Over the past decade, Asia’s consistent economic development has led to international companies seeking to set up a presence across the continent. With Asia contributing over half of all global consumption growth, the opportunities to establish operations in Asia by jumping into new product and market segments continue to flourish.
Asia and the United States are typically the world’s largest recipients of foreign investments, with Asia being the world leader in 2018 and 2020. Hong Kong, Singapore, and China are usually the recipients with the largest investments. There are a variety of challenges that the Asian marketplace poses to American companies, with local regulations and customs presenting unusual cultural circumstances for western businesses to navigate.
Even with the recent dips in the economy caused by the COVID-19 pandemic, the benefits of international expansion into Asia still vastly outweigh the potential downside. Most companies expanding into Asia will do so with a shared set of goals in mind: establish operations quickly and cost-effectively while maintaining full compliance with local laws and regulations.
But while most companies will approach the Asia market with similar objectives, some will ultimately find more success than others. It is important for foreign companies to consider the competition in their respective industries, particularly from local companies. Local businesses in Asia benefit from having lower operating costs, as well as already being connected with a base of consumers and partners who recognize the local company’s brand.
Our experts at Horizons have identified three key strategic approaches to successfully establish operations in Asia in 2022:
Below we break down our recommendations as well as provide background information and key insights on each subject to give businesses everything they need to successfully establish operations in Asia.
1. Leverage Emerging Social Trends
As of 2020, over 56% of the world’s population lived in urban areas. With Asia being home to some of the world’s fastest-growing economies, there are trends emerging in the continent that will act as key indicators of business opportunities to come in the near future. For example, the continual increase in people moving to urban areas will generate more spending on housing, health care, education, and consumer purchases in the coming years. This will create more opportunities for companies to enhance their supply chain capacities, as well as capitalize on the inevitable increase in consumer demand.
In addition to this growth in major cities, countries like China and India are also seeing steady population increases in smaller cities and rural towns. As demographic trends suggest that cities in these regions will only continue to grow in the coming years, additional market entry routes will begin to become more prominent.
This will impact global supply chains in multiple ways. Notably, the rise in expectations surrounding services will create a stronger emphasis on the importance of distribution. These heightened levels of service will begin to create a need for retailers and manufacturers to provide more transparent ordering and delivering models, in addition to making improvements to other elements of the process.
The rise in consumption will also make its way into rural areas, which will aid in the development of newer distribution models for both foreign and domestic Asian businesses. With manufacturers starting to be required to sell to rural distributors who will subsequently sell to retailers in nearby villages, new consumer goods companies are rolling out innovative kinds of rural distribution models to meet the growing demand.
Diving deeper into the trends appearing in supply chains across Asia, the management of working capital is becoming an increasingly important element of businesses across every industry. This is due to the fact that there is a large amount of capital locked into the extended value chain across the continent. Additionally, supply chains in Asia are unusually complex because of the increases in various facets of manufacturing and distribution, including more routes to market and consumer segments.
For businesses looking to establish operations in Asia, it is important to be knowledgeable on these social trends that impact global supply chains and will ultimately impact foreign businesses as well.
2. Understand Consumer Diversity
Asian consumers are very diverse in the nature of their shopping habits for goods and services. Different groups of people across the region place value on different things; some focus on owning luxury goods as a means to elevate their social status, and others look for the best deal from a cost standpoint.
This consumer behavior has translated into widely varying price points across most Asian markets. Along with increased entrepreneurship from locals, a variety of new business models have developed to provide consumers with the goods and services they want at the value they are looking for. Markets that are focused on high-volume tend to place stronger importance on value from a cost standpoint, whereas more flexible supply chains promote more premium products to a demographic that prioritizes quality over price.
For companies expanding into Asia, it is important to understand how to best compete with local companies who have deep expertise in meeting diverse consumer needs.
A strong example of this is shown in the size of consumer markets in Southeast Asia. Because of the smaller stature of these markets in comparison to other Asian countries, businesses have the ability to profit on regional distribution and production in these areas.
Analyzing Diversity – Qualitative & Quantitative
An important practice for any organization looking to establish operations in Asia is to utilize different levels of market analysis for understanding consumer diversity. There is the common misconception that Asian consumers are very similar in taste, which would suggest that a singular marketing approach would afford a company the opportunity to capture an entire market segment. But as previously mentioned, Asian consumers are highly diverse in spending habits, with consumer behavior varying not just from country to country, but even by city.
