Success in Southeast Asia requires functioning networks.
In the first part of our newsletter “ASEAN: SALES STRUCTURE AND MANAGEMENT – Successful sales structuring in the world’s biggest growth market, Southeast Asia” we described how important it is for Western companies to have their own staff on the ground in the relevant country on a permanent basis, that in the ASEAN countries a holistic approach is the basis for successful operations, and that local dealers and distributors should be chosen with the greatest of care. In the second part we will explain, among other things, why local sales staff have to be integrated skilfully and provided with organised support from company headquarters.
1. The joint venture – “Be careful who you trust!”
Such joint ventures are established primarily with a view to ensuring influence and control, and to operate on the market directly and close to the customer. Frequently elaborate contracts are concluded and an attempt is made to ensure either majority voting rights or at least a major say in what happens – but this is normally as far as it goes.
Under certain circumstances the company’s CEO shows up every few years, the controlling department makes an annual check on the perhaps skillfully doctored balance sheet, and in the meantime the local partner gets rich. At this stage the consultant’s discretion prevents us from listing the real cases in which clever local managers or shareholding partners have lined their own pockets, while fobbing off their Western partners with the “usual five percent” profit. The real earnings go into the partner’s bank account.
The popular repertoire includes the leasing of real estate at inflated prices from the partner’s relatives or close friends, as well as the undermining of margins by sales at highly favourable prices to so-called “customers”, who actually sell as “related intermediaries” at a markup of 30 per cent and more. The “customer” of course shares this markup with the local joint venture partner.
At the annual audit the auditor is then surprised by the fact that the joint-venture is selling with very low margins, but hardly gaining any market share in spite of this. At worst the auditor even says with a clear conscience that the ailing subsidiary needs to be granted better prices in order to boost local sales.
Often no questions are asked about why the partner in this supposedly low-yielding company – with the modest salary he voluntarily allows himself – lives in a luxurious house, drives an expensive car and eats at all the best restaurants.
Such cases are not an unpalatable exception. And when it occasionally comes to a real check, we’ve heard of scenarios where the local accountant suddenly no longer understands English, or accounting documents have inexplicably disappeared. It has been reported to us, for example, that the bookkeeper had given notice and taken the account books with her, that no balance sheet had been drawn up for years, and other examples of “Asian fairytales”.
Not infrequently small or large production facilities operated by the joint venture are even used in order to manufacture products that are then sold by the disloyal partner for his own account. These partners don’t have a guilty conscience. After all, they’re the ones who do all the work, while the foolish investors in Europe are only interested in appearing once a year and sharing the fruits of their labour.
Two solutions are available in such cases.
If it isn’t too late the parent company also needs its own representative within the joint-venture company on a permanent basis, either as the commercial manager or at least in the role of an independent controller.
However, this person should not be head of sales, for reasons which will be explained below.
If the situation over the years has been a negative one, then local consultation is the only solution. Auditors from headquarters may be financial experts, but with their inadequate knowledge of the language and business culture they won’t be able to deal with the local wiles and tricks.
It must, by the way, be taken into account that many cases are not simply based on a lack of good faith. On the contrary, the negative development may be due to a simple lack of commercial skills, combined with lack of support from the parent company.
The feeling that the Western partners aren’t interested and the whole business rests on one’s own shoulders anyway can turn even well-intentioned characters into dishonest joint-venture partners.
Good consultants will therefore also assist the partner in building up successful structures and help or her him generate greater understanding of the local market within the parent company.
For 25 years Dr. Gunter Denk, the author, was the successful manager of a medium-sized company in Europe with a number of sales organisations right around the world. He understands the mechanisms of sales organizations both internally and with foreign subsidiaries or partners. In 1997 he became the sales and marketing manager of a listed group in China, into which he had integrated his own company. Since 2004 he has headed SANET ASEAN Advisors, a consulting group focusing on the most important economies of Southeast Asia.
2. Nothing will succeed without local sales staff
“Thais only buy from other Thais” is a popular saying in Thailand, but in practice it could apply to any other country. In this respect it must be understood that the ASEAN countries have very different Buddhist, Islamic, Christian and Chinese roots. Politically their systems range from kingdoms via sultanates, military governments and states which are gradually opening up right across to Laos as the last communist country apart from Cuba.
