Hailing and paying for a taxi on the bustling streets of Bangalore, India, provides visitors with a masterclass in negotiation. A trip to the market reveals how ferociously Indians will bargain for fruit and vegetables.
“Negotiating in Australia is rare,” says Mukund Narayanamurti, Asialink Business chief executive, because the prices of taxis and most of our goods and services are fixed.
An inability to acknowledge cultural differences is a common cause for our failure in Asia, Narayanamurti tells BOSS. Indians, Chinese and South-east Asians expect everything to be on the table when doing a deal. Our businesspeople often arrive with a fixed agenda that can scuttle a long-term partnership before it begins.
“A wise businessman once told me when I was learning Mandarin that more important than learning the language is understanding the culture,” Singaporean businessman and Tiger Airways director C.K. Lee says.
To better understand the problem, Asialink has undertaken one of the largest studies of the Asian capability of our biggest companies. The results in its report, Match Fit: Shaping Asia Capable Leaders, provided exclusively to BOSS ahead of its release this month, are dire.
Despite Asia being home to four of the world’s five-largest economies, Australia has been asleep at the wheel when it comes to our investment in the region, the report concludes.
“Our direct foreign investment into China is the same as Papua New Guinea and more is invested into New Zealand than South-east Asia,” a frustrated Narayanamurti says, as he walks BOSS through the reports’ findings.
ASX 200’s Asian culture vacuum
The study looked at our top 200 listed companies and their 1223 board members and 489 senior executives, who were assessed against six Asian capabilities and given a score out of 30. The study also rated BRW’s top 30 private companies and their 153 company directors and 57 senior executives.
Less than 4 per cent of ASX 200 board members are of Asian descent, well below the 12.2 per cent of Australians declaring their Asian ancestral background from 30 different countries in the 2016 census.
Even when you take account of non-Asian executives and directors who understand the region based on six Asian capabilities – including knowledge of Asian markets, operating experience in Asia and language skills – our companies scored an epic fail.
The average Asia capability score of our top 200 boards is just 6.42 out of 30. An alarming 67 per cent of ASX 200 board members have no experience of operating in Asia, while 55 per cent demonstrate little or no knowledge of Asian markets. Only 19 per cent of the boards were rated Asia capable (a score of 10 or more out of 30), with Telstra, Coca-Cola Amatil, Lendlease, Newcrest Mining, REA Group and Blackmores among those to score a pass mark.
Other research supports these findings. For top 300 boards, only 2.7 per cent have directors with an Asian cultural background, according to recent research by Watermark.
In Britain, the Parker report into ethnic diversity on boards has recommended that each FTSE100 board have at least one director of colour (not a term we use in Australia) by 2021. But business groups here rejected recommendations made in the government’s 2012 Asian Century white paper for one-third of top board members to have deep experience in Asia by 2025.
Senior executive teams at top 200 companies performed even worse, with an average score of only 3.79 out of 30. Only 14 per cent were rated Asia capable.
‘Blame the investors’
Senior executives at our top private companies perform slightly better. Former ANZ chief executive Mike Smith tells BOSS that isn’t surprising and lays much of the blame at the feet of our institutional investors.
“There was a lot of momentum for change after the Asian Century white paper but that seems to have completed dissipated,” he says.
“There is huge pressure from investors who are very risk averse; that is one issue and of course the other issue is that any expansion into Asia will lower your returns in the short term but could well increase them in the longer term,” Smith says. “Investors in Australia think very short term basically because of the way they are measured.”
Smith says measuring our superannuation returns on a quarterly basis is pointless and drives the wrong investment decisions.
“We should stop the performance monitoring of these funds on a short-term basis and instead look at them every two to three years. You are looking after 30-year money, who cares what happens after a quarter, you are not going to get the right investment decisions looking at it that way.”
The report concludes the key to successfully executing an Asian strategy is a virtuous circle of Asian-capable executives, boards who can oversee and assess that strategy and supportive and long-term investors. “You have to have champions at every level,” Narayanamurti says.
Yasmin Allen, a director at ASX, Cochlear and Santos, urges companies to build up the Asian capabilities of their executives as the first step in the chain. “When a company has decided on an Asia-focused strategy, its first priority should be to build up its skill base at the executive level before a major strategic decision is made,” she says.
Ralf Wunderlich, a consultant and former president of Amcor Flexibles Asia Pacific, has spent almost three decades in the region. He says that of the 51 countries there, 14 have populations of more than 50 million people – more than double the size of Australia’s – so companies need an effective bridge. That is usually an executive who knows a specific Asian region who can work with the Australian management or board.
“The moment we understand what we don’t know, then we have a chance. If you are sitting in a Thai boardroom and people are talking very softly and calmly, not energised or with passion, the moment we know that is good and shows leadership in Thailand [we begin to understand].”
Too many lawyers and accountants
Even if companies can build an effective bridge, the lack of understanding by Australian boards remains problematic, Smith warns. Australia’s compliance-driven culture has attracted too many accountants and lawyers at the expense of entrepreneurs.
“Regulation and corporate governance have got people into such a state that you have got public boards who are very, very risk averse because of the personal liability,” Smith says. “People who are comfortable with compliance governance are generally people who have a background in it: lawyers and accountants. So you find boards of directors are often taken from those disciplines rather than entrepreneurs.”
Westpac, IAG and Cochlear director Alison Deans urges companies to consider advisory boards, which can attract Asian businessmen unwilling to commit to a full-time non-executive director role on an Australian board.
“An advisory board is an alternative way to bring the perspectives and wisdom of people experienced in these markets to a board’s decision making. This can be a useful first step,” Deans says.
