Developing economies, technologies, and talent
“A recent study by Nielsen found more than three quarters (76%) of business leaders expect their business model in five years will differ significantly compared to today; only 48% believe their organization is prepared for the future; 43% are confident they have the systems and processes in place to be able to spot early indicators of change; and 59% acknowledge it will be difficult or extremely difficult to navigate their organization forward through the next five years.“ Regan Leggett, Executive Director, Thought Leadership and Foresight, Southeast Asia, North Asia and Pacific at Neilsen September 3, 2016
A Wide Lens
Asia is the world’s largest and most populous continent, and a leading driver of the global economy. Nick Sutcliffe, executive director of The Conference Board for Asia explains “what you have to remember is that the region consists of China, the ten markets in ASEAN, Korea and Japan and Taiwan, then Australia, New Zealand and India and more. So ‘Asia’ consists of about 48 different countries, all at a different level of economic development.”
While it is impossible to generalize about so diverse a collection of economies, some truths apply to all. “Look at the world: technology and the digital marketplace is disrupting everyone’s business.” Atul Vohra is managing partner of TRANSEARCH, India. “For any manager in any country, embracing those technologies is an imperative. Companies are rapidly transforming themselves, putting different demands for talent in the market, and affecting all companies in all sectors,” he says.
Automated stores, facial recognition, virtual payment platforms and AI are disrupting industries, and creative ecosystems and reshaping how business works. Sherry Ding leads Spencer Stuart’s consumer, private equity, and financial officer practices in Shanghai. She says, “We’ve seen this with Alibaba and Tencent, they really leverage tech to drive those changes, but more is coming from consumer needs—consumer needs are shaping industry sectors."
Businesses in Asia are innovators and disruptors, with massive internal markets, abundant resources, and broad reach. Disruptors like Alibaba, Flipkart, Quikr, Tencent, WeChat, Go- Jek and Grab are transforming the way people live and work.
“Asia is expected to grow by around 5.5 percent this year, accounting for nearly two-thirds of global growth, and the region remains the world’s most dynamic by a considerable margin. … China’s growth is projected to ease to 6.6 percent, partly reflecting the authorities’ financial, housing, and fiscal tightening measures. Growth in Japan has been above potential for eight consecutive quarters and is expected to remain strong this year at 1.2 percent. And in India, growth is expected to rebound to 7.4 percent.”
- Regional Economic Outlook: Asia Pacific, International Monetary Fund, May 2018
The transformation of businesses in Asia is not accidental. Fabrice Desmarescaux is managing partner for Southeast Asia, with Eric Salmon & Partners. “Asia is aided by the fact that most of the governments in the region have pro-business policies and helped tech develop very fast.” He adds, “In general, the level of education in Asia has increased tremendously.”
Greasing the Rails
The “Doing Business 2018” research report by The World Bank Group compares the regulatory environment for domestic business in 190 economies, measuring multiple factors by country, including startup processes and costs, taxes, credit and equity regulations, building, logistics and a range of areas where regulatory policy influences the ability to start and conduct a business. A lot is happening in Asia, with the region‘s economies adopting 371 reforms since the research began 15 years ago.
According to the World Bank Group report, “among top improvers, Brunei Darussalam, India and Thailand implemented the highest number of business regulation reforms in 2016/17, with eight reforms each.”
Perhaps most notably, Singapore ranks as the second highest country for the ease of doing business, with New Zealand, Republic of Korea, Hong Kong SAR-China, Taiwan-China, the United Arab Emirates and Malaysia ranking in the top 25.
“Starting a business in Thailand used to take 27.5 days. Today, thanks to a series of business regulation reforms, the process takes only 4.5 days.”
- Doing Business 2018 The World Bank Group
“There are many areas where Asia will need to continue improving, if they are going to realize their full potential— areas like corporate governance which is still fairly dark,” Desmarescaux says. “Even in advanced economies like Singapore, the standards of corporate governance are relatively behind western standards, in terms of diversity of the board, in terms of independence of directors.”
The Regional Comprehensive Economic Partnership (RCEP) that is currently being negotiated between ASEAN and India, China, Australia, South Korea, Japan, and New Zealand may further energize the business climate in Asia.
According to Deloitte, “A central element of the RCEP is the creation of a safe and efficient transaction environment, avoiding cumbersome regulatory barriers that will affect SMEs playing a part in the digital economy. Online payments via platforms like AliPay, Apple Pay, and PayPal ensure that trade can occur across borders.” (from “Economic growth and development in Asia: What is the role of digital?” Voice of Asia, May 2017)
The Pace of Change
The speed of digital disruption and transformation is a global phenomenon, with a particular impact in Asia. “We are seeing a rapid transformation,” Vohra says. “We have seen companies come from nowhere to become big behemoths, in the digital space and in the traditional sectors. There is a lot of private equity funding consumptionled industries in India, which has transformed companies in terms of size, scale, and complexity into massive companies. India is seeing enormous, disruptive growth across the entire spectrum of industries and sectors.”
