Originally Published MX November/December 2002
BUSINESS PLANNING & TECHNOLOGY
Setting Up Operations in the Asia-Pacific RegionDeciding why is easy, but deciding where may not be.
Dennis W. Smith
For example, while finding qualified staff is hard anywhere, the difficulty is greater overseas, involving issues not previously considered: work visas, home leave, State Department travel warnings, restrictions on women working at night, employee intellectual property issues, and limits on ownership of stock options being among them. In America a male boss does not give away his female employee at her wedding, nor advise a staff member on whether he should marry his girlfriend. In Asia, he very well might.
This article presents a model for site selection in the expansive, rich-with-potential region of the world we shall for convenience call the Asia-Pacific region: eastern and southern Asia, Australia, and New Zealand.
Why Go to Asia-Pacific Countries?
The selection of an Asia-Pacific country and city in which to do business—be it research, development, production, distribution, or any venture requiring capital and management resources—needs to start with an assessment of the issues driving the decision. Is the company going to the region to access raw materials? To obtain labor skills and talent? To establish product distribution in the area? To enter the local markets?
These markets are tempting. Asia has 3.5 billion people, 60% of the world's population. Two countries, China and India, have between them 2.3 billion people, 40% of the world total and eight times as many as live in the United States. Japan by itself, though a smaller nation, is the world's second-largest market for medical technology.
At the beginning of the Asia-Pacific site selection process, upper management has to seriously evaluate its reasons for going there. It is disappointing but not unusual for top executives within a company to have different objectives in mind. Such differences in viewpoint should be cleared up at the outset, because the reasons for looking to Asia-Pacific countries will be referred to time and time again when evaluating location alternatives. This is not like choosing between Georgia and Tennessee. A U.S.-based company will find that intellectual property protection, its corporate rights in court, its ability to repatriate dividends, and its ability to sell cross-border to other countries vary considerably between Singapore and Indonesia, only two miles away across the straits, or Malaysia, just half a mile distant by bridge.
A company dependent on key raw materials will want to know who controls them, and whether they are available in-country or must be imported. Will it be a small user of those materials, or a major player? Singapore has a huge petrochemical industry and extensive plastics processing. A company needing plastics can safely believe that Singapore's government will provide assistance to the industry. Or perhaps specially processed components such as stainless-steel containers are needed. Can they easily be imported if not available locally? This is not a problem in Australia, where the system is very transparent. Can intellectual property be protected in China, where software pirates are reputed to be back in business within 48 hours of a police raid after paying a fine and picking up confiscated equipment at the police station?
Finding answers to questions like these takes time. But first the questions must be developed. Singapore provides great distribution. Australia has a skilled multicultural workforce, with Western intellectual property protection and political stability. China has growing markets, a massive labor pool, and strong local governments to make things happen. India offers skilled workers at low wages. The Philippines has a long history of working with American companies. Malaysia's Multimedia SuperCorridor displays that coun-try's dedication to being competitive in the global information technology market. It all sounds simple: question, and then answer. But the process is more complicated.
Operating Styles
Executives examining their reasons for going to Asia-Pacific countries must also consider their operating style. They are contemplating entering another business culture, one much different from what they would find in Europe. Of the several different business cultures that will be encountered in Asia, two are preeminent: the Chinese and the Japanese.
In China, family defines business culture. The business is an instrument of accumulation of family wealth and status. In Japan, the large corporation is dominant. Workforce loyalty, industry "clubs," and interlocking ownership keiretsu—all designed to reinforce efficiency and structure—determine corporate behavior. The stockholder is not in power.
In fact, in many places in Asia the basic Western concepts of business are not part of the legal tradition. Several years ago in China, a major corporation transferred its principal subsidiaries to other companies and then filed for bankruptcy. The international banks complained but discovered that no laws prevented it, as in the West. During Indonesia's recent economic downturn, lawyers in court had to deal with judges who found no support for the concept of debtors being paid in full while the equity holders received nothing.
And Japan's is a culture with enormous requirements for compliance. According to Lawrence Taylor, principal of Aziotics LLC (St. Louis), a consulting firm specializing in Asian business, "This means compliance with everything from government reporting at all levels to wage schemes to parking permits. The expectation even includes community participation: assuming patriarchal responsibilities, hosting festivals, and making philanthropic contributions will become aspects of local management's time and financial budgets."
