How are consumer products
companies restructuring their
operations in emerging Asia?
Leading practices
March 2015
Emerging markets have long been key sources of revenue
growth for consumer products companies. Today,
however, they must also be the engines of profitability.
As we explored in our report Profit or lose, companies
need to focus on profit in these markets, or risk losing out
to competitors that instill this discipline from the outset.
This emphasis on profitable growth is prompting a renewed focus
on how companies organize their operations in Asia to build
platforms for long-term profitable growth.
An emphasis on regional
Traditionally, companies have tended to favor either a highly
centralized model, with most major activities taking place at the
head office, or a decentralized version comprising country-based
operations with a thin regional headquarters. Both approaches
have their drawbacks. A highly centralized “full principal”
model facilitates economies of scale but hampers agility and
responsiveness. By contrast, a highly decentralized model leads to
duplication of effort and hinders the transfer of best practice.
The disadvantages of these two approaches are prompting
companies to seek out a middle ground in the form of a regional
model. This enables key activities to be centralized without
jeopardizing the entrepreneurial capabilities of the market.
When considering how and where to regionalize their operations,
companies need to ask themselves a number of key questions:
1. What location should we choose for a regional headquarters in Asia?
2. Which activities should we place in the regional office and
which should we leave in the markets?
3. How should we handle innovation?
4. How can we best supply the market and reach the maximum
number of consumers in the region?
What location should companies choose
for a regional headquarters in Asia?
Consumer products companies establishing a regional
headquarters in Asia need to assess potential locations according
to five key criteria:
• Proximity to clients and markets
• Favorable legal and regulatory environment
• Stability of the political environment
• Access to human capital
• Favorable tax environment
Traditionally, this assessment has led companies to favor two
markets in particular. For many food companies, including P&G,
Nestlé, Kellogg, Unilever and Johnson & Johnson, Singapore has
been the location of choice. Meanwhile, many apparel and retail
companies have tended to choose Hong Kong, on the basis that it
is close to their export-based manufacturers in mainland China.
More recently, however, the choices facing consumer products
companies have broadened. China is now so important that many
companies recognize they need a local headquarters within the
market. A common strategy is to set up twin regional hubs: one in
Shanghai to cover China and North Asia, and another in Singapore
to cover South Asia.
Other destinations are also emerging as potential choices. For
example, the Malaysian Government has been working hard to
attract multinationals through its Invest KL program. Malaysia
offers the advantage of human capital that is both more plentiful
and cheaper than nearby Singapore. This makes it an attractive
market for activities that are human capital-intensive, such as
procurement or shared service centers covering HR, IT or finance.
Which activities should they place in the
regional office and which should they
leave in the markets?
The first step towards regionalization involves bringing together
regional management, finance, HR and IT into a single service
company for the region. Increasingly, however, we see consumer
products companies moving beyond this basic stage to explore
greater centralization. Each additional step brings greater
potential benefits but also increased business impact and risk.
A careful balance therefore needs to be struck between the two.
Companies will often start by bringing in activities, such as
procurement, where scale benefits can be realized at relatively
low risk. They may then look at centralizing other activities,
such as the supply chain or R&D. The key stages towards greater
centralization, beyond the basic service company, can be outlined
as follows:
• A sourcing company, which brings in procurement
• A supply chain management company, which also centralizes
manufacturing, logistics and supply chain activities
• An import/export company, which also incorporates regional
account management, for companies with customers in multiple
geographies
• An innovation company, which brings in R&D and brand
marketing
• A sales principal, which adds sales, customer service, S&OP and
trade marketing
• A full principal, which combines all the preceding models and
adds intellectual property
Our experience has been that moving to the furthest point in this
spectrum is too disruptive and costly to the business. Depending
on the circumstances, we would advise companies to consider a
supply chain management, import/export or innovation company
as a happy medium between local and central.
How should companies handle
innovation?
In the past, many consumer products companies controlled
innovation from a single global innovation center. Most have now
realized, however, that innovation needs to happen closer to the
market in order to take account of local consumer tastes and
preferences. As a result, we are seeing more R&D moving out of
the global headquarters into regional hubs across Asia. Recent
examples of regional R&D and innovation include the following:
• Companies are also looking at “India for India” strategies.
In the past, an inefficient, province-based tax system made the
movement of goods costly and bureaucratic in India, hampering
the development of domestic manufacturing. The proposed
introduction of a national goods and service tax would dismantle
some of these barriers.
Wherever they locate their manufacturing, one key requirement is
to reach as far as possible into rural areas, because these markets
remain key drivers of growth. Distributors can only take products
so far; in addition, consumer products companies are exploring a
range of innovative, direct-to-consumer models that can extend
their reach. Examples include the following:
• As part of Unilever India’s Shaktiman initiative, men from
participating families were assigned responsibility to sell
products to surrounding villages by bicycles.
• Estée Lauder has opened an Asia innovation center in China to
develop products tailored to the specific needs of Chinese and
Asian skin.
• P&G (Vietnam) uses boats in the Mekong Delta to access rural
consumers living on the water to sell low-cost lines, including
sachets of its Downy Single Rinse laundry softener.
• PepsiCo has opened a food and beverage innovation center
in China to serve as a hub for new product and packaging
innovation across Asia.
• Using a network of rural salesmen, Colgate India has tripled
the number of villages where its products are sold, from 5,000
to 15,000.
• Haagen-Dazs has launched products designed exclusively
for the Chinese market, including a green tea flavor and ice
cream cakes in the shape of designer Western perfumes for
Valentine’s Day.
More broadly, multinationals are looking beyond the expat
model and recruiting almost entirely locally to ensure familiarity
with Asian consumers’ culture. At L’Oréal, for example, 95% of
employees in China, including brand managers and marketing/
sales executives, are local. At Unilever in Vietnam, around 95% of
managers, 80% of directors and 40% of the board of management
are local.
How can they best supply the market
and reach the maximum number of
consumers in the region?
The manufacturing footprint for consumer products companies in
Asia is changing. Four important trends stand out:
• Companies are closing plants in developed markets, such as
Australia.
• Regional hubs are being established, usually in Thailand,
Malaysia or Indonesia.
• A “China for China” strategy is becoming more commonplace
in response to higher levels of domestic consumption and
difficulties relocating cash from China. These plants do not need
to be located in expensive coastal cities or export zones; instead,
they can be established in the interior, where costs are lower.
Conclusion
The emphasis on profitable growth in emerging Asia is
prompting consumer products companies to reconsider the
structure of their operations across the region. Although there
is no one-size-fits-all model, a clear pattern is emerging: the
need for a strong regional headquarters that brings together
not only the back-office services of HR, IT and finance, but
increasingly procurement, supply chain and innovation.
Contact
Kimjin Gan
APAC Operating Model Effectiveness
Advisory Leader
Singapore
[email protected]
+ 65 6309 8552
EY | Assurance | Tax | Transactions | Advisory
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