses are relocating as much to access new tariff structures as to address increasing costs in China.  For them, the US has put duties in place if the goods in question are made in China, but no such duties are encountered if the goods are made in Vietnam, Bangladesh or Indonesia.  It’s worth pointing out that this is exactly what would be accomplished if the US Congress’ Currency Reform Act were to pass and actually become law:  industries in China as a consequence of its low cost labor would not come back to the US, they would merely relocate to another low cost labor country in southeast Asia.


Analysts anticipating the end of China’s reign as the dominant low cost manufacturing hub for the world have long pointed to Vietnam as a country that could potentially step into the gap.  Investments to Vietnam have increased over the last several years, with Taiwan, Korea, Japan and Singapore and Malaysia leading the way in terms of foreign direct investment into the country.  Yet, the overall level of development in Vietnam has still lagged in comparison to what many outsiders anticipated.  Why is this?


My friend’s experience opening up a new factory in Vietnam illustrates why the country’s development has lagged behind expectations:  infrastructure and logistics.  His business in particular is very raw material sensitive, which means the precursors he needs to bring into his factory in Vietnam have to be brought in by road or rail, both of which are in very poor shape.  Consequently, his supply chain is longer than what he has in China that translates into higher carrying costs for inventory.  In addition, he has to plan on additional time to get his products to both customers in Vietnam and ports where he can ship.


His experiences beg the question:  should you be thinking about Vietnam?  If your company is in the infrastructure or logistics business, the clear answer is yes, simply because these two areas remain the most pressing needs the country must address if it is to become the next Asian Tiger.  But if your business is in more conventional manufacturing, you need to complete a thorough due diligence process before knowing if you should be in Vietnam or not.

This due diligence should include:

  • evaluating the VAT and duty/tariff structures for your products
  • identifying the location of your proposed factory
  • identifying the location of potential vendors
  • looking at the logistics (road quality, access to rail spur, are either impacted by tropical storms, etc.) between your factory, your potential vendors, and either customers or your outgoing port
  • energy supply (amounts and consistency – you will need for your site)
  • vet potential vendors (manufacturing infrastructure, quality controls, access to properly trained labor, etc.)


Before you can answer whether you should be thinking about Vietnam, you need to complete this sort of preliminary analysis.  The answer to your question might be a resounding “yes” on one front (it might get you around a China-specific tariff problem), but an absolute “no” on another (logistics).  The role of a firm like Rubicon is to make this missionary process easy, painless and cost-effective for your company.  If you are interested in a proposal on what it would take to evaluate Vietnam for your business, email us to talk further.


Think You’re Struggling?

Then spend a little time in the SME sector in China, or for that matter, most Chinese manufacturing businesses.  Today I visited a factory owner who I’ve been working with for several years.  A Taiwanese who has homes in Taiwan and Guangzhou, this second generation businessman is facing an incredibly difficult future.  The tone in this part of the Chinese economy has definitely changed over the past five years, from a spirit of “can-do” at almost any request to an attitude of reticence, reluctance and refusals today.


Here’s why:  this factory owner, one of the many SMEs Beijing no longer needs to make a priority, has had his factory get closed down by the government (the building, not the business).  Not because they don’t want him making any more of what he’s involved in manufacturing, but instead because they have decided that the factory complex he’s been operating in for the past several years now should be an electronics mall.  So, the government has appropriated the land and will be demolishing all the factories in the area starting January 1st.  Even before this, the rent on his factory had tripled in the last five years.  Ouch.


In addition, his labor rates have gone up – according to his back of the napkin estimates today over lunch in Shenzhen – over 50% in the last 5 years.  He commented that even if he could afford to pay them, he couldn’t find workers that were willing to work in the sort of manual labor jobs he has to offer.  Labor rates have increased about 10% over the last 18 months alone.  Coupled to the appreciating RMB and food costs (he, like many factory owners in China supplies dorms and food as part of his workers’ compensation), he faces an incredibly uncertain future.


Over the short term, he is planning to move production to Ningbo, where he has a business partner who has cheap land and an available factory where he can relocate his operation to; however, the combination of a tripling in his rent, 50% wage increases, the RMB appreciation, and the inflationary pressures on his food purchases, he is becoming additionally uncertain his business can compete much longer.  His friends are talking about opening up factories in Vietnam or Indonesia, but thus far, he has resisted doing this.


What does all this mean to American companies?  Most obviously, China is transitioning out of being a low-cost manufacturing center much faster than we might expect.  The country has long been more expensive than other countries in the region like Indonesia and the Philippines, but other factors (the vibrant domestic Chinese economy, infrastructure and logistics advantages, rule of law, etc.) have given China the edge.  As China’s costs continue to grow, smart companies in the field of logistics and infrastructure will begin helping to further build the conduits of commerce in countries like Vietnam, Indonesia, the Philippines and Thailand in order to facilitate low cost industries migrating out of China.


More on this in a later post, but the predominant reason countries like Vietnam have struggled to become the next great Asian success story is the lack of infrastructure and logistics, which if resolved, could transition Vietnam into a source of growth opportunities.  While it might be too early for your manufacturing company to invest in Vietnam or Indonesia, if you are a logistics or infrastructure company, you are in an ideal position to benefit as the Chinese low-cost story fades and other countries become attractive as sources of low cost manufacturing labor.