U.S. companies need to consider how well their operating styles will fit with Asia-Pacific cultures, and how willing they are to adapt. Could a company's operating style accommodate the idea of its chairman spending several days as host of a Japanese festival? Does it allow delegating authority well down the chain of command? Would you send a 26-year-old woman to negotiate a major contract with a senior Korean man? One company wisely sent an older man with such a woman, and the deal was completed. These are the sorts of adjustments that will have to be made.
Businesspeople in India are accustomed to the Western style. However, everyone says "yes" regardless of whether they mean yes or no. A U.S. executive who simply accepts a yes answer when asking if a deadline will be met had better be ready for disappointment. For a recent study by Korn/Ferry International (Los Angeles), 67% of U.S. chief information officers said that outsourcing has not been cost-effective.1 If the simple word "yes" had been better understood, maybe these relationships would have worked better.
In Australia and New Zealand, most business styles will be accepted. But don't be fooled by the language: consensus building is more important there than in the United States.
Organizing the Search
The next step in site selection is developing the "long list" of possibilities. Open-mindedness should be maintained in listing the locations that might fit. The long list could be 10 locations or 40. All reasonable alternatives should be examined once sufficient information is in hand to start evaluating. Where more information is needed, the Internet can provide some of the basics.
It should be kept in mind that a country is not one location. New Delhi is different from Trivandrum, Beijing is different from Suzhou, and Sydney is different from Townsville. Those are all locations aggressively seeking foreign investment. However, each pair differs in characteristics even though they are in the same country. Their workforces, transportation systems, fiber-optic connectivity, and even political arrangements are distinct. Just as San Francisco, Sacramento, and Smith River are very different locations within California, so Nagpur, Bombay, and Poona (the last two now transliterated as Mumbai and Pune)—all large cities in the state of Maharashtra in India—are separate places with different characteristics.
Now it is time to set up a matrix, with possible locations down the side and issues for consideration across the top (see sidebar, page 29). The number of issues is essentially limitless. Many consultants, particularly for site selection in the United States where the analysis is much simpler, have standard matrixes. But the company expanding overseas should build its own. Starting with the obvious issues, the matrix should expand as the effort progresses, splitting categories and adding new ones. "Lifestyle" might be one column, or it might be broken into the details of housing, medical care, schools, recreation, entertainment, and cost of home leave. "Political risk" could be one column or more. The number of columns on each topic should reflect the earlier analysis of reasons for going to Asia-Pacific countries. The more important each reason is, the more attention it should receive.
Based on the matrix information, a preliminary "short list" can be developed. But a final short list should not be generated until executives have made a first round of site visits. Field experience will answer some questions and create new ones. The map may have shown the airport to be a tolerable 30 miles away, but a visit provides the opportunity to measure airport access by time rather than by distance. Executives in the Makati area of Manila tell of having to cancel a dinner engagement and return home when, after two hours, they had moved only half a mile toward their two-mile-distant dinner. Is traffic important? To a company planning to ship airfreight on a daily basis, it is. To one intending to sell into the local market, it is not.
These first visits are the time to begin the conversations about government incentives. Practically every government in the world seems committed to attracting life science and biotechnology investment. Companies need to know what is available, and what is important to them. Executives need to assess their needs before making visits so that they can start exploring the flexibility of the local governments in delivering incentive packages (see sidebar, page 31). Governments in Asia-Pacific countries do not have as much experience as U.S. state and local governments in customizing incentive packages. If special assistance is important to a company, its leaders will have to start early to find out which locations have the appetite and the legal flexibility to work with them.
On the first set of visits, executives will start evaluating the cultural issues surrounding each location, even if on the matrix culture was not an issue. (It should have been.) These cultural issues go beyond the matters of business culture discussed earlier. For example, in India personal status is determined more by the status of the company an individual works for than by the employee's position. Working for IBM has high status. Working for a start-up biotech firm—despite the enormous growth potential and the stock options that may make the employee rich—has low status. So how can a company hire quality people in India if its name has no perceived status? And how does it deal with suppliers in risk-averse Asian countries where, as Aziotics's Taylor puts it, "The demands for enormous amounts of data and long, repetitive discussions before arriving at decisions create the syndrome often dubbed 'death by a thousand questions'."
The Short List
Once the first location visits are completed, the facts and impressions gathered in the matrix can be used to start cutting to the short list. The first step is to finalize the matrix to reflect issues that have emerged as predominant. Categories of information can be dropped or consolidated. The list of surviving categories should be shown to a broader group of people in management for input and approval. When the matrix is finalized, the site selection team can begin to eliminate locations.
