Why companies are dissatisfied with their globalisation strategy

Long before US President Barack Obama acknowledged it, it had already become the decade of Asia.

Companies from Asia - particularly companies from Japan, China, Korea and, increasingly, India - have been leading, and dominating, the growth of globalised business.

The number of multinational companies in the world trebled in the past decade. And an increasing number of these new globalisers have been from India.

East’s rising suns

International investments by Indian companies more than trebled between 2003 and 2013, according to consultancy major Accenture. Outbound investments grew from around $10 billion in 2003 to $37 billion in 2013. And, while ten years ago, just eight per cent of the investment was in mergers and acquisitions (M&A), the share of M&A in all outbound deals has climbed to a third.

But whether it is Apollo Tyre’s complex negotiations with unions in an American takeover target, or Ranbaxy’s struggles to exit China, the new breed of global Indian companies have also discovered that the world, all of a sudden, has become far more complex, volatile and uncertain than they had imagined.

As the newly emerging Asian globalisers go toe-to-toe with more seasoned international players from the developed world, there are new reasons to go global, as well as new challenges in doing so, an Accenture study of the growth strategies of Asian companies has revealed.

Accenture spoke to the CEOs of around 250 Asian companies - from the original trend-setters in crossing borders from Japan and Korea, to the new kids on the block from India and China, as well as from some of the smaller ASEAN ‘tigers’ and Australia and New Zealand, which have also thrown in their lot with Asia in a bid to ride the Asia growth story.

Charting a new trail

“Asian companies expanding internationally have recently found themselves in a unique and enviable position,” says Accenture. “High-growth domestic markets, Government support, lower valuations of takeover targets and ready access to capital have provided unprecedented opportunities to journey to new markets in Asia and around the world.”

However, the study warns, Asian companies cannot simply replicate the strategies and operating models employed by earlier globalisers.

Not only is the environment radically different post-meltdown, but with rising competition, decreased barriers to entry and increasing regulatory complexity, the old models are no longer relevant.

As strategy, “cheap and cheerful is no longer sustainable,” avers Paul Gosling, Senior Managing Director, Management Consulting, Asia-Pacific of Accenture. Simply relying on lower cost operations may work in the short-term, but most Asian players recognise that it is not sustainable as a strategy over even the short to medium-term, he says. In fact, respondents felt the importance of ‘low cost operations’ will fall by as much as 60 per cent within three years.

What will work, however, is a more difficult question to answer. “What struck us was the level of frustration and indeed disappointment expressed with their activities,” says Gosling. Just 34 per cent of Indian companies, for instance, felt that their companies’ revenues and profits from international operations have grown in line with expectations, only marginally better than the Asian average of 28 per cent.

When the going gets tough

However, “90 per cent were determined to continue. Disappointed, yes, but not deterred,” says Gosling.

The reasons to this surprisingly high level of dissatisfaction have as much to do with who is doing the investing, as where and how, he adds. Japan, for instance, was the top Asian globaliser in 2003, with 40 per cent share of all outbound investment in Asia. A decade later in 2013, it was still number one, with an identical share.

“Japanese and Korean investments have been driven by the need to grow revenues,” Gosling points out. “They have typically been greenfield, setting up new plants and taking their brands and products to new geographies.” This, understandably, has been difficult to execute. “That’s a tougher road to travel,” he points out.

The ‘where’ reflects this, with the bulk of the investment going predominantly into Asia itself, as Japanese and Korean giants expanded.

Today, particularly in India and China, the drive to globalise comes from the need to access technologies - like when China’s Geely Motor bought Volvo; or the need to secure resources - which has driven expansion by Chinese and Indian energy and steel companies; or to acquire a valuable brand at bargain basement rates - like Tata’s Jaguar Land Rover buy.

In some instances – like that of the China Construction Bank - it has even been to support home customers as they globalise.

So, what are the key lessons that the new breed of globalisers can learn from the experience of the trail blazers? “There is no single model but there are some things,” says Gosling. The first is to have “great clarity of purpose”, he says, “know where you are going and align what you are doing with it.”

The biggest lesson, he says, is to be aware of the actual challenges on the ground. “Awareness of the challenges will enable future globalisers to plan better and focus on things to get right,” he says.

Accenture’s other key recommendation is to identify what will be the basis of differentiation in a crowded marketplace - and being cheaper is not the answer.

And equally important, invest in talent and leadership development. “It doesn’t matter what you do - whether you’re transplanting your son, or hiring local talent - make sure that you invest in their development,” Gosling advises.

raghavan.s@thehindu.co.in

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