EcDev Journal

Strategic Alliances in Asia Pacific

Posted on Thursday December 17, 1998

by Stephen Li (1998 Issue)

IT IS WIDELY RECOGNIZED that over half of the global economic growth is generated by the Asia Pacific Region, an area comprised of a number of countries at varying stages of economic development. These range from the industrial and prosperous nations of Japan, Australia and New Zealand to the impoverished nations of India, Pakistan and Bangladesh. In between are rapidly-industrialized regions and nations such as Hong Kong, Singapore, South Korea and Taiwan, often referred to as the Small Asian Dragons. The rest of Asia includes Thailand, Malaysia, Indonesia, the Philippines, Vietnam and Burma. Significantly, the Asia-Pacific region is identified by Global 1000 companies as the top target for strategic investments.

Asia has achieved rapid economic growth over the past 15 years or so despite the collapse of some Southeast Asian economies in the early 1970s. The industrial nations of East Asia will continue to achieve dynamic growth and present significant opportunities. Japan is expected to return to a pattern of expansion following a sharp deceleration between 1992 and 1995 associated with overpriced asset values and restructuring of the country''s financial sector. The heavily-populated nations of India and Pakistan will enjoy respectable GDP increase as they aggressively attempt to industrialize, but growth will not be sufficient to lift them out of Third World status at any time during the foreseeable future.

China by contrast, will enjoy robust growth and achieve significant industrialization in response to the introduction of market incentives over the past five to seven years. Prospects in the remainder of the region are mixed with the germinating market economies of Indonesia, Malaysia and Thailand holding very good prospect.



POLITICAL STABILITY
About half the people in the Asia-Pacific region are able to elect their government leaders in generally free and fair elections. The people of South Asia number about the same as those in China and have democratic parliamentary institutions to represent them. China is the single most populous country in the region and is among the most politically repressive. Both the democracies and the autocracies of the region have the potential to be politically unstable during the next few years. Low-intensity religious and ethnic strife is bound to continue throughout the South Asia subcontinent. This has been a feature of life for many decades and is likely to present a major threat either to regional security or to growth in the subcontinent. It will, of course, continue to impede the pace of economic reform and to tarnish the image of this subregion in the eyes of foreign investors.

There are doubts over China's political stability. However, analysts contend the break-up of the country is highly unlikely during the next five years. Policy inertia would leave the structural weaknesses in the economy, in particular the need to overhaul loss-making state enterprises, locking the economy into a constant "stop-go" cycle of inflationary growth followed by draconian clampdowns on credit. If Hong Kong's role as an international financial and shipping centre is threatened, there are few places in Asia other than Tokyo ready to take up the displaced business.

The ASEAN countries are likely to remain stable despite the latent threat in the Philippines and Indonesia. Japan, Hong Kong, Singapore and Taiwan will also remain socially stable for the rest of the decade. North Korea is still a major concern. A unification of Korea, if it ever happens, would put tremendous pressure on South Korea both socially and economically.


RAPID GROWTH
The Asia-Pacific region will be the most rapidly growing part of the world over the next 10 years, expanding by an annual average of 6.4 percent. The commitment of nearly every government in the region to economic liberalization, privatization and the streaming of top-heavy bureaucracy will remain strong.

Governments that spend billions of dollars on infrastructure projects in these emerging markets provide huge opportunities for foreign investors. Foreign partners and investors can also take advantage of the abundant supply of competitive labour in this region.

With the growth in economies, this region is hungry for new technologies to enhance their productivity and consumer products to better their standards of living.



STRATEGIC ALLIANCES
In recent years, virtually every business leader has considered the possibility of forging an alliance of some kind. Every day brings announcements of more than joint ventures, cooperative agreements or minority equity swaps between companies even among some that were previously head-on competitors.

The principal objective, is almost always to get access to new technologies, to manufacturing capacity, to markets and distribution, and to service capabilities.

Alliance generally requires the partners to contribute some of their managerial or technical expertise to the partnership. This transfer of knowledge can be a valuable source of innovative ideas as it requires the partners to prepare a detailed explanation of operations with which they are very familiar and probably have not examined objectively for some time. Ideas for improvement tend to be stifled by habits that no one questions. Alliances typically involve applying knowledge under different conditions, such as a new market, or with a new workforce or new material input. Knowledge is put to the test and this can generate valuable ideas. Alliance can also help in understanding the market conditions in the partner's market and respond to them by applying local knowledge and practice, which in turn enhance market acceptance and competitiveness.

With the rapid economic growth in the Asia-Pacific Region, numerous North American companies, big and small get into this emerging market through direct investment and strategic alliance with local partners. Such strategic alliance is not only a response to the need for economies of scale but often a reaction to competition and elimination of cross-border risks. A joint-venture with a foreign partner can take advantage of their local market knowledge to react to changing needs. Another way to do it is to create a network of local distributors who can carry your products and advise you of the market conditions and needs.

There are also numerous professional legal, accountants and consultants firms of international standing who are readily available for advice on international businesses. Multi-national financial institutions also provide assistance not only in financial transactions but credit information on local trading partners.