Is Asia developing at hyper-speed? “The pace of change is much faster than what we see in the western world because the economies in Asia are in catch-up mode,” Desmarescaux says. “We’re looking at economies that are growing in the aggregate 3-6% per year. Our low end in Asia is 3% which is similar to the US economy but much faster than the European economy. And if you look at specific sectors, for example healthcare, or education, you will have a growth rate that could be in the 10- 20% rate per year in aggregate. You don’t necessarily find that in developed economies because the levels of GDP per capita are already very high.”
To put the impact of Asian businesses in perspective, according to The Economist the retail sales market in 2018 will be $3 trillion in Europe, $5 trillion in North America, and $10 trillion in Asia.
“The challenges are not just the speed of change but the political and cultural nuances—there’s not a singular challenge,” Sutcliffe says. Optimistically he adds “and there’s plenty of opportunity. There is a lot of young talent here, however the problem is that people continue to recruit talent from clearly defined sectors or clearly defined demographics,” that may not meet future needs.
Legacies and Leap-Frogs
“Rapid technological advances open windows of opportunity for trailing or nascent economies to quickly take leading positions in prosperity-sustaining value chains without having to replicate the paths taken by more established competitors. The Fourth Industrial Revolution will definitely create fresh opportunities to leapfrog.”
- How business can win at leapfrog Mauricio Zuarua and Otto Schulz, World Economic Forum, January 11, 2018
Countries with developed economies have traditional infrastructure and oldline businesses with long-established systems, cultures and markets. Because many legacy structures like traditional retail, telecom and banking never made it to parts of Asia, digital alternatives are providing opportunities for these countries to leapfrog the established systems in developed economies.
For example, consider digital payments. Casey Hynes wrote in Forbes, “In 2017, there were 53.86 million internet users in Vietnam, and predictions show that number reaching nearly 60 million in the next four years. The proliferation of mobile phones have accelerated e-commerce growth there and throughout the region. But mobile wallets play an integral role as well, particularly in developing markets where a high percentage of the population is unbanked. As of 2014, just 31% of Vietnamese held formal bank accounts, which can be a barrier to accessing goods and services.”
A “Voice of Asia” report published by Deloitte in May 2017 showed that “Asian economies are ahead in digital engagement terms, with almost all Asian countries above the world average.”
Consumers in Asia are also likely to be early adopters and more accepting of new technology. This acceptance is reflected in the 2017 Freeman Global Brand Experience Study. According to Marketing-Interactive.com “31% of Asian companies use virtual reality, compared to only 7% to 9% percent elsewhere. Gamification is another growing digital integration, with 22% of companies in Asia utilizing this form of integration. This is compared to only 9% in North America and 13% in Western Europe.”
Desmarescaux explains, “In the last 10-20 years, many countries in Asia reached a level of development precisely at a time when new technologies were becoming available, so for example, some economies didn’t need to equip their countries with land lines because they could start directly with 2G and 3G.” He adds, “That allowed countries to develop digitally very quickly.”
“In Korea, e-commerce is now the largest retail channel and in Indonesia online retail sales are growing at a pace of around 50% per annum. While still in its infancy in Southeast Asia, one thing is certain, e-commerce is set to grow exponentially and will change the retail and consumer landscape as we know it.”
- Regan Leggett, Executive Director, Thought Leadership and Foresight, Southeast Asia, North Asia and Pacific Neilsen, September 3, 2016
Leapfrogging accounts in part for the speed with which Asia has been able to embrace digital transformation. Desmarescaux says, “Much of Asia is unencumbered with all the legacy infrastructure of the West, such as retail structure. If the West wants to modernize, it has to deal with the legacy first, which Asia hasn’t had to do because there was no legacy to speak of.”
For example, in an October 2016 McKinsey Podcast “Digital innovation in Asia: What the world can learn” McKinsey Senior Partner Alan Lau explained Sesame Credit. “In China, most people don’t have a credit history. What Alibaba has done with Sesame Credit is to say, “Based on your previous transaction history or borrowing history, I can automatically generate a score for you.” If you had a high enough score, that allows you to do things in a more convenient way. So, for example, if you have a score that is above 700, you can book a hotel without making a deposit. If you have a score over 800, you can get a visa to go to Europe without producing income proof. I think if you have a score also around 800, you can get a priority listing on the most popular dating sites in China. They’re creating all kinds of new cases, and other new ecosystems.”
