Doing Business in APAC PDF

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Geographic Location of 500 largest Multinational enterprises - “Global 500: A New World Order”, Fortune, 2015 Feb

Area Population GDP (US$) GDP per capita (US$) Major Export Destination Major Import Source

China 9,561,000 km2 1,367 million 10,380 billion

Japan 378,000 km2 127 million 4,770 billion

South Korea 99,000 km2 50 million 1,416 billion

7,589

37,540

28,101

US, HKG, Japan

US, China, South Korea

China, US, Japan

South Korea, Japan, US

China, US, Australia

China, Japan, US

L1 - Business in Asia Pacific Geographic location East Asia South Asia China, Japan, North & South Korea

India, Pakistan, Bangladesh, Sri Lanka

Economic comparison More advanced Japan, Australia, New Zealand, Hong Kong, Singapore, South Korea, Taiwan

South East Asia

Australasia

Singapore, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Cambodia, Laos, Myanmar, Brunei

Australia, New Zealand

Central Asia & Middle East Too different from the other Asia countries which are commonly known and are more familiar

High Potential, undergoing rapid economic development

Lagging behind in economic development

China, India, Indonesia, Philippines, Sri Lanka, Vietnam

Bangladesh, Cambodia, Laos, Myanmar, North Korea, East Timor

Management practices are determined by: 1. Level of industrial development --- Economic Development Model 2. Environmental constraints such as PEST --- Environmental Model 3. Cultural variables such as attitudes, beliefs,, values, needs --- Behavioural Model 4. Management Philosophy such as Management’s attitudes towards stakeholders --- Open Systems Model * Comparative Management Systems?? Main content: - Major differences in Management philosophies between East and West - Traditional East Asian strategic philosophies -

Key Confucian values, Guanxi Overseas Chinese management, changing management system in China The Family Enterprise Business strategies of Chinese Companies in ASEAN State-owned Chinese business, its management, Differences with overseas Chinese Enterprises

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Japanese and Korean management Systems Keiretsu vs Chaebols Core values of Japanese management / Korean Management

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How to negotiate with Chinese and Japanese

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ASEAN Countries, problems and prospects, economic integration

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India / Australia, their culture and how they do business with examples

L2 - East and West Comparison

Management strategies General Characteristic s

System

Culture

Ethnics

East (Asia) West More systematic, scientific and formal Based on intuition, tradition and informal perspective Calculating, emergent, risk-seeking Calculated, rigid, risk-avoiding

Deng Xiao Ping’s Cat theory: Result-oriented Fiduciary System (as in China & Japan): Emphasizes basic trust and commitment to shared values in society, relies on government leadership and intervention More hard-working, High trust societies (esp. amongst relatives and close friends) High social ritual context: Follows a living pattern accepted by the society without being too conscious about it Confucian Value: Confucian ethics preaches a person’s social responsibility and duties so has a strong dutyconsciousness

Process-oriented Adversary System (as in US & UK): Respects free market competition and laissezfaire, protects individual rights and selfinterest, highly legalistic / Low social ritual context: Relaxed, comfortable, tolerant of diverse behavioural patterns, but difficult to cultivate lasting and solid relationship Always claims the rights of the individual

3 Cs In Asian Business - Contacts - Connections - Culture

Asian countries in general have weak institutions: - Lax disclosure laws and governance standards in stock exchanges - Under-developed financial markets - Inefficient banks - Inadequate intellectual property rights protection - Inefficient Judicial systems - Weak enforcement of contracts - Scarce consumer organizations - Untrained, unskilled, unproductive, inflexible labour

