AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

Investing In An Emerging Market In Asia

June 16th, 2016

 

There are some tried and true “do’s and do nots’ in relation to investing in emerging economies, and some of them are outlined here.  Interesting!

 

About the Author

Glen Robinson experience and expertise lie in the manufacturing, processing and distribution areas, with specific emphasis on business management and strategic planning. Glen has more than 25 years’ experience in management consultancy and has worked with a wide range of industries from agriculture through to manufacturing and distribution industries. He gained his South East Asian experience as chief executive officer for the Asian subsidiaries and joint ventures of a major International manufacturing and marketing organisation. Glen sits on the board of many Asian related business organisations and has for many years advised a number of Foreign Investment Boards in the ASEAN region.

THE PROCESS OVERVIEW

There are some process steps through which an organisation has to go to maximise the benefits and minimise the risks in an investment or market entry into an emerging market, and while these basic steps are self-evident and entirely sensible, far too often they are ignored or shortcuts are taken which can lead to unhappy conclusions. The steps through which the process should be taken are: –

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The following paragraphs discuss some of those elements in more detail

COUNTRY SELECTION

Some comments are relevant about the country selection.

Country Strategies

In this area of emerging economies, the situation is dynamic and many countries are looking at their own global strategies and developing actions and directions which could be of significant interest to an investor, as advantage can be taken of them and perhaps even coat-tail. We refer specifically to China which together with India, not only are dominating our region but are heading towards dominating the world’s economy.

However, the strategy which is being adopted by China is most interesting and relevant, as it is creating opportunities which most governments in our part of the world are not even considering. They are seeking efficient access for their distribution channels to Europe, Middle East, Africa, and into the Indochina region.

They have completed the planning for three major forms of transport, railways, roadways and waterways. We are beginning to see the New Silk Road stretching from the seaboard in eastern China through to middle Europe, with significant north south corridors into the major countries of ASEAN, India, and providing a route to Middle East, Europe, Eastern Europe and Africa

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The construction has commenced for significant infrastructure works along these various distribution channels. This need is being driven by the two-way growth in goods and services and the overcrowding and high-level expenses associated with the sea channels around the very over-crowded Malacca Straits.

There is no doubt there are significant opportunities for Australian companies to take advantage of the infrastructure work, but they will need to be quick. Practical completion is expected during 2020.

Country Attractiveness

It is very difficult to determine what attractiveness is as it really is in the “eye of the beholder”. However, one measure may the Foreign Direct Investment [FDI] flow into the country.  As can be seen by the analysis, most of the selected countries are increasing the inward flows of FDI. Of course, FDI is not the only inward investment as portfolio investment may be significant, however, as portfolio investments can be withdrawn usually quickly and easily, it is not seen as a long term investment.

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Regional Alliances

Regional Alliances should not be overlooked, as they could be a means of entering markets through indirect means. There are many Free Trade and other economic alliances, and include:

  • BIMSTEC: Bay of Bengal Initiative for Multi-Sectorial Technical and Economic Cooperation (BIMSTEC) Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, Thailand
  • AFTA: Asean Free Trade Area; Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam
  • IMT-GT: Indonesia, Malaysia, Thailand, Growth Triangle
  • GMS:Greater Mekong Subregion; Thailand, China – specifically Yunnan province and the Guangxi Zhuang autonomous region – Myanmar, Cambodia, Laos and Vietnam
  • ACMECS: Ayeyawady – Chao Phraya – Mekong, Economic Cooperation Strategy (ACMECS) is a cooperation framework amongst Cambodia, Lao PDR, Myanmar, Thailand and Vietnam
  • TPP: Trans-Pacific Partnership Agreement between Australia, Brunei, Chile, New Zealand, Singapore, Peru, the United States, Vietnam and Malaysia

This is not an inclusive list as there are many FTAs in existence and many under development. Australia has 19 Free Trade Agreements already in existence

MAKING A POSITIVE SELECTION

There are a number of positive aspects which should become evident during the investigative process

Timing is Imperative; this is a little understood imperative. To enter a market too early will almost certainly ensure that significant resources will be wasted, as the market is not ready for that service. To enter too late means having to enter into a market that is well serviced and perhaps over-supplied.

The consumption curve developed empirically over a range of products and a range of geographic markets, demonstrates that there are 4 distinct phases in the market acceptance of a new product or service.

The early phase is very difficult to enter into the market because there is limited knowledge; the second phase is when there is the maximum rate of growth, and is the ideal time for market entry; the third phase is when the market consolidates; and the final phase is the mature market. The timing determines the strategy which should be adopted to maximise potential benefits.

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The “disruptive technologies” may well not follow this pattern, careful consideration is required to understand the likely market consumption phasing.

Perception is not reality.  A truism is that the truth is sometimes difficult to find.  Some may remember the political events in Thailand 2006-2008, in which there was a military led coup, significant social disruption and general instability. The press was using headlines such as” foreign investment stalls” and” foreigners depart”, which was certainly not the case, as the analysis from the World Bank demonstrates.

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This graph implies that the political instability of the time did not deter foreign, but that the GFC had a very adverse effect

It recognised however, that it is not always easy to obtain factual information.

