Asia Business Letter

As the world becomes increasingly global, Swedish companies are expanding internationally and setting up sales and operations in more countries. At the Swedish Trade Council we are seeing an increased interest in Asia, and more small- and medium-sized companies operate throughout the region. At the same time, Asia is experiencing rapid change, bringing new challenges and opportunities.

For this reason, we are proud to introduce the Asia Business Letter, with the goal of inspiring you to expand your business in the region and take advantage of the full potential of the Asian markets. We hope you will read it with interest, and we look forward to hearing your reactions to the topics in this and following issues.

Torbjörn Yngwe Bäck
Swedish Trade Council

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Asia''s potential: We are only scratching the surface
It is time to adjust our perceptions of Asia, and be part of the region that is experiencing the world''s fastest economic growth. By integrating better with local market needs we can achieve more. Read the full article here.

China
From "Made in China" to "Invented in China"
China is determined to cast off its current reputation as a place for low-cost manufacturing and reinvent itself as a leading innovation centre. Foreign companies are responding by establishing R&D centers. Read the full article here.

India
A booming economy creates great opportunities
Unlike many other Asian economies, the Indian economy is driven by its domestic market, and the country''s 200-300 million middle-class consumers represent a huge opportunity for Swedish firms. Read the full article here.

Japan
A reawakening giant
Japan has put its zero-growth period behind. The structural reforms have made Asia''s most mature economy an easier place for foreigners to do business. Read the full article here.

South Korea
Mass innovation comes of age
In the short space of just over four decades, South Korea has moved from being a imitation-based economy to an innovative, leading global economic powerhouse. Its next challenge: mass innovation. Read the full article here.

Southeast Asia
Exploring the ICT potential
Despite huge differences from one country to the next, a study has found ICT technologies to be an area in which Swedish companies could seize opportunities. Read the full article here.

Taiwan
High-tech looks to the future
Despite the fact it has shifted much of its production offshore, chiefly to China, Taiwan continues to be the place where strategic decisions are made, and it is increasingly emerging as a global centre for R&D. Read the full article here.

Vietnam
Moving up the value chain
Manufacturers and even high-tech businesses are eyeing Vietnam as a low-cost rival to southeast China, where production costs are expected to rise rapidly in the coming 10-20 years. Read the full article here.

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Are you interested in starting or developing your business in Asia? Please contact Mattias Bergman, Vice-President Asia, mattias.bergman@swedishtrade.se, +46 8 588 660 009.

You can also find the contact details for all our Swedish Trade Council offices at http://www.swedishtrade.se/

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Asia''s potential
We are only scratching the surface

We hear a lot about Swedish companies entering Asia, but how well are we performing? As four of the world''s 12 largest markets are in Asia - a region currently experiencing the world''s fastest growth - it should be expected that Swedish companies would be allocating at least one-third of their resources developing Asian markets. However, our export share to Asia is only about 7 per cent, presenting a big gap between what we might expect and reality. And, even if we include Swedish companies with local operations in Asia, that gap still remains. In fact, our exports to Asia are declining and we are losing market shares.

A recent study by Boston Consulting Group analysed large Western firms, and found that only 14 per cent of their sales, 7 per cent of their employees, 5 per cent of their assets, 3 per cent of their R&D and 2 per cent of their top 200 people were allocated to Asia, even though 34 per cent of their potential markets were in the region. If we assume this picture represents most large Swedish companies, then how is the situation for small and medium sized enterprises?

An incomplete view of Asia
One contributing reason for lack of attention to Asia is in wrong or outdated views of the region. The view of Asia as a place of cheap, low-quality products, inexpensive and ill-qualified labour, difficult and closed markets, and, to a certain extent, a place where cultural differences make for hard work, tend to prevail, but it is neither up-to-date nor complete.

In large part, Asia today is not an emerging market but an emerged market that can be compared to Sweden, with rich and demanding consumers who are open to Western products, a wealth of competent talent, and strong local competitors with high-tech products run by managers who have graduated from the top international business schools.