Ding provides an example of one such ecosystem. “Xiaomi created an environment for consumers in which products are linked. This ecosystem connects products to the mobile phone, and has expanded to other industries.” Xiaomi started as a low-cost smartphone maker, and grew to become a massive online retailer that builds its ecosystem by investing in smartphone accessories, IoT companies, and other goods that benefit from Xiaomi’s distribution network. Ding says “Xiaomi created an ecosystem capitalizing on how crosssector industries are related.”
Desmarescaux describes ride-hailing giant Uber selling out to competitors Grab in Southeast Asia and DiDi in China as “the proof that a Silicon Valley company can come in, fail, and be taken over by an Asian company.” He says “that gives local startups the confidence that in digital technology, they have caught up to the West.”
Funding future growth
The region also appears to be inspiring confidence in venture capital and private equity. According to EY’s March, 2018 Private Equity Briefing: Southeast Asia, “The surge in fundraising for the Asian markets have been a major headline in 2017. The rise in fundraising activity reflects investor’s confidence in the region, which will drive activity in the upcoming quarters. We are already witnessing a strong start to 2018...”
“Performance, of course, is what drives investor interest, and for the past several years the Asia-Pacific market has delivered. Funds focused on the region have posted median internal rates of return in the 12% range for two years running, and top-quartile funds have been producing returns of closer to 20%.”
- Asia-Pacific Private Equity Report 2017 March 16, 2017 Bain & Company
Private Equity firms in Asia are flush with unspent capital. Vohra says, “In India there is a huge inflow of private equity, both with traditional legacy sectors and also in the digital and e-commerce world. That has, in turn, produced massive companies. We have a company in India which was started five or six years ago that is now valued at $21 billion dollars and has just been bought by Walmart.
Private equity is also flowing into newer economies—Philippines, Vietnam, places where private equity sees enormous opportunities for growth because they are relatively less developed markets,” Vohra says.
The EY Private Equity report also highlights the increasingly crowded and competitive environment and notes that competition has “driven the need for PE firms to articulate a differentiated source of value-add above and beyond their ability to invest capital.”
“The Chinese people have increased income, and appreciate a better quality of life,” Ding explains. “So anything that enhances the consumer experience has room to grow. In addition to tech, those startups get funding from private equity and venture capital because generally, there is more money than there are good projects.”
Desmarescaux describes the frenzy. “In Asia there is a very strong startup culture in the region, with thousands and thousands of companies being created. It has taken a while to get there, but clearly in the last five years there’s been a shift.”
There is also an apparent shift in companies’ willingness to accept capital investors.
“Resistance to corporate raiders in markets like Japan and South Korea is falling. In Vietnam, the government is practically opening the door to private equity. Warburg Pincus earlier this month agreed to invest more than $370 million in Techcombank as the lender prepares to list on the local exchange.”
- Nisha Gopalan, Private Equity's Money Problem, Bloomberg, March 14, 2018
“We’re starting to see a community of venture capitalists emerging in Asia; local firms as well as international firms coming to the region,” he says. And these firms are luring established, old school businesses as well as startups.
All in the Family
Family run businesses are prominent across Asia. According to Sutcliffe, “the family business model has a lot of advantages over the corporate model— they focus on the sustainability of their business, they can think 20 years ahead and don’t have to worry about quarterly results.”
Desmarescaux agrees. “Most companies in Asia are owned by families for two or three generations, and those companies by and large are run by the families. They haven’t had to bring in outside investors, and they don’t have to deal with shareholders like in the West. Even when families bring in professional managers to run the business they have limited say over the big decisions—family still runs the business.
Sutcliffe believes there are pros and cons on both sides. “Family business is an integral part of business in Asia,” he says. “You come across organizations like Ayala Group in the Philippines—they are forwardthinking with a broad base of leadership and a highly engaged workforce. Then you come across other organizations who are still in that hierarchical mindset.”
“The challenge is very often the leadership within the family business. It is what I would define as old school and very hierarchical. Will they have the agility to adapt to new competition and new ways of doing business?"
Many family-run businesses in Asia are recognizing the need to adapt in order to remain competitive. “A lot of family businesses have embarked on a journey of professionalization,” Vohra says. “The demand for talent in family-run businesses is going up, and there is an intense demand from family-run businesses to transform their businesses and make them more global, putting increased pressure on demand for talent.”
According to Bloomberg’s Gopalan, “While founding families are still running many firms—85 percent of Asia Pacific deals over the past five years have involved minority stakes—the value of buyouts surged 94 percent to $72 billion in 2017, making up 45 percent of the total transaction value in the region. That compares to an average of 38 percent from 2012 to 2016. Many Asian tycoons in their 80s and 90s, or as can be the case in China, even younger, are facing the fact their children are less than keen to take over.”
The China Story
Sutcliffe explains how business is evolving in China. “China is economically going through what can be described as a transition, moving away from being the manufacturing center of the world in an era of constant high growth, to one driven specifically by the internal consumer and service-driven market. China is seeing a slow-down in the rapid growth they’ve experienced for many years, and as a result the business perspective is transitioning from a fight for market growth to fight for market share.”