By performing qualitative research and analysis on consumer spending habits, companies gain the ability to understand customer needs, their feelings about certain brands, and most importantly, their process for making purchasing decisions.
Qualitative research can be done by interviewing customers, shadowing customers as they shop for similar products, creating focus groups, surveys, and more. Whatever method a business chooses, the goal is to observe the mindset and behavior of their target customer base and reveal hidden findings that would have been unavailable through purely quantitative research methods.
On the other hand, there is still value to be gained by performing research on a quantitative level. Polling existing customers and accessing key data from their current subscriptions or spending behavior can provide organizations with insights that can move the needle in terms of better understanding the diverse consumer behavior within these Asian markets.
3. Capitalize on eCommerce
Our final strategy to successfully establish operations in Asia is to capitalize on the eCommerce market. Because of its consumer diversity and massive landmass, the APAC region has become a highly profitable market for online retailers in recent years.
Southeast Asia continues to be a leading force in the global eCommerce market, contributing over 40% of worldwide sales in 2017. In fact, China is predicted to be the world’s fastest-growing eCommerce market from 2019 to 2024, according to Statista. With younger, more tech-savvy consumers beginning to enter the Asian eCommerce market, companies have added focus to their online presence in order to capitalize on the growing budding opportunities.
There are several factors that have lead to such robust profitability in this market.
Electronic Payments & Online Shopping
With China’s eCommerce market skyrocketing, digital payments in Asia are becoming increasingly common around the continent. Electronic payments allow for easier transfer of goods and services by Chinese retailers to consumers paying with a variety of currencies through mobile payment apps.
Recent studies have shown that people living in the Asia-Pacific use their cell phones as the primary method for both researching and purchasing products and services that are available online. Companies that do not provide the option for customers to shop online are risking the possibility of losing those clients to a competitor who takes advantage of the eCommerce market for that particular niche.
Additionally, eCommerce provides companies based in Asia with the opportunity to connect with foreign-language speakers who would not otherwise be able to patron their business. With mobile retailers like Alibaba, Rakuten, and other Asian-based companies making their platforms accessible to consumers outside of their native language, businesses can expand their reach in ways that were previously not possible.
As a company looking to establish operations in Asia and compete with domestic product and service providers, there is perhaps no better single method of breaking into the market than by leveraging the opportunities in eCommerce sales.
How to Set up Different Office Types
Now that you have three key strategies to establish operations in Asia, it is important to have an understanding of how to set up the office-type that makes sense for your business.
Below are the benefits of utilizing a branch office compared to a subsidiary:
There are several advantages gained by setting up a branch office in Asia, including the benefit of accessing lower registration and administrative costs. Parent companies have the ability to offset a portion of their taxes due in Asia against the taxes they will pay in their home countries. There are numerous double tax treaties set between Asia and foreign country jurisdictions that help foreign companies expand in a more cost-effective manner.
The main difference between a subsidiary and a branch office is that a subsidiary registers as an independent company in the local market where the company wishes to do business. This arrangement grants the company the status of being a tax resident, which means that it will benefit directly from the same perks as most local businesses.
For example, Hong Kong allows foreign companies to register their subsidiaries as LLCs, which grants the company independence to operate in Asia with the local corporate tax benefits.
In order to successfully compete, there are a few key strategies foreign companies can apply in the early stages of their expansion. From focusing on innovating new solutions with more frequency and offering lower prices, companies expanding into Asia with little to no brand recognition must apply competitive strategies to give them a chance to succeed in these new markets.
Establish Operations in Asia Today
Between Asia’s rise in consumer consumption, insights into capitalizing on untapped sales potential linked to consumer diversity, and opportunities to generate uncapped growth through eCommerce, international businesses have a chance to successfully expand their business and establish operations in Asia.
With this array of complex opportunities that present businesses with such high upside, it is important for foreign organizations to make the most out of these opportunities for international expansion. If your business does not currently have the infrastructure in place to make this kind of leap on your own, Horizons’ Global PEO can ease the challenges presented by international expansion and help your company establish operations in Asia in a more cost-effective and efficient manner.
To learn more about how to establish operations in Asia, contact Horizons today.