The short list will comprise the locations that company executives plan to visit for an in-depth look. These are not specific pieces of property, but rather contending geographical areas. When the short-list candidates are winnowed to a few, or as many as a dozen, it is time to bring in the service providers for assistance, if they have not already been consulted. These include international real estate advisers, law firms, architects, and accountants. The company should now also go to the government investment-attraction agencies, either directly or through a consultant, to tell them the time has come to put specific proposals on the table. The company's executives should emphasize their readiness to talk about specific sites, that is, particular pieces of property that are available, and should bring up specific concerns generated by the initial visits and research.
Deadlines for the receipt of information should be set but should not be too demanding. Most government agencies in Asia are not market driven. While U.S. state economic development agencies often prepare proposals with 24-, 48-, or 72-hour turnaround times, many Asian agencies could not get a brochure mailed within 72 hours. Some of the provided material will be impressive, but much will be disappointing. These are different cultures. Many of these countries have short histories of competing to win investments. They should be given a couple of weeks to supply information, which can be expected to arrive on the last day.
The list of prospective locations is now ready to be cut to the three, four, or five finalists still in contention. Organizations involved at each location should be notified of their finalist status. Each requires a fresh visit. How extensive a visit depends on the size and scope of the investment. One major electronics manufacturer that makes billion-dollar investments sends waves of people: a finance group, a facilities group, a purchasing group, and an engineering group. The visiting company should have an agenda that fits its timetable and the size of its investment. Responsibilities should be divided among participants.
Executives will want to plan carefully all meetings at each location and not let the host drive the schedule, even if the site visit is being hosted by the area investment agency. The site selection team should review the schedule of meetings and do some of the scheduling themselves.
Incentives
When negotiating with foreign governments, both from the home office and in the overseas country, executives should keep in mind that the government negotiators have motives very different from those of the company. The business wants to maximize its gains; the government wants to minimize its losses. Politicians won't be doing the negotiating, but they may be the source of the final concessions that make the deal work. The site selection team needs to manage well the political aspects of government incentives, to the advantage of both the company and the bureaucrats. Those bureaucrats will be the negotiators of the incentives, the enforcers of the incentive rules, and the regulators that the company must deal with subsequently. The game gets very intense. An executive of a major corporation that was looking for an overseas site tells of receiving a phone call from British prime minister Tony Blair just after a meeting at which the company's incentive package had been approved. The head of government had made the call personally, only to be told by the executive that the incentive package was not sufficient and that the project would be located elsewhere.
No project should be announced before an agreement is signed. Some governments are very good at taking deals public before they have been concluded. This is attributable partly to the desire of politicians to maximize their personal visibility at certain times, such as when elections are pending. Executives should nevertheless stand firm, saying nothing until signatures are in place. This discipline can, in fact, be valuable in negotiations.
The Decision
How long does the site selection process take? Cultural differences can make the work leading up to selection of the finalist list go on for quite a while. The gathering and appraisal of matrix factors can, of course, be done in conjunction with visits to countries and meetings at home with foreign-government officials. Once the time to push for proposals from government agencies arrives, the remainder of the process—the short list, the site visits, the finalist list, the negotiations, and the decision—can be accomplished within a few months. It can be, but probably shouldn't be. If company site selectors can control the timeline, they should make that cycle more like six months. However, often other issues force a quicker decision.
In any case, company executives may want to rely on outside expertise. Much of the site selection process perfectly fits the definition of work that can be outsourced. Final selection is the executives' decision, and they have to live with the results. But it may not be possible to become an expert on government incentives, raw material sources, labor availability, foreign transportation, and overseas distribution networks, and conduct negotiations with several governments, while also doing one's regular job. Outside advisers with decades of experience can be contracted to assist with this kind of work.
At the end, when the decision has been announced, the site selection team leader should do one more thing: contact representatives of all the locations on the finalist list that were not selected and explain how the decision was made. That courtesy can help the company to maintain friendly contacts in those parts of the world. After all, who knows where its next facility investment will go?
Reference
1. The Changing Role of the Chief Information Officer (Los Angeles: Korn/Ferry International, 1998).
Dennis W. Smith is president of PacTac Advisors Inc. (New York City), a consulting firm that assists governments and corporations involved in Asia-Pacific site selection, primarily on issues related to incentives.
Copyright ©2002 MX
