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SpirE-Journal 2006 Q3

Asia Pacific Outlook 2007

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Asia Pacific Outlook 2007

In this edition, we interview Spire’s Group Managing Director Leon Perera for his views on trends that will impact Asia Pacific’s marketing and economic landscape in 2007 and beyond.

Spire E-Journal: China, India and other developing economies are fast rising, having accounted for more than half the world’s GDP growth (measured at purchasing-power parity) last year. What does this mean for the future marketing strategies of international companies?

Leon Perera: Competition for the price-sensitive dollar in the Asia Pacific is driving innovation in branding and product strategy. I would expect that more companies in the region will innovate in addressing the mass-market opportunities created by income growth among low- to middle-income consumers in giant markets like China, India and Indonesia.

In a sense, this reflects the “Base of Pyramid” marketing strategy theorized by C K Prahalad, author of “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits”. There is a huge potential profit to be made from the underserved lower income group, though the obstacles to realizing this profit are somewhat daunting.

With marketers paying more attention to the low-to-middle income mass market, we also expect to see Indonesia regaining some of the corporate investment and attention that it lost in 1998. Being home to the world’s fourth largest population and experiencing close to 6 percent GDP growth, Indonesia’s status as a key market in Asia will trail China and India more closely in years to come.

International firms are struggling with low-cost Asian competition (particularly made in China products) in the price-sensitive segments of their markets, auto parts makers and some industrial product makers being among the hardest hit.
Options to capture price-sensitive segments include second brands, “no frills” products and remanufactures.

Grameen Bank’s strategy in Bangladesh is a good case in point. Another is GE Money’s EZcash scheme in Singapore, which has been a huge success. Their advertising targets those with low-to-middle levels of income who have difficulty acquiring credit cards. Emphasis is on points of presence in the “HDB heartland” via partnership with SingPost.

On the industrial front, many international brands are launching second brands to compete with cheap made-in-Asia products. Power tool brands like Makita and Hitachi have launched made-in-Asia “second brands” while commercial vehicle manufacturers like Caterpillar are selling remanufactured parts alongside brand new genuine parts. Chemical manufacturer Dow Corning has launched a B2B online sales brand called Xiameter to sell chemicals in bulk volumes at low prices, but with lower levels of pre-sales service.

SEJ: You mention focusing on the “base of pyramid” segment. Should marketers adopt any particular strategy to reach out to the mass consumer market?

LP: Marketing strategies are constantly evolving to suit the context. In this age of technology, the Internet has become one of the most powerful means of outreach to customers of all segments. Internet use in Asia is exploding. Broadband penetration rates, already extremely high in Korea and Japan, are also growing explosively in the rest of Asia.

The rise of highly involved “e-communities” is one important channel allowing vendors to reach out to consumers in new ways. The emergence of these personalized Internet spaces is changing the rules of the game. Personalized Internet forums and communities will offer a far more effective way for marketers to reach out to target segments in future, leveraging peer to peer linkages for “word of mouth” recommendations, referrals and collective buying.

In Korea, world-leading levels of broadband penetration have facilitated the emergence of an estimated 34 million personal or small-scale e-community sites and over 10,000 sites with over 1,000 subscribers (Spire estimates some 50,000 such sites across Asia). Participants in these e-communities are linked by a common interest or profile, and interact in a radically egalitarian manner,regardless of social status.

For marketers to truly make the most of these e-communities, though, they will need non-traditional models of engagement that are subtle and non-intrusive, given the well-known propensity of e-communities to be suspicious of commercial agendas.

Coming back to the subject of price-sensitive consumers, we also see a bright future for the phenomenon of “team buying.” This refers to collective buying by household consumers at bulk discounts. Internet malls, like Japan’s Rakuten, allow users to “team-buy” products – securing discounts when buying in bulk with friends, family, colleagues, or simply like-minded acquaintances. Team buying can also be seen in the Singapore Motherhood forum, an e-community enabling mothers of young children to post messages, seek help and take part in conversation strings, but which also facilitates “team buying” of baby products. Discounts from team buying on this site can go up to 30 to 40 percent off single unit e-purchases.

SEJ: The consumer marketplace is certainly evolving at a rapid pace. From the corporate perspective, what are the key changes you see in doing business in Asia in 2007?

LP: The watchword is in-sourcing, which refers to the placement of internal backoffice facilities in low-cost locations, rather than outsourcing those activities to third parties. In the course of our work, Spire has seen a great deal of interest in in-sourcing IT, with back office activities being located by international companies in China, India and to some extent Singapore and Thailand. Going forward, we believe work that is mission-critical, knowledge-intensive and customization-centric will increasingly be in-sourced rather than outsourced. Ultimately, however, most organizations will pursue a balanced delivery strategy and take the selective outsourcing route – keeping some services in-house and outsourcing others.

In terms of organization structure, Spire’s research has shown that international companies in Asia are increasingly creating separate Regional Headquarters for North and South Asia. Our research clearly shows that Singapore’s position as an RHQ for manufacturing companies is fairly secure, though not immune to competition. Going forward, many international companies may be tempted to locate a South Asia headquarters in Singapore (with Thailand and Malaysia providing keen competition) and a North Asia headquarters in Hong Kong, Shanghai or Beijing.

Foreign direct investment (FDI) in Asia’s manufacturing sector is not new, but competition to challenge China’s position is. While China will remain Asia’s most attractive location for manufacturing investment by a wide margin, many international companies are quietly increasing production of FDI into India and Vietnam, to diversify risks and tap into the domestic market in these countries.

The development of Special Economic Zones in India is likely to usher in a sharp increase in FDI into India, especially in the telecommunications, biotechnology, electronics and automotive sectors. Over 150 SEZ projects are underway. FDI will continue to pour in. Nokia, for example, now manufactures 10% of its global mobile phone volume in India.

With entry into WTO likely in 2007 and its history of often being Asia’s secondfastest growing economy, Vietnam is poised to suck in more manufacturing FDI from multinationals wary of placing too many eggs in the China basket.

SEJ: What industries in Asia-Pacific will see the most exciting developments in 2007 and beyond?

LP: We see renewable energy as a huge business opportunity going forward. Aside from governments meeting their Kyoto protocol obligations, public concern over air pollution will be a major impetus driving the adoption of renewable energy.

China will continue to lead the world in the deployment of small-scale solar power cells, primarily for home water heating. Looking ahead, China will become the world’s key market for the testing and commercialization of home solar cell technology, driven by government concerns over energy security and air pollution from coal-fired power generators.

China is easily the world’s biggest market for solar energy, accounting for roughly three-quarters of the world’s new solar panel collector capacity; the next largest region is the whole of Europe which accounts for about 10 percent. Even in per capita terms, China’s solar collector capacity of over 6 kwth. per 1,000 inhabitants now places it in fifth place, which means it has overtaken the stagnating German market in 2005.

Another renewable energy source that is poised for exponential growth is biofuel, and in particular biodiesel. Asia is uniquely positioned to become perhaps the major producer and consumer of biofuels in the world. One example of a biofuel variety is Jatropha curcas, a plant growing in tropical/subtropical climates which is used to produce biodiesel. Many Asian countries aim to develop cultivation of Jatropha, or encourage refining of Jatropha oil into biodiesel, to benefit from the migration towards biofuel, while also encouraging use of biofuel in their own countries to reduce emissions. Jatropha and biofuels in general represent an enormous opportunity for energy, agri-business and automotive companies. Indonesia is poised to benefit from this trend as it possesses much cultivable land for this crop. The Indonesia government has developed a five year plan to grow Jatropha to be used to develop biodiesel for domestic use.

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