So, how does one conduct business in countries with limited rule of law and transparency? As my associate and Southeast Asia analyst Jose B. Collazo have shared in a range of media, including in the Straits Times of Singapore – deemed by the World Bank as the best place to do business – and discussed in forums across the region, there are lessons to be learned from business professionals already operating in some of Asia’s frontier markets.
Such lessons may well be more and more relevant as the golden age of China as the leading market opportunity has lost a bit of luster.
Indeed, Microsoft’s Nokia handset division has announced the elimination of some 9000 jobs in Beijing and Dongguan and they are not likely to be the last as China’s economy continues to slow. The news coming out of China and the National People’s Congress these days is certainly not what the business investors have been used to, as a “new normal” of slower economic growth – down to about 7 percent – takes hold.
China will remain a critical market, but all is not well despite China’s historic economic rise. Concerns persist about toxic air and contaminated water – underscored by a now banned documentary on pollution, Under the Dome, that had attracted hundreds of millions of views – and the feeling among some foreign companies is that they are being unfairly targeted with investigations that their Chinese counterparts are not. One result is that even international businesses once enamored by China’s more than a billion consumers are rethinking the market.
The Motorola announcement of the closure of the two Nokia mobile phone production facilities came with the news that some of that employment and investment will move to Vietnam. Japan’s Citizen Holdings also recently closed a watch factory in China’s Guangdong Province, and Panasonic has announced that it will cease LCD television production in China.
As the world’s number 2 economy continues to slow, businesses may well find new opportunities for growth and returns beyond China, on Asia’s frontiers, whether Mongolia to the North, Sri Lanka further southwest or in the heart of Southeast Asia. An Association of Southeat Asian Nations (ASEAN) Economic Community is to be established by end of 2015, offering investors a 10-nation market, and the promise of greater opportunities and returns.
Whether in energy-rich Timor-Leste, or reemerging Myanmar (Burma), however, eager investors must beware and be wary of economic and geopolitical risks. The findings of the World Bank “2015 Doing Business” survey make clear, for example, that significant business challenges remain in many parts of the Asia and Pacific region, including in Southeast Asia, despite much of that region’s overall solid growth rates.
Singapore continues to rank No. 1 in the world for ease of doing business. But many so-called frontier economies continue to be characterized by pervasive corruption and weak governance and rule of law. Such developing markets also often lack the regulatory and financial institutions found in other more economically developed destinations in the region such as Malaysia and Thailand.
Yet, signs, literally, that opportunity exists even on Asia’s frontiers are easy to find. In Cambodia, for example, billboards from multinational businesses and brands dominate streetscapes. Ford and Coca-Cola are just two of the consumer brands that U.S. First Lady Michelle Obama is likely to notice during her upcoming, March 18-22, visit to Japan and Cambodia as part of a trip focused on international girls education. Overall, according to the U.S.-ASEAN Business Council, the amount of U.S investment in Southeast Asia surpasses U.S. investment in Brazil, Russia, India and China – the much-touted BRIC nations – combined.
My associate Collazo and I suggest six best practices to consider as companies increasingly diversify away from China.
First, be realistic about your timeline for success. International brands have succeeded in part by taking a longer-term view to networking and to developing relationships with local partners.
Granted, relationships are important in every country, but this can be particularly true in parts of Asia. As with marriage, trust needs to be built over time before a commitment is agreed to, and just as in a marriage, the hard work begins when the signing ceremony ends.
Second, leverage local talent. This can include local nationals who work with locally-based business organizations such as chambers of commerce. They, and other organizations as well as law, accounting and consulting firms with local expertise, can help with introductions and provide valuable insight into the nuances of the local business environment.
Third, recognize you are not alone. There is strength in numbers. Businesses that have done well in nations where corruption is endemic have often partnered in efforts to change the environment in their favor by together refusing to take part in illegal business practices.
Fourth, educate your local partners of the consequences to violating anti-graft laws. Local business partners may well be unaware that foreign laws, such as the United States’ Foreign Corrupt Practices Act or the United Kingdom’s Bribery Act, apply to multinationals outside their own country. Local partners may well assume that because you are doing business in their country you are not required to abide by the laws back home.
Fifth, understand and address the challenges of corruption’s close cousin: cronyism. Many businesses entering Asia’s frontier economies seek to do so in partnership with the family and friends of the political elite. Companies that follow this approach must be aware of both the benefits, and the potential for extreme downside. The power imbalance in the relationship along with deficiencies in the regulatory environment can make it difficult to fairly resolve any disagreement should the partnership go bad.
Finally, and most importantly, don’t hesitate to walk away from a deal. Or, as in the case of Nokia in China today, to shift and to adjust as one market opportunity closes and another opens.