Role of Governments in Asia: - More intervention in business than in US or Europe - i.e. Hong Kong and Singapore amongst freest in the world, but: Singapore government are major players in many sectors, competing with private enterprises; e.g. Singapore Airlines, SingTel, DBS Bank, SMRT, Raffles Holdings, SembCorp, etc - i.e. Japan, often called a mixed economy, gradually liberating its control on various sectors including agriculture, telecom, finance, etc Strategies in Asian countries differ  difference in institutional environment, including: - Governmental bodies; the legislature, judiciary, regulatory agencies - Non-governmental bodies; stock exchanges, credit agencies, consumer councils - Economic institutions; markets, industry bodies and consumers Political Uncertainties in Asia: - Thailand: Governments change hands rapidly - Myanmar, Cambodia, Philippines: Politically unstable still

National Competitiveness: East West Comparison - Asian Businesses are very competitive with the West by 1980s - Asian Model of Economic Development: Export expansion, Governmental involvement, High-savings rate o

Scholars attributed progress to Confucian ethics in Government leadership, Consensus formation, Emphasis on Education, Work ethics

Confucian Values  Important in Asian Management - Harmony in Society - Downplay individualism: Tries to collectively mobilize one’s closes relatives and trusted friends to unleash tremendous energy - Dependence on Guidance - All-rounded personality for adaptation to the environment

L3 - Overseas Chinese and the family business The overseas Chinese (華僑) - Chinese national s who live abroad, in both East and West (Chart below) - Don’t hold Chinese nationality but with strong sense of consistency and continuity to identify themselves with Chinese civilization - Left mainland china for various reasons e.g. Japanese invasion, Civil war, internal turmoil, domestic hardship For Mainland China, they are major source of tourism and investment Successive governments in China showed little interest or concern about overseas Chinese

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Overseas Chinese Population in Asia Continent / Country Thailand Malaysia United States Indonesia Singapore Canada Philippines Vietnam Australia (Oceania) South Korea Japan New Zealand (Oceania)

Overseas Chinese Population 9,392,792 6,960,900 3,800,000 2,812,510 2,808,300 1,487,580 1,146,250 970,027 866,200 800,000 674,871 180,066

% 14% 24.6% 1.2% 1.2% 74.1% 4% 1% 1% 4% 1.3% 0.4% 4%

Year of Data 2012 2010 2010 2010 2011 2006 2005 2009 2011 2010 2011 2013

Common influences to Chinese living overseas: - Unfriendly environments, forcing them to rely on their own resources - Discriminated over indigenous people e.g. University quota, difficulty and costly in acquiring citizenship, government favouritism to local business o

Feeling uncertain about the future - Even Singapore, though mostly Chinese, is surrounded by non-Chinese nations, thus feeling of isolation and uncertainty - Giving rise to higher SENSE of cooperation amongst Chinese residents network overseas (excluding HKG, Macao and Taiwan)

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Overseas Chinese are proud of the deep-rooted Chinese Culture of their ancestors, this sense of Chineseness has become a powerful unifying force - Except for Thailand, other ASEAN countries have diversifying cultures due to colonialism by different countries: Indonesia under France, Philippines under Spain, Singapore and Malaysia under Britain, Taiwan and South Korea under Japan. o

Initial hardships of migration cultivated values - They fight for survival provided strength e.g. work ethic, thriftiness and pragmatism which corresponds to Confucius values.

Competitive strategies of overseas Chinese in SE Asia - Low margin / High turnover - Economy of scope rather than economy of scale - Form alliance with local / indigenous governments to take advantage of development strategies offered by government

Chinese family business: Core Family business Size Small to medium Structure

Simple; - No complete rules or system - No ancillary departments for R&D, labour relations, PR or market research Functions not clearly defined, roles are unclear - People dealing in a range of activities across multiple fields - Employees assigned to various jobs at the liking of the boss - Personal relations and Feelings take precedence over objectivity Tends to suppress professionals - Set up personnel department of hiring financial analysts ~ challenging managerial authority - Lack of formal structure breeds cliques (factions). Cliques compete with each other, hindering the cooperation in the company

