The fear factor

FUJIO MITARAI KNOWS more than most people about building a multinational. He is the 78-year-old boss of Canon, one of Japan’s biggest firms. Worth $43 billion, it makes everything from scanners to lenses for Hollywood. It first opened a New York office back in 1955, but breaking into America took 20 years of hard slog and an Apple-style innovation. In 1976 the company launched a cheap, automatic single-lens-reflex camera on the back of a massive advertising campaign. Mr Mitarai was in charge and the memory still makes him smile. “Our competitors thought I’d gone crazy.” Canon became America’s biggest camera firm. Today it faces competition from smartphones and low-cost rivals. Mr Mitarai insists innovation will keep the firm ahead of the pack. It is developing a raft of new products, from surveillance cameras to virtual-reality design studios and 3D printing materials.

According to conventional wisdom, emerging Asia’s firms should go global as Canon did. But there is an alternative view. As domestic markets in China, India and Indonesia become vast, why do their firms need to bother to compete abroad? After all, the argument goes, they can grow and achieve economies of scale at home. There is a parallel with America, where listed firms tend to be domestically focused, whereas in Europe home markets are often too small to offer growth opportunities. American firms are frequently far more profitable in their own backyard than in foreign fields; Procter & Gamble’s American margins, for instance, are more than double its international ones.

Some industries in Asia will certainly remain local, not least property and utilities, which are dominated by local firms everywhere. In addition, just as American firms have got the cowboy-hat industry tied up, so specialised firms cater to Asia’s idiosyncratic habits. Dabur, based in India, makes Ayurvedic medicines and hair oils. In Greater China Want Want makes rice crackers and Tingyi makes noodles. But on closer inspection the American comparison falls down. Emerging Asian firms are growing up in a world that is radically different from that faced by Western firms in their early days. Globalisation has changed the rules of the game in several ways.

First, Asian firms face global competition at home. Big listed American and European firms have Asian investments with a book value of about $2 trillion. The biggest firms have vast businesses (see chart 6). But the queue to get in may be shortening. Last year American multinationals made an 11% return on equity on their Asian operations, down from a peak of 15% in the glory days of 2005-07.

Not easy, but worth it

Some sectors and companies have found the going tough. Luxury-goods firms have been hammered by China’s crackdown on corruption. IBM, Vodafone and many others have been persecuted by India’s tax authorities. Mining companies in Indonesia have been subjected to tighter rules. Most of the 20-odd foreign insurance firms in India are struggling, as are big foreign banks in South Korea. And some foreign firms have failed to gain a foothold altogether.

Yet on the whole foreign capital is set to stay in Asia. Across the continent, consumer goods, hotels, fast foods, cars, beer and many other industries are pretty open to foreigners. And in industries where foreign firms are active, local firms have to try harder. An example is Li Ning, a Chinese sportsgear firm named after its founder, a former gymnast with a pile of Olympic medals. Despite its famous boss and its local connections the firm has struggled to take on Nike and Adidas with its global brands and global sourcing, and its shares have dived.

Over the past 20 years most global industries have consolidated, with a few big multinationals becoming far more dominant. In his book, “Is China Buying the World?”, Peter Nolan, of Cambridge University, shows how the global markets for gases, brakes, databases, cash machines, constant-velocity joints and many other products are each controlled by three or fewer firms with a total market share of over 70%. They, in turn, have tight groups of global suppliers.

R&D budgets for individual firms tell a revealing story. Great Wall Motor, of China, and Mahindra & Mahindra, of India, are seen as Asian carmaking champions, yet their combined R&D budget is just 3% of Volkswagen’s. Asian firms were responsible for 33% of last year’s R&D expenditure by listed firms globally, but almost all of that was by Japanese companies, which accounted for 16 of Asia’s 20 biggest spenders. In emerging Asia only a handful of firms are close to matching the global leader in their industry.

Consumer tastes in Asia have also changed. Thanks to social media and the internet, they are now influenced by trends around the world. So in many industries companies in emerging Asia face competition from global firms selling to customers whose tastes are more globally influenced than before. In the medium term these firms will either have to give up or become more global themselves. Asia’s 100 biggest listed firms make only 32% of their sales abroad, and if Japanese firms are excluded this falls to 24%. For the 100 biggest Western firms the figure is 52%. Asia’s share of the world’s stock of foreign direct investment is 17%, far below its share of global GDP and market capitalisation.

But going global is hard. By the 1990s Japan’s expansion abroad ran out of steam as the bubble burst at home and too many deals went sour. More recent waves of Asian deals have proved tricky, too. Between 2004 and 2010 Indian firms spent around $100 billion on cross-border deals. Aditya Birla bought Novelis, a metals firm; Bharti Airtel acquired Zain, a mobile operator based in Africa; and Tata bought Corus, a British steel firm, and JLR, a carmaker. All were leveraged buy-outs, with a puny Indian unit raising debt against its target’s assets. The same frothy market conditions that allowed Indian firms to borrow heavily offshore also meant that their targets were overvalued. Only JLR has created value, and none of the acquired firms has been properly integrated with its Indian parent.

South Korean firms have expanded stealthily and more successfully, including in India. Hyundai Motors is becoming as globally minded as Samsung. Near Chennai, a southern Indian city with perhaps the world’s highest incidence of moustaches, it has invested $2 billion over a decade and a half in a factory that builds a car every 68 seconds. That makes it India’s second-biggest car firm, after Japan’s Suzuki. The facility looks, sounds and feels multinational. The working language is English. Indian engineers are rotated to South Korea (“Be careful what they put on your plate,” says one). Bo Shin Seo, Hyundai’s boss in India, says he benchmarks his operating performance against Hyundai’s American factory. Globally the group is hiring foreigners to its top ranks. It makes 56% of its sales abroad and is the world’s fourth-biggest car company, with a 9% market share including its affiliate brand Kia.