Investment Incentives; many economies offer significant investment incentives which can include up to 13 years of tax free operation. Naturally conditions apply.

Ease of Establishment; the investment laws regulations and practises of the economies vary quite considerably. The variations can be dependent on the nature of the project, the nationality of the promoters, and the perceived value of the investment to the country. Most are reasonably clear and there is little room for “ambiguity” or interpretation by the low or mid-level decision makers.

Concept of Trust or Temptation; there are many stories about how trust must be developed in order to have harmonious business relationships. That is true. But there is another complementary and far more relevant and important truism, and that is that you must avoid putting temptation in people’s way. There are many examples of the benefit of temptation avoidance

Concept of Control; there is the natural tendency to require “control” of the entity, but that could be an illusory concept.  If the need for control is an absolute, you will need to make sure of its reality.

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In the 4 Scenarios above, the foreigner and the local entity have approximately 50% each, but with the foreigner having a little more and hence having “control” and the first diagram depicts that situation, however, in the subsequent structures:

  • In the second, the ownership is still +/- 50% each, but the local has exclusive distribution rights
  • In the third, the ownership is still +/- 50% each, but the local has exclusive supply rights
  • In the fourth, the ownership is still +/- 50% each, but the local has exclusivity of supply and distribution rights.

Who actually has control of that company in 3 of the four situations is a moot point.

Partners: this is usually the most vexing question facing a foreign investor. If a partner is required for legal reasons or if it is required for strategic reasons, the process is the same. Identify the attributes you require, seek out an organisation or person with those attributes, discuss ALL ISSUES with that partner, including the course of action if the need arises to separate the 2 partners or in the event of a disagreement on some aspect of conducting the business, as well as an exit clause for both of you, and then turn it into a legal document.

SOME OF THE OTHER ISSUES

Compliance with local laws: It is an absolute necessity to comply with the local laws, even if they are stupid, irrelevant, ignored by others. As a foreigner, we have special responsibilities, and it is incredibly embarrassing to be caught trying to take short cuts, even as an expediency.

Corruptionan oft talked about phenomenon and it is an activity which must be avoided at all costs as the results rarely match the expectation. Logically, if a “middleman” promises to arrange an outcome for a fee, his objective is to keep you paying, not to achieve the outcome. There is the larger, higher level of payments which are sometimes sought to achieve an outcome. DO NOT DO IT. There are many examples of significant outcomes being achieved without any corrupt activity.

Criminal activity:  Keep away. Sounds logical, but what is not a criminal activity in the home country, may be so in the country in which you are operating.

Approvals Process: In several jurisdictions the Approvals Process is convoluted, but the key is to work through it with patience and persistence. Short cuts do not work in the long run.

Linkages throughout the supply or distribution channels: one of the more difficult determinations to undertake is the identification of impediments in the supply or distribution chains, and they are difficult because they are not obvious. It is conceivable that there is a linkage with a potential supplier to your organisation and he has the power to disrupt your activities. Similarly, a competitor or somebody in the distribution chain may have a linkage to the end customer and there is the opportunity to just block you out.  Not an easy situation to identify, but could be crucial.

Competitor activity – strategy: the strategy adopted by competitors [or potential competitors] may be revealing as to how the market operates, and a knowledge of their strategy may assist you in developing a strategy which gives you an advantage, even though you are the new comer.

Operational structure: There are a number of operational structures which could be adopted, including an agency, distribution arrangement, a JV processing or distribution arrangement, or a wholly owned organisation. Regardless of the structure it is highly recommended that you establish a relationship with the end customer. There are many reasons for this, but it does provide some protection, and importantly, provides feedback on the acceptability of the goods/service you are providing.

THE COMMERCIAL

We will be self-serving and strongly suggest that you take advice from an organisation which has on the ground experience in assisting foreigners to take a commercial market entry. We do not mean your potential partner, as he may have conflicting objectives, and his knowledge of the “rules” would be questionable. Do you know the investment rules for your home country? Do you know the details of work permits?

While the law/regulations in most economies are reasonably clear, the application of those laws is subject to local knowledge. As an example, in Thailand it is imperative that a foreigner obtain a work permit which allows you to undertake commercial activities. On it you nominate your place of business, in addition to your corporate address, and if those 2 addresses are the same, then you cannot conduct any business activity outside that address. Meetings, site visits, or any activity which could be deemed as “business” is theoretically illegal. Under normal circumstances, this should be no problem but if a disgruntled employee, or an aggressive competitor wishes to cause you a problem, you have made it very easy for them, by putting temptation in their way

The other issue is never go to the front door of an authority [or other entity] unless you know the response.  That is, do not seek an approval, a determination or similar, until you have done the background work to ensure a positive response. There are many examples.

THE FINAL DECISION

There are many factors which go into the final decision, but in reality there are only 3 relevant ones:

  • Does the investment stack up commercially?
  • Will we get paid, and get our money out of the country?
  • Do we feel good about it?

If we have 3 positive responses, GO FOR IT!

 

 

Glen Robinson,

AFG Venture Group

glen.robinson@afgventuregroup.com

+61 412 229 664

 Original Prepared Dec 2011, Updated April 2016