Former IOOF chairman Roger Sexton, who has sat on the boards of several Chinese companies, has long argued that more Australian directors also need to seek appointments to Asian corporate boards.
“A better way to integrate is to get Australian directors on Asian boards. They are all looking for the sorts of skills we can provide. One way is through some of the legal and accounting firms in the region. There are plenty of opportunities,” Sexton says.
The enormous opportunities in Asia certainly seem clear. Asia will represent 66 per cent of the global middle class by 2030 with south-east Asia expected to be home to an estimated middle class of 400 million by 2020. A recent note by Global Infrastructure Hub found that 50 plus per cent of the world’s infrastructure, worth $118 trillion, will be created in Asia by 2040 but Australian companies risk being left behind.
The largest destinations for direct investment by Australian companies overseas continue to be the United States at 19.4 per cent, Britain at 15 per cent and New Zealand at 11.2 per cent, according to 2015 figures. Singapore ranked fourth at 3.9 per cent, followed by Papua New Guinea, Germany and China in equal fifth position.
“Seven of our top 10 export markets are to Asia but what we are exporting is a very narrow basket of bulk commodities,” Narayanamurti says. “We are heavily focused on mining, energy, food and agriculture, international students and tourism.”
Busting the risk myth
Some sectors such as energy and resources, and financial services are more Asia capable than others. Healthcare and pharmaceuticals, property, gaming and manufacturing are among the least capable.
Asialink’s Match Fit report, conducted in partnership with PwC and the Institute of Managers and Leaders, builds on its 2012 research which found that companies with a high-level of Asia capability exceed market expectations: 80 per cent of companies with board members and senior executives with a high level of Asia capability, derive more than 40 per cent of their revenue from Asia.
Asialink wants to conduct more research to bust the myth that doing business in Asia is more risky. Narayanamurti says the failures, such as infant formula maker Bellamy’s, make mistakes that are often framed in a way that makes Asia seem riskier than other regions.
An investigation by The Australian Financial Review’s China correspondent Angus Grigg reported that Bellamy’s big mistake was being spooked by rumours that China’s Customs Bureau was set to tighten up on the so-called daigou market of personal shoppers who bring products into the country via courier, mail and the suitcases of tourists.
Bellamy’s decided to sell directly to Chinese resellers such as JD.com and Alibaba’s Tmall and then drastically discounted its product to try to stimulate demand. The move undermined any margin for the daigou, who quickly switched to other brands and sent Bellamy’s sales and share price plummeting.
“What we have right now are a few organisations that have tried and a lot that haven’t,” Narayanamurti says. “There needs to be a level of mythbusting, we are not convinced that there are more risks investing in Asia.”
Narayanamurti believes while Bellamy’s’ experiences and the retreat by insurer IAG and ANZ bank from Asia hit the headlines, success stories such as SEEK remain under the radar.
“For the first five years of every investor roadshow, I’d be getting questions to the effect of, ‘When are you going to wave the white flag in China and realise you made a mistake?’ ” SEEK chief executive Andrew Bassat says. “A lot of our investors would have applauded if we shut up shop. We just stuck the course and withstood the pain and now China is bigger than Australia in terms of our revenue.”
SEEK has built up a stake of more than 60 per cent in Zhaopin which is the leading jobs website in China, after an initial $20 million investment in 2006 which, Bassat says, he and the board were prepared to lose. “You need CEOs to have a degree of courage and you need boards to have a degree of courage and an alignment between the CEO and board,” Bassat agrees.
Smith claims to appreciate the reasons behind ANZ Bank refining its Asian strategy but clearly remains frustrated by management having to pander to short-term investors, who are hard to avoid when you’re a major listed company or bank.
“There aren’t that many large Australian companies left, so these funds have got to hold you even though they may not like it. They almost act as index funds,” Smith tells BOSS by phone from his vineyard in Bordeaux, France.
“At ANZ what has happened of course is that regulation has meant that the returns coming from personal or retail banking is very difficult to achieve now, you have to have a real critical mass,” he says.
“What they have done is pared that side of the operation back to concentrate on the institutional banking which is still growing. I understand that, the problem is that retail business does provide you with local currency funding and with interest rates rising, markets could be difficult.”
Mutual misunderstandings
The report also busts the myth that an increase in the number of female directors could displace Asian-capable male directors. The research finds that ASX 200 women directors rated better than their male counterparts and ASX 200 female executives are four times more likely to have Asian capabilities than the men.
But even if companies can achieve the holy grail of Asian-capable executives and boards that are backed by willing investors, that only provides the preconditions for success.
Tiger Airways’ Lee says, “The companies that do best are the ones that have integrated into the local community.”
He points to Hindustan Lever, the local subsidiary of the world’s largest consumer-products maker Dutch giant Unilever. The company realised its $6 shampoo bottles just wouldn’t sell in rural India. It built a bespoke Indian business selling small and affordable sachets which, combined with a local campaign, saw sales soar.
Former ambassador to China and former Fortescue Metals director Geoff Raby cites his experience working with Australian mining companies when Chinese companies reneged on contracts after the global financial crisis hit.
“From the Australian side, the Chinese were cheating, [people were saying] you can never trust them, this is what you get and we have to teach them a lesson and make them pay by going through the courts,” he says. “On the Chinese side, [they were thinking] if they were forced to adhere to the contracts they would probably go out of business and the Australians wouldn’t have a customer anyway.
“Both sides were right but from a Chinese point of view, [the Western companies] actually behaved in an untrustworthy way; broke the faith, were not behaving as a friend in the long-term interest,” Raby says.
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