Leadership

Consists of core family members, close relatives, long-term employees (honorary family members), distant relatives, and non-related employees - Top management positions filled by key family members - CRO is either the boss or key family members, the son or wife - Secondary positions kept by close relatives or long time employees Boss maintains large power distance; Subordinate should think what the boss thinks - Different opinions should be channelled privately with a respectful tone - Boss can interfere with business frequently and make changes as he likes - Boss makes all important decisions as he has all the info - Financial situation of the CFB is often kept a secret to non-family members - CFB captures business opportunities quicker because the boss can make the final decision by himself without consultation

Management control

Due to unclear authority and responsibility of each level of position, performance assessment is based on level of loyalty rather than goal attainment - Though operating responsibility maybe delegated to lower level management, boss has the final say on staff performance as he holds the purse  Force staff to side with the boss, regardless of right or wrong Western management technique by objective is difficult to be transferred to CFB due to the clash with Chinese notion of relationship - Employees spend a lot of time to develop connection within the company

Management of External Relationship

Weaknesses

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Complex network of personal relations between relatives or friends Business connections make up for the limited resources of CFBs

Trust and loyalty is difficult to build - Non-family members do not feel part of the business - Leadership style represses professional talents - Talents either marry into the family, or must possess special skills that CFB lacks, or endure for a long time to get recognition CFB style centralized management can function in large companies ONLY if focused on single businesses which requires big capital but few big changes in the market - When the company diversifies, CFB becomes ineffective under centralized management because decisions become too complicated, esp. fast-changing industries

Strengths

Easier to establish personal relations - Too much delegation may risk abuse by managers; Too little may strain top management - Too much nepotism causes ineffectiveness; Too little brings distrust Small size allows more flexibility

- Smallness makes authoritarian style decision-making quicker to grab business opportunities L4 – China & Chinese State Enterprises State Owned Enterprises (SoE) - State = the owner, operator and employer and funded all enterprises. - It sets the prices of goods and commodities (which not reflect production cost), regardless of costs, and covered all losses o

The then social economic system: - Not based on supply and demand, resulting in misallocation of industrial resources and wasted inventories due to mismatch with market needs - Some commodities ran out of stock - Rationing was imposed on cotton, cloth, food grain vegetable oil, sugar, meat soap etc.

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Management of SoE - The state set general wages, CSE has no power to allocate income based on job performance or quality - CSE had no independent management power, nor responsibility. No distinctions on good or bad performance. Everything followed the big plan.

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Example of State-owned enterprises after WWII and before modernisation - China National Foodstuffs and Oil Import Export Corporation - China National Metals Import Export Corporation - China National Machineries Import Export Corporation - China National Non-Ferrous Metals Import Export Corporation

Historic background of Chinese State Enterprises (CSE) Before Modernization: After WWII

Nationalists (capitalists) and foreign capitals controlled major banks, heavy industry, railroads, highways, airlines, large trading firms, large industrial enterprises, and major light industry

Communist Take-over (1949)

Turn enterprises into state-owned; - State-Owned Enterprises were confined to domestic transactions. Only limited Import Export Corporations had the right to conduct transactions with overseas firms

1953

Communists started to follow the Soviet way of industrialization - The state Council (國務院) controls the whole economy. - The government controlled the operation of the enterprises

Great Leap Forward (大躣進) (1958-1962)

A campaign to accelerate agricultural development and industrialization - Sees steel and grain production important for the country’s industrialization - Turned out to be a major disaster causing millions of people death due to famine o

Backyard furnaces - Families, communes, factories, schools were encouraged to use scraps to produce iron

Hundred Flowers Campaign (百花齊放)

Encouraged citizens to voice opinions of the Communist regime - Turned out to be a political check whereby revolutionist, rightists were later on purged, executed or put into prison camps - Chairman Mao temporarily stepped down as party chairman due to the criticisms about his policies such as the Great Leap Forward

The Cultural Revolution (文化大革命) (1966-1970)

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Mao rebuilt his team and power with wife and other supporters to remove the then Liu Shaoqi from chairmanship He called on the youths to rise and purge impure elements of the society and revive the

revolutionary spirit

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The rise of Deng Xiao Ping (1978)