A more correct description of the current situation would be to say that the old picture of Asia is still valid, but that it coexists with an altogether more modern situation. That makes Asia a difficult but exciting experience, and also a place replete with opportunities.

"Asia does not concern me as my home markets are the Nordic countries", is a comment I often hear from Swedish companies. This head-in-the-sand attitude is a one-way ticket to disaster. Asia will affect all of us, both in our home markets and in our export markets.

China as a platform for growth
The country that will affect us most is China. With low-cost production on their side, Chinese companies are using their cost advantage, not only to compete on price in their home markets, but also in export markets. This we have seen for years in commodity products, but what is happening now is that Chinese companies are also becoming strong in high-tech areas, and are investing large sums into R&D and brand building. Meanwhile, companies worldwide are also using China as a platform for growth, not only for the China and Asia markets, but also for exports to other parts of the world. This is shifting the playing field for many of our Swedish companies.

With increasing competition, the markets are becoming more attractive. This is not only because Asia represents one-third of the global market and that many regional markets are enjoying annual growth of close 10 per cent, but also due to the fact that markets are becoming more developed and demanding more of both high-quality consumer products and of high-tech industrial products, not to mention infrastructure. And this provides a good fit with what Sweden does best.

The question is, how can we tap the full potential of Asia''s growing markets? As always, there are no simple answers, but let me point out three areas where I believe many Swedish companies need to improve.

1. Adjust better and quicker
Until now, many Swedish companies have established their presence in Asia, but halted localisation and expansion too early. A strategy based on taking the existing products, services and business models from Europe and applying them to Asia will, in most cases, only skim the markets. In order to reach a larger share of the market, we need to better understand local customer needs and adjust products, services and business models. Part of this process is realising that it is possible to localise production in order to lower costs and produce at "the China price".

2. Use local competence
To be able to fully understand the requirements of a market, it is essential to use local talent to a greater extent. This is important not only for sales, but to an even greater degree in terms of product development. Today we can find a huge pool of competence in all fields from R&D, production, marketing & sales to management. This talent should be used to not only perform better on local markets, but also globally. The fact that most top international universities are full of Asian students with top grades only hints at the potential.

This said, it is still important to use expatriates in order to facilitate the integration of the company culture, provide core product know-how and ensure the company is smoothly integrated with the global business environment. At the entry stage, when good communication with the head office is crucial, and there is possibly the need to make important organizational changes, it is recommendable to use more expatriates in key positions. But such staff should have the clear objective of transferring their knowledge to local talent.

3. Adopt a more integrated strategy
Previously, it was enough to approach each country separately and apply global strategy with minor local adjustments. Today, the Asian markets are no longer closed, independent markets, but are on the way to becoming fully integrated markets. For most Asian countries, local Asian markets are now more important than the US and European markets. As those markets become more integrated, we need to address them, employing a more integrated strategy that balances the different comparative strengths of each market. It is also necessary to consider the correct sequence and timetable for expansion and rollout, while calculating how long strong local competitors are likely to sit idle.

With a well-designed, integrated strategy, using a pool of local talent to adjust our offerings to the market, we have huge potential for developing our businesses in Asia. But, of course, all such strategies must be based on up-to-date and correct information about the markets as they rapidly change and develop.

Mattias Bergman
Vice-President Asia
Swedish Trade Council

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China
From "Made in China" to "Invented in China"

In the 1930''s, an American politician said: "Let the Japanese continue to produce what they are doing, they can never produce things with enough quality for a Western consumer."

Sometimes in Sweden and Europe we hear the words, "We are certain that China cannot compete on innovation, high technology and quality."

Do comments like this reflect reality? The answer - as was the case with Japan - is probably, no. After all, China is transforming itself into the world''s market, while also aiming to develop strong products and brands that can conquer the world. For the world''s factory, it is a question of proving that it is serious about its plans to develop into the world''s most innovative country.

Aiming to be innovation leader
Domestic R&D performance is an important indicator of a nation''s innovative capacity and its future growth potential, productivity, and science and technology competitiveness. Outside the European region, R&D spending has increased considerably since the early 1990s. Several Asian countries, most notably China and South Korea, have been aggressive in expanding their support for R&D.

