Intouch Autumn/Winter 2007-08

Taking the fast track to Asia

In the nearly 10 years since retail group IKEA entered China, it has learned that despite the glittering promise of runaway economic growth, doing business there is not easy. The retail group believes China could be its biggest market of the future, yet its profitability has been hard earned, and future success is by
no means assured.

“The odds against success in China are very great,” asserted Ian Duffy, IKEA’s President Asia Pacific, speaking at 3i’s April 2007 CEO Forum in Shanghai. “I think from afar, from another continent, it is difficult to understand the challenge. Only when you are really here and are operating and working in China do you really see and understand it.”

On a more positive note, he added: “What we will see between today and 2015/2025 is an explosion of China’s middle and upper classes. The market that lies ahead of us in the next 10 to 20 years is unimaginable.”

IKEA and other large companies have led the way in entering Asian markets. Now, many mid-sized companies from Europe and the United States are following, attracted primarily by the region’s burgeoning economies. China’s economy has achieved growth of at least 8% a year for a decade, with India sustaining a similar, although slightly lower, growth rate. And, their lower costs are changing the competitive dynamics of some sectors.

Asian markets have become more accessible, but mid-sized companies often do not have sufficient resource to plough into market entry. Success in these countries requires thorough understanding of the opportunity, as well as local knowledge and contacts. Idiosyncratic business cultures, intricate regulations and inadequately understood business opportunities can all trip up western businesses. High expectations can easily founder on harsh reality.

“For small and medium-sized enterprises, the investment and resources required to enter these markets can be considerable,” says Chris Rowlands, 3i Managing Partner for Asia. “3i actively supports the companies it invests in, sharing its experience, knowledge and contacts. In this way, it provides value beyond simply offering equity.”

Getting the foundations right
International private equity companies have a role to play in helping their portfolio companies to enter these markets. 3i established its New and Emerging Markets team in 2005 to help European and US companies design and implement their Asia strategies, as well as to assist Asian businesses seeking to expand into international markets. The team has since been flooded with work, fielding more than 60 requests for assignments in 2006 alone.

Broadly speaking, it is either consumer products or industrial companies that are most attracted to Asia. Whether they are seeking to increase revenue, reduce cost or both, 3i helps them both to develop and implement their strategies.

Assignments have included support in: outsourcing, setting up local offices or manufacturing facilities, making acquisitions, developing effective sales approaches, recruiting and sourcing.

Although at present more European businesses are setting up in China than in India, the economies differ vastly, and both have their appeal. According to Nicole Buisson, 3i’s Business Development Manager Europe, many industrial companies looking to establish inexpensive production overseas first consider China due to strong transport infrastructure, and low labour costs. However, companies that require a skilled labour force, knowledge of the English language, or expertise in specific industries (for example automotive, forging and services) also typically consider India. India is also the home of business process outsourcing, through which companies offshore back office processes. Indeed, 3i has recently created Portfolio BPO Services, specifically to offer outsourcing services to its portfolio companies.

Creating strategic value
Starting out in Asia may be just the first step in a long-term exercise, but it is critically important. The uninitiated can easily make errors that would be difficult or costly to correct later. Getting the strategy and then the implementation right requires deep expertise in local markets.

For many companies, it is clear where their greatest market opportunities lie. For Wendt, a German supplier of highend grinding tools for manufacturing industry, the 40% annual growth rate of China’s car industry meant that this was a market it could not ignore. But to be competitive, it would have to make its tools there. After backing the management buyout of Wendt from mining company Anglo American in March 2005, 3i helped management formulate and implement its strategy.

In October 2006, 3i’s Business Development Director Asia, Dominic Orchard, spent a week introducing Wendt’s CEO to suitable pre-built facilities in the Yangtze River Delta around Shanghai. By the end of the week and after a number of introductions from 3i, Wendt had selected a site, started negotiations with the landlord, and was well underway with implementing its plans for China. The site will become operational by the end of 2007. This greatly added to Wendt’s strategic value, a fact recognised when Switzerland’s Winterthur Technologie acquired the company in June 2007.

The story of Q-Matic, the Swedish world leader in queue management systems, is similar, although in this case the target market was India, where the large population and current increases in investment in infrastructure mean it has a large potential market. In May 2007, 3i hosted a management trip to India to assess the scale of the opportunities and practicalities, such as where to place a local headquarters. During the trip, 3i made introductions to potential customers such as railways, banks, government offices and retailers.

3i has developed a template for assessing a business’s Asian strategy. This helps to determine whether a business needs to move into Asia now, later or not at all. It analyses factors including the opportunities for a business in China or India, the competitors there, the effect that businesses operating from there are having on prices globally and so on. “I am not saying we have all the answers,” says Orchard, “but we are helping companies negotiate the pitfalls and pick the fast track to success in Asia. We are seeking to help them succeed much more quickly and without so many mistakes.”

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