- Posted by Janina Bernardo
- On February 23, 2017
- 0 Comments
The United Nations estimates that over 60% of the world’s population, or 4.6 billion people, live in Asia-Pacific. In recent years, the region has attracted many businesses and entrepreneurs because of its largely untapped consumer base.
The decision to enter a new market is one of the most significant, if not the most difficult choices any company will face. Shrinking profits and intense competition in developed markets has prompted companies to seek expansion in emerging markets for potential business growth. However, investing in these developing economies can be a gamble because of various risks involved. Here are the top reasons why many businesses fail when expanding to Asia.
Assuming Asia is a Homogeneous Market
One common myth about Asia is that it is a uniform and homogenous market. One will realize that Asian nations differ greatly in geopolitical, social, and economic conditions. Even within the larger countries such as China and India, one can observe huge disparities in economic growth within their borders. There are also notable variations among countries in terms of population, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, and lifestyles.
Each country’s history, religious affiliations and cultural nuances also widely differ. It may surprise many Western executives that Singapore consists of three main ethnicities, including Malay, Chinese, and Indian. Also noteworthy is that the majority of Vietnam’s population are atheists (81%), while the remaining are Buddhists or Catholics. Not knowing topical cultural sensitivities can be disastrous to one’s business.
Traditionally, foreign B2C companies have concentrated on major cities and business hubs. However, B2B companies may find opportunities scattered in lesser known areas. Many Asian nations have encouraged foreign investments by developing industrial complexes with improved infrastructure and entire supply chains. The first step to any prudent market entry strategy is to identify the individual sub-markets, know where its target customers are, which cities to focus on, and where to base its operations.
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Misreading the Market
Understanding where opportunities lie within Asia can be extremely challenging. It is critical to spend time mapping out the location of customers and suppliers. Successful market entry depends on a number of factors, including industry trends, scope and size of the market, ground sales and technical support expected by customers, and required distribution channels to reach clients.
It is also imperative for Western business owners to learn nuances in relationship building especially in the B2B space. In North America, for example, relationships can be established through one or several phone calls, or a meeting. In Asia, an introduction by mutual friends or colleagues is more important in forging strong relationships.
It is often said that Asian countries are considered ‘high context’ cultures wherein many things are left unsaid. It is assumed that the hidden meaning is understood within the context of their culture. In contrast, Western models often prize direct communication. This can easily lead to wrong assumptions and miscommunications between cultures.
Tytus Michalski, Managing Director at Fresco Capital shares his local experience in the software industry.
“Some business models such as SaaS (software-as-a-service), that find success elsewhere, don’t always work in Asia. Locals are not used to paying for software through a monthly subscription unless they own the license. Consumers have the habit of buying products. So one approach to adapt to the local mindset could be to bundle hardware with software and get higher value in terms of revenue.”
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Dismissing Local Competitors
Foreign companies may get overly enthusiastic about their own products and services that they may overlook the fact that a local competitor already exists. While it’s great to have first mover advantage in a specific industry, having no competitors, on the other hand, may signal something about the demand side of market that can spell trouble for the business down the road.
It is also dangerous to get into the mindset that everything Western-made is automatically superior to its local counterpart. Some companies fail to remember that they must address and satisfy the needs of the customers to be profitable. They may have built an effective business model in their home country, but it does not necessarily mean that they can replicate its success by “re-educating” Asian buyers or modifying their behaviour. Keep an open mind and invest in market research to learn about the local competition. Develop Key Performance Indicators (KPIs) to assess and improve your performance.
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Not Understanding the Legal Framework
Failing to thoroughly research local regulatory barriers could block market entry in specific regions. In Asia, many industries remain heavily regulated and remain off-limits to foreign companies. For example, China severely restricts foreign companies’ involvement in the field of petrochemicals, energy and telecommunications sectors. Thailand requires that companies have 51 percent local ownership. Myanmar does not have direct foreign ownership rules, although many businesses still prefer incorporating elsewhere because of the nation’s complicated registration processes.
Government regulations can cause significant delays and escalate costs of market entry. It is advisable for companies to scrutinize the implications of such regulations prior to expansion overseas. For example, in healthcare, products may require thorough clinical trials that can result in a longer sales cycle. Just because a product has previously been approved in the EU or the US, does not necessarily mean that it will be approved for the intended country. Products may also be subject to safety, performance and packaging designs, including languages, sizes and materials used.
Constantly monitor any changes in legislation or regulations. There are government regulatory bodies in Asia that are not as transparent as their Western counterparts making it difficult to understand and abide by the rules. These regulations are also often vague and open to interpretation. Hiring local legal consultants may be necessary to help navigate complicated laws. Some companies opt to engage in joint ventures to lower the risks of doing business.
More and more countries are recognizing the need to regulate marketing, advertising, and sales tactics. In some regions, advertising of certain types of products are subject to approval by various governing agencies. For example, ads for pharmaceuticals may be regulated by health departments. Other types of comparative, and possibly misleading, sales tactics may also be penalized.
Lacking in Flexibility
In order to adapt to a new cultural environment, it is essential to develop cross-cultural competency. Cross-cultural Competence is the knowledge, skills, and motivations that enable individuals to understand and develop human relationships across cultures to achieve personal or professional goals. In business terms, it is the ability to identify cultural biases and employ strategies to overcome cultural barriers that may jeopardize business operations abroad.
Western leaders are often perceived as unwilling to listen or having a tough disposition in negotiations. While their Asian counterparts prefer a less rigid approach, foreigners tend to favor a more structured framework. The Asian approach typically takes many rounds of talks, and often involves consulting a large number of people from different levels within the organization. Even when a contract has been drawn, many changes are still made before an agreement is finalized.
When coming to Asia, companies must learn to experiment rapidly, frequently, and economically—not only with products but also with business models and strategies. Experimentations are necessary, though there is always risk of failure. Adaptive companies do not fear failure but simply prepare for it. They must constantly watch for signals of change from the environment, analyze them, and adapt to the current landscape.
Each market presents different challenges and opportunities. It’s imperative to be adaptable and flexible when venturing into the unknown. Keeping these tips in mind will help you successfully expand your business in Asia.
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