China''s 11th five-year programme clearly states that China will focus on developing independent innovation, with the aim of building an innovation-oriented nation. Meanwhile, the government also announced last year a 15-year plan to increase spending to 2 per cent of GDP by 2010, and 2.5 per cent of GDP by 2020. This would put China''s R&D spending, as a percentage of GDP, at US levels by 2020. By way of comparison, Sweden spends about 3.95 per cent of GDP on R&D, a very high percentage in global terms.

A major R&D base for foreign companies
Patents are not a direct indicator of innovation capability, but they do provide some illuminating insights. The number of patents in China has continued to grow over the past five years, reaching a record growth rate of 36.4 per cent in 2004-2005.

China''s government policy is to actively attract foreign R&D by providing exemptions from customs duties and VAT on the import of equipment and technologies for self-use, and through a regulation dating from 2000 that offers preferential treatment for foreign R&D labs.

The huge increase in foreign China-based R&D centres is proof of this, and according to China''s Ministry of Commerce, multinationals established more than 750 R&D centres in China in 2005. Beijing and Shanghai are the preferred locations: Beijing for IT, telecommunications and electronics companies, and Shanghai for automotive, chemicals, food, pharmaceutical and engineering companies.

Local expertise - cost-effective production
Swedish companies have also established R&D centres or institutes in China, and they are not simply focused on the China market. ABB, for example, has located one of its 10 global R&D centres in China, while Electrolux has an electronic development and a global design centre in China. Several of Ericsson''s 10 Chinese R&D centres are developing for the global market, harnessing the talents of some 1000 R&D staff.

Moreover, companies that move product development and design to China also find that their production costs are lower in comparison to products developed in the West. By using local expertise, cost-effective production can be achieved in China.

China as an innovation economy
The ability to generate, absorb and commercialise knowledge is important for a nation when developing its competitiveness. Scientific and technological knowledge is of importance not only for economic growth, but also for health care and sustainable development, all issues stressed in the Chinese 11th five-year programme. China has realised it has to develop its ability to innovate, and it is apparently willing to invest heavily in it. By further and aggressive exchange of knowledge and experience with the outside world, China is set to become an innovation economy much faster than most of us imagine, and future products will certainly be not only made in China, but also invented in China.

This will surely be an opportunity for Sweden, a country well known for innovation, R&D and high-quality products. All Sweden''s global-leading product and service companies have to do is to seize the opportunity to use innovation growth in China as a platform for their future success.

Charlotte Rylme
Swedish Trade Council in Shanghai

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India
A booming economy creates great opportunities

Since the early 1990''s, India has been opening up its economy and in recent years experiencing growth rates touching 8-10 per cent. The liberalisation process was initiated by the current Prime Minister, Manmohan Singh, laying the foundations for some very exciting years ahead.

Growth is not being driven by public investment or a strong export industry, making India different from many other Asian economies. Its strengths are a strong private sector with global ambitions and a fast-growing middle class - between 200 and 300 million people - that is consuming more and more. The engine of the Indian economy today is a strong domestic market, making it interesting not only from a traditional sourcing perspective, but also as an important future market for products and services.

7 million new subscribers every month
The telecom industry in particular is growing at a dazzling rate. Every month, the country gains 7 million new mobile subscribers, and Ericsson install a new base station every 24 minutes. Nokia and Motorola have established handset-manufacturing units in India, and Sony Ericsson recently announced plans to do the same. This makes for enormous potential for Swedish suppliers to the telecom industry, and many of them are already successfully taking advantage of the opportunity. Close to 50 per cent of Sweden''s exports to India are telecom-related products.

Opportunities in the automotive sector
Another fast-growing Indian market is the automotive industry. India manufactures more than 9 million vehicles per year, including more than 1 million passenger cars. The Indian company, TATA Motors, is already performing well on several international markets. For Swedish companies, this means India is not only an interesting domestic market, but also a market with huge sourcing opportunities, as many Indian suppliers are already strong in the manufacturing field.

