Business Risk May 2011

China Plus One

Asia offers much more than just China

As the Chinese market grows and operational risk rises, many global organisations are seeking to supplement their Asia strategy by pursuing new countries in the region.

For the past two decades, global corporations have opened factories and service businesses in China to access booming Asian markets and profit from relatively low costs. But as the Chinese economy matures, the picture has been changing. Once known chiefly as a producer of inexpensive textiles and toys, China is now also making computers and cars. As wages climb and skills increase, China is no longer one of Asia’s cheapest labour markets.

Instead of relying on China as their sole beachhead in Asia, multinationals are now operating in such places as Vietnam, Indonesia, Thailand and India—a strategy known as “China plus one”. Besides holding down costs, this new approach enables firms to diversify risks and exploit opportunities in growing markets. All of those countries have less of a reputation for counterfeiting than China; have relatively stable governments, and employ younger and cheaper workers than does China.

Many, though, still cherish their Chinese business address as an important symbol of global expansion. And because they are reluctant to antagonise China, multinationals do not necessarily publicise their new Asia strategies. Meanwhile, China is developing secondary regions, particularly in the western provinces, and has made high-profile arrests to show they are serious about cracking down on corruption and the theft of intellectual property. Yet it is much more difficult now than it was 20 years ago for outside firms to identify reputable partnerships in China and more global organisations are hedging investments with outposts in neighbouring countries.

Plus which one?

Western multinationals in China can also invest in countries such as Vietnam and Indonesia that may be less developed and with lower labour costs. Indonesia is among the most aggressive countries to promote itself to Westerners, with tax incentives and a marketing campaign on low wages and its growing work force.

But choosing which Asian market and how to proceed entails extensive market research and due diligence. Investors usually need a reliable local partner of which there may be few, and they must probe its culture, performance and other factors. It is important to consult experts with insight on local cultures and how markets are likely to change.

Geography and positioning in the market are also key. For example, a firm that recently entered Vietnam with a partner was keen to expand nationwide. Its partner had business ties in Ho Chi Minh City, but not in Hanoi—two cities with very different business cultures. The outside investor had to join forces with a second partner established in Hanoi.

Perils of getting it wrong

Western firms investing abroad need to know US and other anti-corruption regulations. US investigators have focused increasingly on Asia. In many developing countries, potential business partners refer third-party middlemen to advise and act as go-betweens for the firms and foreign officials, exposing multinationals to US Foreign Corrupt Practices Act compliance risks and fines of millions of dollars. Even small bribes by low-level employees can result in legal action that will harm a firm’s reputation.

Moreover, if a move into another Asian country involves scaling back on Chinese operations, the shift must be carefully planned and executed. Sales from remaining facilities may plummet if customers react to bad publicity about a closing, and dismissed workers have been known to become violent, stealing equipment, damaging property and even engaging in “boss-napping”, that is, seizing executives and demanding significant compensation for workers.

To minimise the possible problems, firms may form crisis-management teams to evaluate legal, financial and public relations issues and to negotiate with labour and government officials to ensure a smooth transition.

Despite the challenges of operating in China, it is unlikely that Western firms will depart en masse. The country is still open for business, and plenty of foreigners are prospering there. But nowadays, fewer multinationals are relying solely on China to provide an Asian foothold.

Businesses are increasingly spreading their bets, putting some resources into other Asian countries that also offer great potential. But while diversification may be the prudent option, firms should remain aware of the challenges as well as the opportunities of operating throughout the region.