For this reason a Thai or Vietnamese is reluctant to conclude a contract with a Singaporean, especially as within the region these are regarded as rich and arrogant. Indonesians in turn will do business with a fellow countryman but not with a Thai and especially not with a Malaysian, whom they won’t respect in spite of their cultural similarities. A Muslim from Malaysia on the other hand will have serious problems selling anything to a radical Buddhist in Myanmar, and the same applies throughout the region.
There are also major differences in negotiating strategies. Vietnamese enjoy negotiating, often without any apparent purpose. They will often discuss a matter with passion even though it doesn’t even fall within their area of responsibility. In Indonesia you can drive people to distraction if you don’t finish up by granting them a massive discount. This is something that needs to be taken into account when you first quote a price.
In Thailand, in turn, you need to be able to recognize the objectives, intentions and objections of your negotiating partner without these being put into words, because they are not communicated directly. Often a de facto “no” is simply expressed by setting up a small hurdle which European partners then overcome, but without it getting them any further. Singaporeans, in contrast, will defend their position decisively and if necessary aggressively.
In all these countries “know-who” is more important than “know-how”. It’s only the kind of long-term personal relationships which local sales staff can provide that will deliver the goods.
And this is the first example where having your own man on the ground will not benefit you, because in many countries people are reluctant to grant business deals to foreigners. The foreigner can participate, give advice and perhaps even set the internal rules. However, the final signature on the dotted line will only be received by the customer’s fellow countryman.
If the foreign manager does not have the support of the local sales manager, there will be no prospect of success on any market.
Legal requirements are not the same in all countries. However, practical and legally sound solutions are available everywhere, and the SANET ASEAN ADVISORS can provide valuable help in this respect.
3. Organising support from the company HQ
An important precondition for success in any of the distant countries of Asia is of course understanding and support from company HQ for the foreign branch or subsidiary. Companies often tend to transfer their own, typically German standards and requirements to the subsidiary abroad.
Often the conditions which are prescribed are entirely foreign to the local subsidiary. Complicated reporting requirements, which in Europe or the US receive IT support as a matter of course, are simply too much for the organizational and commercial conditions found abroad. Catalogues and advertising campaigns are tailored to Western customers, and can be completely without effect in Asia.
Whoever doesn’t understand, for example, that in the case of technical products Asian engineers can quickly and reliably analyze images and patterns, but often can’t cope with extensive collections of technical drawings, will simply not be able to adapt to the traditional ways of thinking which prevail in the countries of Asia, and won’t be successful there.
As a result, even local German managers are often frustrated. Those who take the decisions at the German parent company don’t understand the requirements of local conditions, systems of staff recruitment and retention, or the customer’s decision-making criteria. As a result they are unable to adapt their corporate policy to these countries.
The foreign company therefore needs its own “lobby” or contact person at headquarters, in order to maintain contact with the individual departments and ensure fast and flexible support. The contact person or persons should be tied economically to the success of the subsidiary.
4. Organising support from the company HQ
In their sales operations European plant and mechanical engineering companies often fail in Southeast Asia because they don’t provide adequate local support. Even the best possible automation or the most efficient machine is of little use, if setting it up on site in the Asian country means spending a fortune on expensive German engineers and their travel costs, followed by ongoing local service operations with a 3-day response time and renewed travel costs.
In Thailand or Malaysia, too, the customer expects support in the implementation of operations, for example from a system integrator and in crisis situations from a maintenance engineer who can operate locally on a fast and inexpensive basis.
Parallel to the establishment of a distribution system the company must therefore – on its own or in cooperation with partners – ensure that quick-response local support is available for the installation and maintenance of plant and machinery.
Promising the customer fast support directly from Germany is not a viable alternative. At Sanet Trade & Services in Bangkok, for example, it is standard practice for German customers in the mechanical engineering field to be put in touch with German-managed system administrators.
Of course, in practice all the problems listed here relating to sales structure and management appear in various facets and with varying weighting. At all events, if a company’s success in Southeast Asia does not match its experience in other parts of the world, it is worth taking a closer look at all these factors. Every market has its individual features. Every sales organisation has its individual strengths and weaknesses. SANET ASEAN ADVISORS provide close support to management when it comes to adapting to these features.