Bengt Johansson
Swedish Trade Council in Bangalore

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Japan
A reawakening giant

After a decade of low or no growth, the so-called "lost decade", the world''s second largest economy has finally started to reawaken. As a matter of fact, Japan is now experiencing its longest period of continuous growth since WW II - 60 months and counting.

The lost decade was a tough period for the Japanese economy, bringing many changes and thoroughly shaking the "Japanese model". Examples include the system of lifetime employment, which has become less widespread, and the dismantling of cross-ownership ties and the power of corporate groups. Other changes include a significant increase in foreign ownership in Japanese companies and decreased bureaucratic power, while Japan has also become a less expensive country to do business in after years of deflation.

All these factors have conspired to make Japan a much more "normal" economy, and as a consequence it has in many ways become a lot easier for foreign companies to enter the Japanese market.

World''s highest purchasing power
There is no place in the world with a higher concentration of purchasing power than "Greater Tokyo", with 34 million inhabitants and a GDP equal to that of Italy in a geographic area the size of Skåne. Many companies have decided in recent years to enter the Japanese market; IKEA opened its first two stores in 2006 and is in the process of opening many more. H&M will open its first store in 2008, Husqvarna has recently acquired its largest competitor in Japan, and AB Volvo''s acquisition of Nissan Diesel was finalised in March this year.

However, Japan does not only represent a huge export opportunity; it is also a place to gain inspiration, to learn from and develop new products in. The Japanese customer is in many ways the most demanding in the world. Expectations in terms of quality, functionality and design are higher in Japan than anywhere else in the world.

As the president of Proctor & Gamble, Japan, puts it, "Japan is the toughest, most difficult consumer market in the world; if you can beat your competition here, you can beat them anywhere else in the world." Many of P&G''s globally successful products in the hygiene segment, such as ultra-thin diapers, have come from product development efforts to succeed in Japan.

The same story is true of French company L''Oreal: its globally successful lipstick series "Maybelline" was initially developed for the Japanese market. Another well known example is the British vacuum cleaner manufacturer Dyson, which has been very successful in Japan because of its decision to develop a smaller and lighter product for the Japanese market - the so called DC05, which is now successfully sold worldwide.

Johan Rugfeldt
Swedish Trade Council in Tokyo

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South Korea
Mass innovation comes of age

South Korea was on its knees at the start of the 1900s, with few natural resources, a limited higher education system, and a per capita GDP of US$80. It has succeeded in becoming one of the most technologically developed and best-educated societies in the world. In 47 years, South Korea has achieved the world''s highest per capita GDP growth rate and becoming the world''s 10th largest economy in 2006. The winning ingredients? A combination of hard work and brainpower.

By 2006, South Korea had the world''s sixth highest private-sector R&D expenditure, the third largest number of patents granted and the third highest patent productivity. It had also achieved the world''s highest growth in US patents and the highest growth in patent families, or patent applications spread over numerous countries.

Mass innovation, the evolving Korean model
The rapid advancement of innovation in South Korea was achieved through a state-driven industrial development model, with large conglomerates as its primary motor. The question is now, will the model that has brought South Korea so far become an obstacle?

In terms of technology, South Korea finds itself in the awkward position of running on the heels of the EU and Japan, while China and India tug at its shirtsleeves. For South Korea to maintain its competitiveness, its model for innovation will need to evolve into one of "mass innovation", where the innovative capabilities of small businesses and the dynamic younger generation are unleashed by capitalising on the country''s outstanding infrastructure for distributed innovation. South Korea is one of the most networked, connected and well-educated societies in the world, and could well become a society in which innovation becomes a mass activity. Its demanding and educated consumers may well drive the creation of new markets in communication, information and services.

Implications for Swedish companies
Sweden and South Korea have many overlapping business sectors, have export-led economies and are emphasizing innovation and R&D to maintain competitiveness in a global market. Just like Sweden, South Korea has a strong automotive sector and is the world''s fifth largest manufacturer. They are also strong in IT hardware, IT software, and biotechnology.