After the 2nd industrial revolution, Ding explains, “The key drivers for the emergence of different industries were mainly from the supply side: how to produce products at a lower cost, with standardized, precision processes.” Now, she says, “The trend is coming from the consumer, or the demand side. Industry has moved from a focus on how you make it to providing consumers with a complete solution: how you combine different industries to produce a finished good or a better consumer experience to meet my need."
Contending with this change demands a completely different approach to leadership and human capital.
Leading for the Future
If you are a leader today be warned: what got you where you are is not going to keep you there in the future.
“When we consider the China market and the transition from a fight for market growth to a fight for market share, it means much of the historic talent pool had grown up in an environment continually focused on market growth rather than market share,” Sutcliff explains. “That means they have a different set of skills—their focus is very much on topline growth rather than bottom line factors such as bottom line and productivity."
“Now, business leaders have to focus on very different things, such as productivity, the values of the organizations, their brand and their culture. The technical skills of Asia talent are very good. Whether the softer skills are there, I think that will be the future challenge, particularly as we begin to move into that future of work environment.”
Ding says, “When we assess CEOs and business leaders nowadays, we pay more attention to whether a person has high learning agility, and the courage to correct the decisions they made previously. The environment can change, and if the decision that was correct two years ago may be no longer the right decision, you may need to correct yourself.
The competencies of leaders are changing for businesses in China and across the region. Sutcliffe says, “One of the best expressions that I’ve heard around the talent conversation recently was ‘most organizations follow the Three B strategy of buy, build, or borrow. We’ve now moved to a Four B strategy: buy, build, borrow or bot.’ The implications are that with AI technology, people are going to have to be more creative. The creativity of leaders and the creativity of talent and the agility of talent is going to become more important. And this applies to the whole region.”
Desmarescaux observes that talent will also have to develop skills that work across cultures. “With the exception of China and maybe Indonesia, none of Asian economies are large enough to represent a domestic market sufficient for a company to really go big. Asian companies have to become international very quickly. You need managers who are comfortable managing across cultures, managing across different regulatory systems, who don’t mind being on a plane all the time.”
There is also the issue of competition for talent. Vohra says, “When we look at Asia, we need to be cognizant that ASEAN almost operates as a single block, so within the ASEAN countries there is intense competition for talent, and typically for roles that have always been in short supply, such as chief digital officers, where demand outstrips supply.”
To add to the competition, candidates may come to the process with elevated expectations. The 2013 CEB/Gartner research report “Three Key HR Risks in Asia” indicates employees in Asia are “3x more expensive to recruit than employees in Europe; and expect to get promoted 30% faster than global peers.”
“As technologies continue to evolve, basic numeracy and literacy and familiarity with digital technology will be essential. In this regard, improving the effectiveness of schools and education systems is a priority in many countries in the region where most students are in school but many are not learning.”
- East Asia Pacific Economic Update, April 2018: Enhancing Potential, The World Bank, April 2018
As business in Asia continues to transform, so must its leadership. Vohra says, “If you look at the great companies, it’s their ability to hire, train and mentor the best leaders that differentiates them. It’s the human capital element.”
Ding speaks of the value of courage. “Leaders are aware of the urgency to change, but sometimes the change means the leader at the top as well as the senior leadership team need to admit they are no longer that valuable to the company. So for transformation, leaders may have to dismiss themselves—and that is painful. It is uncommon to find a leader who has the courage to make decisions against their own self-interest—it requires huge confidence to act against their human nature.”
Sutcliffe recognizes some bias as the rest of the world looks at the rapid rise of business in Asia. “When one picks up the Harvard Business Review or the McKinsey Quarterly and one considers business and how business operates, it’s a Western model—Asia has that diversity of culture and thousands of years of history to be able to create ideas and ways of doing business that are Asia-centric. I think the rest of the world needs to consider what Asia is doing, instead of simply following the Western model.”
What’s the difference? “In Asia, in a high growth environment, you spend more time managing your opportunities than managing your business. In the West you spend all your time managing your business and hardly any time managing your opportunities.”
Desmarescaux notices the pace in Asia is different. “We see that anecdotally, the pace at which business is conducted in Asia. There’s not a sense of urgency from businesses in Europe that we deal with, where in Asia, people want to work very fast to catch up. The attitude by and large in Asia is that tomorrow is going to be better than today, so people are eager to progress, work hard, and capture opportunity.
Vohra shares that optimism. “There’s more than enough capital chasing business ideas today, and there is so much disruption! There are enormous business opportunities. And whether it’s in the digital world or in the old world, in the industrial economy, the family run business, or a multinational conglomerate, the ability to harness human capital will make all the difference.”