INSIGHT: Western companies challenged in their Asia strategies

18 January 2013 16:34  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--What’s gone wrong in Asia? That's the question consultants Booz&Co asked in a 2012 year-end note to clients. Demand growth in the region has slowed, certainly, but at a more fundamental level, the Asia strategies of some European and North American companies appear to have gone awry.

The consulting firm is suggesting that companies re-assess the way they do business in Asia and consider the possibility of making some fundamental changes.

“Operators have assumed that definitions that were clear in the west (the difference between specialty and basic chemicals, for instance) would also apply in Asia - and that their products would find an enthusiastic reception there,” they say. “It turns out that the Asian market is different in some fundamental ways, at least for now.”

Those differences have put pressure on western firms to turn a profit in highly competitive and price sensitive markets.

One aspect of Asia chemical markets that Booz&Co picks up on is that of price, or rather the producer’s costs that customers in Asia are not willing to absorb in the prices they pay.

On one level, the regulations that are taken for granted in the west haven’t been introduced in Asia. “Asian customers, quite naturally, are unwilling to cover the cost of safeguards they don’t need,” says Booz. “In this context, western companies will need to reassess their distribution strategy or their operations.”

So western companies find that the effort they have to go to in their domestic and local regional markets is not necessarily appreciated Asia.

Also, in countries like China and India it has not been possible to replicate the business models that have been successful in the west. This has to do with the degree of local and international competition in these fast-growing markets as well as customer resistance to the relatively high levels of service built into the fabric of markets in the west.

“They entered these countries with specialty products that weren’t in demand, or at price points that end customers weren’t willing to pay, or without the scale advantages needed to succeed as high-volume producers,” Booz&Co says. “As a result, many of them will need to make substantive changes - including to their regional business models - if they are to see meaningful improvements in their Asian businesses.”

Making money in China, India and some of the other fast emerging important markets in Asia is not going to get any easier.

Patterns of growth are changing, with China growth moderating and shifting within the vast country. Making inroads into markets in India has never been easy and clearly requires significant commitment.

And it is commitment that western players might find difficult to sustain in tough economic times.

“A long-term player would need to stay focused on India’s specific needs and provide solutions,” Indian Oil said last year in a strategy update.

Firms wanting to commit to countries like India and China need to understand current demand patterns and how they might shift in coming years.

The requirement for chemicals in areas with large populations with little disposable income, for instance, is different from that in locales where there is a rising middle class. In such circumstances effective market segmentation becomes a vitally important issue which western firms have not always been prepared to address relying instead on applying their own ideas on best practice in supply chain management, logistics and marketing.

Failure in Asia markets has been put down to not fully understanding the needs and aspirations of the customer.

These aspects of doing business have become critical in a lower growth environment. And the focus this year in chemicals will very much be on demand and profit growth in Asia. Given the poor global economic environment an affective Asia growth and profits strategy is vitally important.

“There are no easy or obvious levers for chemicals companies to pull in 2013,” Booz&Co said in December. “Success may well come down to a CEO’s ability to look deep inside his or her organization to find new sources of profitability. The question is how to do that.”

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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