The role of government support programs for Canadian companies seeking to capitalize on foreign sale opportunities is changing, as government faces the challenge of its own, often difficult, fiscal situation. It has become imperative that government and financial institutions work together to help Canadian companies find success in foreign markets. While the federal departments of Foreign Affairs and International Trade play a central role in supporting Canadian companies in export trade, there are also a number of crown organizations which make important contributions. They are :

  • The Canadian Commercial Corporation (CCC). It provides exporters with valuable help when selling to a foreign government or international organization. CCC will act as prime contractor and guarantor for the Sale of Canadian goods and services to the foreign customers.

 

  • The Export Development Corporation (EDC). It provides risk management services, including insurance, financing and guarantees to support exporters and their global customers. EDC can insure virtually any type of export, including electronic and technological equipment, raw materials and commodities. Their insurance services protect receivables against losses caused by commercial or political events.
  • The Business Development Bank of Canada (BDC). It provides specialized funding for small and medium-sized enterprises that are commercially viable. EDC can provide term loans, venture loans and venture capital, plus a wide range of export planning, counselling and training services.
  • Program for Export Market Development (PEMD). It provides grants for export marketing development such as trade missions and trade shows held overseas.
  • Canadian Trade Commissioners.  

RISKS OF DOING BUSINESS
All cross-border trade and business carry risks at one level or another. These risks can be categorized as "macro" or large-scale risks and "micro" or company-level or product risks.

Marco risks are grouped into "country risk," "foreign exchange risk" and "fraud."

Country Risk can be defined as political or economic events impeding a payment obligation. This category includes foreign exchange control, labour strikes or government instability. Therefore, it is vital to understand the local business practice and political system. Most international financial institutions and trade offices provide information and analysis on country risk rating.

Foreign exchange is important in doing international business. Exchange rate fluctuations caused by various economic, political and sometimes speculative reasons create uncertainty in currency value which can impact or even eliminate narrow profit margins. There are some bank mechanisms available, such as forward foreign exchange contracts, which can eliminate most foreign exchange risk.

Global trade provides many opportunities for exciting and profitable business ventures. Unfortunately, along with these opportunities, come some carefully developed fraud schemes. Fraud can take the form of misrepresentation in documents and contracts, a counterparty not delivering goods as agreed, insurance fraud, cargo theft or outright piracy. It is difficult to identify all the methods used to defraud individuals and businesses, but one should watch out for some of the common fraud schemes such as prime bank note or standby letter of credit frauds, bogus securities, illegitimate shell banks, counterfeiting of currency, credit cards, stocks and bonds.

One should reduce his risk by obtaining trade and credit information reports from his bankers or government trade offices. Do not hesitate to consult your counsel to discuss the deal that has been presented. They can assist you to determine the authenticity of the transaction and will maintain confidentiality.

Micro risks include product, payment, remoteness, market information and cultural differences.

In doing cross-border business, it is vital to understand the foreign market, whether the product is acceptable or adaptable to local needs. Due to the remoteness of the market, payment and market information are often problematic. Understanding the business practice and working closely with your joint-venture partners can reduce some of these risks. Doing business in the Asia-Pacific region means dealing with over a dozen of countries with different cultures. Start with a few countries that best accept your products or technologies in order to form a solid market base before moving into other jurisdictions. Very often customization of your products is necessary to meet the local needs.


RESEARCHING THE MARKET
It is absolutely important to do your homework. There are numerous international market research firms and business consultants who can provide valuable advice and market data on market conditions, local business practice, government rules and regulations, taxation, and credit information on business partners.

Suitcase selling is no longer applicable to sustain long term growth. It is vital to establish your presence in the market you are in by setting up a representative office or a joint-venture with local partners.

It is always advisable to have at least one of your own representatives in the management team of the joint venture. In setting up a joint venture, make sure the joint-venture agreement is carefully structured to include a sell and buy-out rights between the parties.

It is not surprising that joint-ventures do not have long life expectancies. The trouble starts when the market begins to grow. Suddenly, new capital must be committed and the venture is re-evaluated by the two parties. One party walks away with capital gains, the other with ownership of the venture.

Due to the recent rapid growth in most Asian economies, it becomes rather costly to set up operations in this region. One should be mindful of the cost and always leverage on strategic allies and their infrastructure and networks. Rent and management compensation packages in the more industrialized countries like Japan, Hong Kong and Singapore are rather high. Qualified and competent management expertise is available in this region and one should recruit a local management team in order to reduce high expatriate costs.

In other to be successful in doing business in the Asia-Pacific, one should take a longer term view and be patient in developing a good relationship and network. Sufficient financial planning should be made to nurture a new joint venture.



ABOUT THE AUTHOR

 

STEPHEN Y. S. LI is a partner of Quorum Funding Corporation, a Toronto-based private fund management company incorporated in 1985 with two branch offices in Vancouver and Calgary. The company also manages an Asian operation headquartered in Singapore with offices in Hong Kong, Taipei, Seoul and Tokyo.

Li joined Quorum in 1988 having moved from Hong Kong where he held a senior management position with the Hong Kong government. He is a graduate of Hong Kong Polytechnic University with a Diploma in Management Studies; a member of the British Institute of Management; and a Board of Governors member of Mount Sinai Hospital, Toronto.