While automotive and engineering products have fuelled rapid growth in the past, the government, together with the private sector, has staked out an ambitious path to drive Korea''s "second leap" in GDP by identifying and pushing the next-generation growth engines of biotechnology, nanotechnology and IT. They are realising this second leap will require the evolution of the innovation model from a state-driven industrial development model to a mass innovation model, as well as close collaboration with international research communities and international technology development companies.

Given the similarities in industry structure and research areas, there should be ample opportunities for collaboration between Swedish and South Korean research communities and technology-development companies.

Tarras Delin
Swedish Trade Council in Seoul

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Southeast Asia
Exploring the ICT potential

A market research study of four markets conducted by the Swedish Trade Council has found that, in the largely emerging market of Southeast Asia, the information and communications technologies (ICT) sector shows great business potential.

With over 550 million people and GDP of US$841 billion, the combined economies of Southeast Asia are considerably larger than the entire Indian economy. Indications that the region is growing in economic power are ample, but can mostly be seen in terms of FDI inflows. Several product sectors show a strong, positive investment trend and ICT is one of them. For example, in 2006, Sweden''s exports of telecommunications equipment to Indonesia increased 107 per cent on the previous year.

Growing market
"There is no doubt that there is potential for more Swedish ICT business opportunities in the region," says Abhinash Murukesvan, at the Swedish Trade Council in Malaysia. In 2000-2006 mobile penetration in Malaysia increased from 21 to 78 per cent. "Given that the majority of these users are starting to migrate to 3G, we see a huge wave of incoming mobile services products in the market."

Tomas Dahl, Trade Commissioner with regional responsibility for Southeast Asia, adds: "Malaysia, with its population of 25 million, is a relatively small market in Asia, but offers very good incentives, as well as an attractive cost level for Swedish ICT companies."

Swedish Aptilo Networks is one of the companies that have chosen to place their regional headquarters in Malaysia. The American computer giant Dell Inc is another. Meanwhile, a study by market research company Frost & Sullivan shows that the increasing number of regional cellular subscribers and computer users is even leading Original Equipment Manufacturers to canvas the more mature market of Singapore in search of an HQ base to serve the growing regional market.

A tale of four markets
Although Southeast Asia is a coherent region with many common characteristics, there is no country that comes close to representing the norm. After all, Southeast Asia is represented by everything from a high-tech, market-liberal city-state like Singapore to emergent, fast-growing market economies like Vietnam.

The state of a country can be seen in terms of need analysis; for example, in Malaysia the emphasis is on infrastructure investment for the upgrading of 3G networks, whereas in Laos effort is going into upgrading and maintaining the basic GSM network. The differences across the region between various countries'' needs are so huge that product and service demands encompass a dizzying spectrum.

The Swedish Trade Council has analysed the opportunities and barriers in four very interesting regional markets: Indonesia, Malaysia, Singapore and Thailand. The report reveals that opportunities are often country-dependent, covering many product segments across the region, but that barriers remain, such as the lack of Intellectual Property Rights in Thailand. Despite this, Thailand is a global leader in the establishment of electronics- and component-related industries.

Swedish Trade Council in Malaysia

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Taiwan
High-tech looks to the future

Taiwan may be known as a manufacturing hub for many products, but its wider role in the region, not to mention globally, is less well known. In fact, Taiwan''s role is ever changing, as it adapts to a regional environment characterised by rapid change.

While there has been a phenomenal flow of Taiwanese investment into mainland China, many products that once claimed a major share of Taiwanese exports are now made elsewhere.

Effectively achieved integration
Nevertheless, Taiwanese companies still pull their weight when it comes to IT products. Key components, R&D and, most importantly, major strategic decisions continue to be made in Taiwan. Meanwhile, the integration of head offices and mainland Chinese units has been more effectively achieved than in the case of almost any other investor. Taiwanese companies have utilised competitive advantages and localised production, carrying out design and R&D wherever it best makes sense, avoiding many of the traps companies from other parts of the world have fallen into. Integration has obviously been greatly facilitated by language and cultural factors in a market that has presented investors from other parts of Asia and the world with major obstacles.