Goal: To preserve ‘true’ Communist ideology in the country - The movement spread into the military urban workers and the communist party leadership itself - It resulted in widespread factional struggles in all walks of life. Millions of people were tortured, humiliated, seized of their properties, forced to work in the countryside and rural areas

He was once purged as a dissident of the Communist Party, was reinstated (vindicated) in 1978 and rose to party chairmanship in the same year

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Reforms for SOEs since 1979 - Government no longer relies on administrative directives and imperative plans - By 1984, only 30-40% of industrial production being planned by the Central - In 1986, first Bankruptcy in Shenyang - By 1991, SoEs obtained 72% of their resources from the market. By end of 1990s, resources fully from the market - Ownership and management began to separate between state and SoEs

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In late 1990s, government privatized most of the SoEs - Since 1979, market system, based on supply and demand, began to develop. Many goods used to be in short supply became available - Seller’s market became buyer’s market - Competition increased

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Financial Changes: - SoEs instead of remitting profits, could pay profit tax and retain remaining earnings. - State no longer the only investor. SoE could set prices according to supply and demand. - SoEs could borrow from banks, instead of funding from the government. 

SoEs became motivated. - Personnel and labour policies changed. - Lifelong employment weakened. SoEs could hire and set wages. - Product economy became market economy. - Role of State reduced except a few key SoEs with key strategic importance.

Strategic industries (absolute government control) Weapons, Power generation and distribution, Oil and Petrochemicals, Telecommunication, Coals. Civil Aviation, Shipping

Heavyweight industries (High government presence) Machineries, Automobiles, Information Technology, Construction, Iron and Steel, Nonferrous metal

4 stages of Modernization and transformation of China’s SoEs: The First stage (1979 -1992)

Primarily focused on increasing operational autonomy of managers and the introduction of a commercial orientation for SOEs - The introduction of the ‘responsibility contract system’ in 1984 to allow SOEs to retain the ‘after-tax’ surplus - SOE managers and workers could benefit from the profit as wage incentives, but the government would bear the financial shortfalls. - This system was actually a form of subsidy. - The government subsequently injecting cash, also allowed State banks to offer loans to SoEs. However, unprofitable SoEs started to rely on high leverage, thus State banks

were piled up with unperforming loans Objectives: - To decentralize the decision making power of SoEs allowing them to retain the profit for certain designated purposes The second stage (1993-1997)

Stock exchanges in Shanghai and Shenzhen were set up in 1990 to pave the way for SOEs to raise capital from equity markets. - A portion of the shares were held by the public but the State remained the majority shareholder SoEs still under Government control after 2nd stage - This was not about reducing the state’s control over SOEs. It merely changed the way how SOE was financed and introduced modern management structure with a board of directors and supervisory boards

The third stage (1997-2003)

‘Grasping the large and letting go the small’. It had three objectives: - To privatize or sell off small SOEs at the county level that were unproductive - To lay off SOE workers at the city level to improve efficiency - To carry out mergers, groupings/conglomerations, corporatisations, and publicly list through initial public offering (IPO) some of the larger SOEs Problems after the 3rd stage of reform: - The lack of accountability and transparency of management - Other stakeholders were excluded from the reform process - In many SOEs there was virtually no change in management team despite the adoption of modern management principles - Some of the small SOEs were bought by managers or investors, then stripped of their assets and sold off bit by bit These problems resulted in the large disparity between production outputs and capacity between the county and major cities in China. It also suggested that the larger SOEs in the major cities had been keener and more successful in adopting modern management principles, resulting in greater efficiencies and increased profitability.

The fourth stage (Present)

Focuses on the regulation of state assets management, which includes the transfer of state assets and increases supervision of the SOEs. - The responsibilities are divided into two clusters; the first is where local provisional governments are responsible for supervising small and medium-sized SOEs; the second is where the central government is charged with the supervision of large SOEs.

Further CSE Reforms called for: - Further loosening of State control and intervention - More complete market system, such as less frequent Stock Market intervention, more transparent role of banks, sm...