Western Firms Rethink Asia Approach

March 11, 2013, 4:55 p.m. ET

Western Firms Rethink Asia Approach

Industrial Titans GE, Honeywell Boost Presence in Region to Prevent Market-Share Erosion


JAKARTA—After 60 years supplying locomotives to Indonesia’s state-owned railway,General Electric Co. GE -0.63% faced a serious threat to its dominance in the country’s locomotive market last year.

Indonesian railroad operator PT Kereta Api needed 100 locomotives to alleviate overcrowding on trains where riders often spill into the aisles and climb on the roofs. European and Canadian companies offered competitive technology, while a Chinese company promised low prices.

GE won the $250 million contract—thanks, in part, to its long relationship with the railroad operator—but “we had a very close call,” says Stuart Dean, the Fairfield, Conn., conglomerate’s chief executive in Southeast Asia. “When a railroad buys five or six locomotives, no one cares, but when it wants 100 engines, everyone comes to play.”

The rapid advance of competitors isforcing one of the world’s largest companies to change the way it does business across Asia and emerging markets.

“Historically, we’ve taken global solutions and sold them all over the world,” says Mr. Dean. “But we’re competing with local companies and we need to fine-tune our strategy.”

Multinationals have been increasing their footprint in Asia for years, as they have moved from selling into the region to also investing here. But the transformation is gaining critical mass as Western companies’ market-share leads in Asia over cash-flush local competitors narrow, forcing Western firms to invest more, tailor their products and transfer top executives to Asia.

Asian companies are increasingly becoming competitive threats outside the region as well, as they set their sights on global dominance, according to Vincent Chin, a Singapore-based senior partner at the Boston Consulting Group.

China’s Lenovo Group Ltd. 0992.HK -3.78% is nipping at Hewlett-Packard Co.’sHPQ +0.78% heels as the world’s largest personal-computer maker, while China’sHuawei Technologies Co. is challenging Sweden’s Telefon AB L.M. Ericsson as the globe’s largest telecom-equipment maker. Lenovo had a 14.8% share of the global PC-shipments market in 2012, compared with Hewlett-Packard’s 16%, according to Gartner Inc. IT +0.41% Meanwhile last year, Huawei had $35.4 billion in revenue, just short of leader Ericsson’s $35.8 billion.

“Competition is getting fiercer because many Asian companies have been able to expand faster and hire better talent” after years of economic growth in their home countries, says Shaun Rein, founder of China Market Research Group, a Shanghai-based consulting firm. “A lot of them are also able to undercut [Western companies] in terms of price.”

Over the next five years, nine of every 10 American companies with a presence in Southeast Asia plan to invest more in the region, according to a July survey by the U.S. Chamber of Commerce in Singapore and the American Chamber of Commerce.

Honeywell International Inc., HON +0.22% a Morristown, N.J., maker of aerospace and safety products, said it is responding to the growing threat from Indian and Chinese competitors in Asia by giving executives in the region more decision-making power. It is also making more products, such as LED lighting, in China as it seeks to address local customers’ needs.

The company has embraced a business philosophy that it calls “Becoming the Chinese Competitor,” which it describes to employees as a way to learn from successful domestic competitors, whether on pricing or sourcing strategies.

In China, domestic construction-equipment makers including Sany Heavy Industry Co.600031.SH -1.22% have widened their lead over Caterpillar Inc. CAT +0.74% of Peoria, Ill., partly by offering aggressive financing deals to customers as construction activity cools along with China’s economic growth. In 2012, Sany held a 13.6% share of China’s excavator sales, a fast-growing segment of the construction market, compared with Caterpillar’s 6.9%, according to J.P. Morgan Research. Two years before, Sany had an 8.5% share of the market versus Caterpillar’s 6.2%.

Caterpillar said while it doesn’t comment on market share, it remains the world’s largest maker of mining and construction equipment. Sany’s deputy general manager, Dacheng Zhu, said in a December interview that overtaking Caterpillar globally is “our target, but there’s a lot of uncertainty.”

Caterpillar has been investing in the Asia Pacific region for decades and isn’t doing anything “fundamentally” new to respond to competitors, according to a spokesman. In China alone, Caterpillar now has 23 manufacturing facilities and employs more than 15,000 people. But China accounted for just 3% of total company sales as of the first quarter of 2012, the most recent data available.

Caterpillar faces other concerns in the Chinese market as well: It is battling an industry-wide construction slump, and in January the company said it would take a write-down of $580 million on the value of a Chinese company it acquired for $700 million last June due to “accounting misconduct” at the unit.

Meanwhile, GE says it is learning from its missteps in emerging markets.

Five years ago, the company used to print instructions for its health-care equipment solely in English, even if these products were destined for non-English speaking countries. Today, these are translated into Bahasa, spoken in Indonesia, and other Asian languages.

The company’s mindset is also changing from being an equipment provider to a company that also gives customers technical support, training and financing, says Mr. Dean, who is based in Kuala Lumpur.

“If you take the business for granted, you’re going to get kicked in the buns,” he says.

Indonesia is a key target for infrastructure companies because its nearly 250 million people are increasingly demanding better health care and transportation. GE said in February it plans to spend $300 million over the next five years in the country on initiatives including an engineering program, an aviation-service center and a rural health-care program. It has already invested more than $1 billion since 1992 inIndonesia, Southeast Asia’s largest economy.

It is also working with Kereta API, the state-run railroad, to set up a service center for the locomotives. With the number of people traveling by rail in Indonesia expected to nearly triple to 600 million annually by 2020, Indonesia’s taxed rail network will need to be upgraded and more trains ordered to meet growing demand.

For companies to win a contract in this market, “the issue of after-sales commitment is big,” says Ignasius Jonan, president director of Kereta API, which has a 1952 GE locomotive running on its tracks. “You have to show that you have a local presence on the ground.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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