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The New Multinational Mission in Asia

HCLI Research

Published 10 December 2015

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Is the era of the multinational corporation (MNC) over? Professor Peter Williamson, University of Cambridge, looks at how MNCs can learn from — and compete — with rising local players.

With growth across the US, Europe and Japan struggling to get beyond 2%, the CEOs of the world’s multinational corporations (MNCs) are counting on emerging markets to meet their sales targets. The Association of Southeast Asian Nations (ASEAN), with more than 600 million people, and an expanding number of middle-class consumers, is the world’s third-largest potential market and one that ranks high on MNCs’ agendas.

It used to be assumed that MNCs were going to take over the world. Their leading-edge technologies, superior products, efficient systems and established brands would allow them to easily out-compete local companies. But MNCs were in for a shock: local champions provedto be formidable competitors. As Unilever’s CEO, Paul Polman, recently told The Financial Times: “We don’t see Procter and Gamble as our toughest competitor. Most of our competitors in emerging markets are regional players.” This sentiment appears widespread. A 2014 survey by the Boston Consulting Group revealed that 73% of large MNCs consider that local companies are more effective competitors than other MNCs in emerging markets.

MNCs are right to be concerned about increasingly competitive local players. Consider laundry detergent, long thought to be the preserve of global fast-moving consumer goods giants. In Indonesia, the largest market in ASEAN, the top four MNCs have 44% of market share. However, the top four local Indonesian players have surpassed them by 4%, with 48% of market share.

This trend was repeated across other verticals and sectors. But why is it happening? And what should MNCs in ASEAN be doing about it?

The Decline of MNC Advantage

For many decades, MNCs made large returns by efficiently moving product designs, technologies, management systems and company cultures across countries and markets. But the march of globalisation is undermining this advantage. Local players can source world-class technologies, components and know-how from anywhere in the world,and then use these resources to upgrade their products and services. Outsourcing by MNCs has created suppliers who now sell ‘plug and play’ modules that ASEAN competitors can purchase to create world-class products.

Local champions now employ dozens, sometimes hundreds, of foreign experts to fill gaps in their knowledge and capabilities. Local firms are also tapping into global professional services firms’ expertise, and there are large numbers of top-tier students from emerging countries returning home after graduating from the world’s best universities.Local companies are also making acquisitions overseas, giving them access to capabilities and knowledge that would otherwise take decades to accumulate. In ASEAN, this has seen MNCs lose their monopoly on world-class technologies, know-how and talent in local markets.

Home-Team Advantage

While globalisation is helping local companies match the resources deployed by MNCs, these locals can also deploy home-team advantages. These advantages arise because local companies have deeply integrated themselves into the national fabric of their respective countries.

Although MNCs have learnt to adapt their products and services to local conditions, adaptation is no longer enough. McDonald’s flavouring its Big Mac burgers with soy sauce and garlic in the Philippines or using halal beef in Indonesia or Malaysia simply will not cut it with consumers anymore. MNCs are competing against affordable products of the same, or better, quality that are offered by local companies who are perceived as pillars of their local communities or national champions. In order to restore their declining competitiveness, MNCs need to become better integrated locally in ASEAN markets.

Strategies for Matching Local Competitors

Some leading MNCs have embraced local integration. This has enabled them to match many of the benefits enjoyed by their local competitors in ASEAN. Here are five steps that MNCs can take to ensure local integration:

1. Engage with Customers’ Daily Lives

By working closely with local influencers, lead users and grass-roots distributors, MNCs can expand their market share and embed their brands into local networks and customers’ lives.

When Peruvian beverage company, AJE, entered Indonesia in 2011 it was to challenge the large MNCs Coca- Cola and Pepsi — a strategy most observers thought suicidal. However, in just four years AJE secured 40% of the Indonesian carbonated soft drink market. Antonio Soto, Head of AJE in Asia, attributes their success to engaging with customers through local channels.

In 2014, he told The Financial Times, “We understand that for customers earning a few dollars a day, value is all about a product tailored to the money in their pocket… We don’t create our brand by having huge shelf displays for [AJE’s flagship brand] Big Cola in supermarkets. Instead we work with local retailers and distributors to get the product out to the mini marts, small eateries and street stalls where lower-income Indonesians spend their cash.”

2. Partner with Local Suppliers

MNCs need to establish long-term partnerships with local suppliers that enable the local suppliers to improve their quality, productivity and innovation. In 2011, Singapore-based agribusiness company, Olam International, entered the coffee business in Vietnam. Olam was already buying black pepper from local Vietnamese farmers, many of whom were also producing coffee on the side. So the company approached these farmers and stationed highly qualified managers in rural Vietnamese villages in order to build trust.

Once trust and transparent communication was established, Olam helped these farmers finance expansion of their coffee acreage and set up a local coffee processing factory. This deep integration means Olam can provide guarantees of traceability and environmental certification — something its competitors, buying through middlemen, cannot easily match.

3. Develop the Local Talent Pool

MNCs in emerging markets often encounter skills deficits. Some companies adapt job specifications to align with available skills, but when Rolls-Royce built an advanced manufacturing and research facility for aircraft engines in Singapore, the British manufacturer decided to address the local talent gap in an entirely different way. Rolls-Royce worked with Singaporean tertiary institutions to create a new degree programme in aeronautical and aerospace technology, which would teach 2,500 qualified local technicians the skills that Rolls-Royce required. As a result, the company was able to dramatically expand its local talent pool, and help build a new industry in Singapore.

4. Shape Regulations and Institutions

All organisations must conform to local laws and regulations, but the emerging ASEAN markets often suffer from institutional voids — gaps in the rules, distorted regulations, and failures in policy implementation. However, local organisations often seek to turn this situation to their advantage by helping shape new regulations. When the Philippines’ oldest and largest conglomerate, the Ayala Group, established BanKO, the first mobile phone-based savings bank in the Philippines, it worked with municipal and provincial governments to enable government employees, teachers and students to receive their allowances and stipends through their mobile phones. Ayala also worked with the national government to move international disaster aid through BanKO’s mobile platform. MNCs need to become similarly proactive in shaping local regulations and institutions.

5. Promote Societal Development

MNCs are often viewed by local societies as acting purely in the interests of foreign shareholders. Instead, MNCs must implement strategies to help local societies achieve their goals and aspirations. In his book, Re-Think: A Path to the Future, Sam Palmisano, the former CEO and chairman of IBM, argues: “[IBM] didn’t simply enter markets… We made markets, working with leaders in business, government, academia and community organisations to help advance their national agenda and address their societal needs.” For example, in June 2014, IBM began partnering with nine Thai universities and the Thailand Management Association to develop big data and analytics capabilities for education and business in Thailand. MNCs that can demonstrate an investment in local society will reap broad societal support that helps propel their business forward.

A New Multinational Mission

If MNCs are to become locally integrated and compete with local companies in ASEAN, in-country and headquarter-based executives, as well as the global organisation, will need to change. They will need to look beyond the global strategies that have dominated their thinking over the past 30 years and embrace a new mission: integrate locally and adapt globally.

This article first appeared in HQ Asia, Issue 9 (2015).