MNCs in Asia: Investing in the Future
To be a major global player, you have to participate in Asia. But challenges facing multinationals as they take part in this market range from currency devaluation to ever-changing government regulations.
The unparalleled size of Asia's markets has always caught the eye of multinational corporations. More recently, as government policies and cultural attitudes in the region continue to evolve, the strategies of multinational companies have changed as well.
What are the current trends in MNC investment, and how do corporations keep their bearings in a bureaucratic maze of regulations? Does the promise of payoff exceed the challenges of doing business in countries that are in the midst of reform?
Those questions were considered by panelists at the Asia Business Conference 2002, held February 2 at Harvard Business School.
Nicholas Howson, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, focused his comments on developments in China. Corporate investment in China used to be long-term and brand-focused, he said, with an MNC dreaming that all Chinese—or even half of all Chinese—would use their particular brand of shampoo after decades of investment in product development and marketing.
The dot-com bubble brought practices, ambitions, and goals to China that are here to stay
— Nicholas Howson, Paul, Weiss, Rifkind, Wharton & Garrison
That's changed over the past twenty years, said Howson, who focuses on mergers and acquisitions, project finance, and capital markets in his firm's Beijing office. The creation of domestic capital markets, increasing access to foreign capital, legal changes in corporate structuring, and the sale of shares in state-owned enterprises have all contributed to the development of a business-oriented society with increased short-term opportunity for MNCs.
"The dot-com bubble brought practices, ambitions, and goals to China that are here to stay," he added. "Increasingly, MNCs will see corporatized Chinese assets with shareholders in both state and private enterprises."
No single Asian market
Mark Newman, vice president and CFO for GM Shanghai, the largest Sino-U.S. joint venture, presented statistics that clarified the corporation's significant investment in Asia. "Eight countries will account for 60 percent of the automotive industry's growth over the next ten years," said Newman, noting that four of those countries—China, India, Thailand, and South Korea—are in Asia. Protectionism is one of GM's biggest challenges, Newman said, with market barriers varying from country to country, and in some cases, from city to city.
"There is no single Asian market," agreed Mark Takahashi, vice president and treasurer of Intergen, a global energy company specializing in greenfield development. "The rules consistently change, and they change in the middle of the game—but that's actually true in California, too. From our perspective as an investor, capital flows will follow structural reform."
How much of a deterrent are shape-shifting regulations to MNCs who want to invest in Asia, wondered HBS assistant professor Mihir A. Desai.
"Government intervention makes my life very difficult," responded Anthony C. Hooper, president of Bristol-Myers Squibb Intercontinental Region, recalling how last-minute pricing interference by the Chinese government wreaked havoc with the financials he'd been preparing for a shareholders meeting.
"These are transitional circumstances," said Howson. "In China, regulators and shareholders are one and the same, but they're slowly separating. There's still some confusion of roles as to how privatized firms are supposed to act."
"It's important to have a good joint venture partner to help negotiate the bureaucracy and influence government policy with your interests in mind," remarked Newman. Successful partnerships are undertaken with clearly defined common goals and organizational structures in place, he added, so that negotiations can focus on implementing, not defining, the company's mission.
"A good joint partner has to understand the goals of individual shareholders," added Hooper.
"It's also very important to be clear about business ethics," Takahashi said.
Who needs partners?
Occasionally, a go-it-alone approach is possible, too, suggested Hooper. "In some areas, the markets have evolved to the point that joint partners aren't as necessary."
Panelists said China's entry into the World Trade Organization created somewhat inflated expectations for the region as a whole, even as they emphasized the very real opportunities for growth available to MNCs in Asia.
"You have to be realistic," said Newman. "You also have to understand that there will be a cost for corporations that don't participate in this market. The key is to invest prudently, and to expand capacity over time."
"Bristol-Meyer Squibb's annual unit growth is highest in the Asia-Pacific region," said Hooper. "To be a major global player, you have to take part in this market. My biggest challenges in Asia are currency devaluation, government price rollbacks, and patent infringements—but we'd be silly not to be there."
Julia Hanna is an associate editor for HBS Bulletin.