The IT Industry is a case in point. According to the latest available statistics, 67 per cent of all laptop computers, 65 per cent of all LCD monitors, and 95 per cent of all wireless LANs are made by Taiwanese companies. Furthermore, the world''s two largest contract manufacturers of semiconductors are Taiwanese, and between them they control 79 per cent of the global contract-manufacturing business.

As a matter of fact, semiconductors continue to be the cornerstone of Taiwan''s unique position in the IT industry. Apart from the foundries, Taiwan has a very strong position among the design houses, or "fabless" semiconductor companies. It also commands strong positions in packaging, Mask ROM, as well as in DRAM. All these factors contribute to Taiwan''s uniqueness as an IT player. Its close proximity to and close cooperation and competition with a host of different players has ensured the island a leading position in semiconductors and many other IT-related industries. And in terms of high-end and capital-intensive products, production, design and R&D are carried out in Taiwan, even though the island continues to manufacture many products offshore.

Moving up the value chain
In recent years, Taiwan has moved rapidly up the value and development/innovation chain, as it moves from original equipment manufacturing, manufacturing products according to specifications provided by a brand owner, to original design manufacturing, in which much of the development and design is outsourced to the manufacturer. This can clearly be seen in the number of patents granted and in patent productivity. Taiwan ranks No 4 globally in the former and No 1 in the latter. In other words, Taiwan is no longer simply a major manufacturer but also a developer and R&D centre where the majority of strategic industry decisions are made.

On 14 April this year, news media reported that VIA Technologies, a Taiwan-based design house with global operations, had signed an order for a new range of Hewlett-Packard PC processors. The significance of this news is that a Taiwanese company has broken into an industry that until now has been completely dominated by two US players, Intel and AMD. This is a major breakthrough, and confirms how fast Taiwanese companies have moved up the value chain, suggesting that Taiwanese and other Asian players will have an important role to play in developing the next generation of IT products.

This is an important development for anyone who is aiming to sell software, design or other solutions, and have them incorporated into a finished product. Decisions and innovations in terms of the design and functionality of the products of the future are likely to be made in Asia, and Taiwan will play a crucial role in this. Any company offering software, manufacturing technology, or other know-how to the semiconductor industry, not to mention technologies associated with PCs, PDAs, mobile phones, digital cameras, broadband, and W-LAN, will in the future need to include a Taiwan presence in their strategy. Increasingly, the story is not only about sales, but also about development and being where the real drivers of the future are.

Henrik Byström
Swedish Trade Council in Taipei

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Vietnam
Moving up the value chain

Since its first tentative steps into the international business community, Vietnam has established itself, both globally and regionally, as a leading low-cost manufacturing base. As companies seek to diversify their supply chains and become less dependent on China, Vietnam is increasingly becoming the obvious choice in a "China + 1" manufacturing/sourcing strategy.

This can be seen in the fact that manufacturers are now starting to choose northern Vietnam to manufacture exports to the world and to southeastern China in particular. After all, it is forecasted that production costs will increase far more rapidly in southeastern China than in northern Vietnam over the next 10-20 years.

In addition to traditional low-cost and low-value-added manufacturing, the first signs are evident that Vietnam is moving into high-tech production. In November 2006, Intel Corporation announced that it would increase a previously announced US$300 million investment in an assembly and test facility outside Ho Chi Minh City to US$1 billion. The new Vietnam facility will be the largest single factory in the Intel assembly-and-test network. Production will begin in 2009, and the operation could eventually employ as many as 4000 staff, many of whom will be more qualified than Vietnam''s traditional low-cost workers.

Håkan Ottosson
Swedish Trade Council in Vietnam

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Are you interested in starting or developing your business in Asia? Please contact Mattias Bergman, Vice-President Asia, mattias.bergman@swedishtrade.se, +46 8 588 660 009.

You can also find the contact details for all our Swedish Trade Council offices at http://www.swedishtrade.se/