We’ll be back

Inevitably much of Asia Inc’s effort to go global will fall to Chinese firms. Just under a decade ago CNOOC, a Chinese oil company, tried to buy Unocal, a Californian energy business. The attempt caused a political outcry in America and the deal was blocked. But the mood has relaxed a bit. The new San Francisco-Oakland Bay bridge was built in part by a Chinese firm.

Since the Unocal fiasco Chinese firms have been pursuing three kinds of expansion. One is to buy natural-resources firms, which have accounted for 45% of their cross-border acquisitions so far, worth roughly $450 billion. In 2013 CNOOC was allowed to spend $17 billion to buy Nexen Energy, a Canadian firm active in oil sands and shale gas. It is doubtful that by getting firms to buy into natural resources abroad China really enhances its energy security: most countries insist on production being sold by local subsidiaries at market prices, and taxed. Besides, oil and metals still have to be shipped on the high seas. Still, the trend continues. In April China Minmetals said it would buy a $6 billion Peruvian mine from GlencoreXstrata, a European firm.

The second kind of Chinese expansion is to buy know-how and brands for use in China. Mainland and Hong Kong-based companies bought 25 German small and medium-sized firms in 2013. Fosun, a privately owned conglomerate, has invested in a French holiday company, Club Med, an Italian menswear brand, Caruso, a Greek fashion-accessories firm, Folli Follie, and a Portuguese insurer. This apparently random splurge makes more sense than it seems to at first sight. Liang Xinjun, Fosun’s chief executive, says the idea is to help Western brands expand their business in China. For example, Fosun helps them build shops there faster and get media exposure. He says his firm has visited 100 foreign companies to scout out deals. The main risk for Fosun is leverage: at the end of 2013 it had a debt-to-capital ratio of 53%. It is now raising new equity.

Evidence of the third important trend—and the most impressive—can be found in the Chinese seaside city of Qingdao. It is home to two big brands. One of them is Tsingtao Brewery, set up by Germans in 1903. Tsingtao is one of China’s favourite beers and most powerful brands, but has become complacent. It faces a price war on its home turf as multinational brewers have gone on the attack, and has made surprisingly little progress abroad. Some analysts think it is a takeover target for a global firm (Asahi, a Japanese drinks firm, owns a minority stake).

Qingdao’s true corporate champion is more unexpected. Haier, built from the ruins of a state-run factory in the 1980s, is now one of the world’s largest makers of household goods. It is owned by its staff and makes sales of $30 billion, a quarter of them abroad, having entered America back in the 1990s. It is rightly celebrated by business gurus as a Chinese triumph, but there is a snag: the margins on the foreign business are low. As Haier’s boss, Zhang Ruimin, explains, “there is a rule in business expansion overseas. You suffer losses for eight years before you make money. This rule applied to us in the US. We spent a lot of money on R&D and advertising locally.” Margins abroad are now improving. Mr Zhang’s new obsession is the internet, and remaining nimble and innovative.

Haier is part of a small and select club: mainland Chinese companies that are multinationals. Other members include Huawei, a telecoms-equipment firm, Sany, which makes diggers, and Lenovo, a computer firm. Most have been plugging away since the 1990s. Opening up a firm’s culture to the outside world is difficult. Huawei’s boss has compared it to cutting a foot to fit American shoes. His firm has faced repeated allegations that it is a front for China’s spies.

Yang Yuanqing, Lenovo’s boss, moved to America after buying IBM’s loss-making personal-computer business in 2005, in the same way that Akio Morita, the co-founder of Sony, immersed himself in American culture in the 1960s. Lenovo has defied the pessimists and turned around the PC business. In January it said it would buy Motorola’s mobile-phone arm from Google and acquire IBM’s low-end server business. Taken together, the deals are worth $5.2 billion. They were slammed by investors, but Lenovo must think that it can repeat its PC trick.

Other Chinese companies, too, are making forays abroad. In 2013 Shuanghui International, a meat firm, paid $4.7 billion for Smithfields, America’s largest pork producer. The deal is China’s biggest ever in America and was concluded to the sound of political grumbles. Shuanghui has since renamed itself WH Group. Part of its motive for the deal was to secure a safe source of meat for Chinese customers and to boost its brand at home. But WH Group now also has sales of $13 billion in America and 47,000 new staff, so it will have to start behaving like a global firm. Discouragingly, in April it botched a flotation in Hong Kong, with investors unwilling to pay the price on offer.

Trying to become a multinational is the hardest path to going global. It involves wrenching change, great risk, lots of scrutiny and the disposal of peripheral businesses in order to concentrate resources. How many Chinese firms are ready to take the leap and make big losses up front to build their business is open to debate. “There are very few Chinese companies that are willing to do this in an overseas market,” says Mr Zhang at Haier. But except for domestic businesses isolated from global competition, it is the right path in the long run, as Japan is rediscovering.

Rising spirits

Masayoshi Son, the boss of SoftBank, Japan’s second most valuable firm, tends to be ahead of the curve

Masayoshi Son, the boss of SoftBank, Japan’s second most valuable firm, tends to be ahead of the curve. In 2000 he invested $20m in a Chinese internet startup called Alibaba that is now worth tens of billions of dollars. In 2006 he bought Vodafone’s Japanese arm, a dog of a business that had bitten its three previous owners. Under SoftBank’s ownership operating profits have increased more than fivefold. In 2013 Mr Son did Japan’s largest ever cross-border deal, the $40 billion purchase of Sprint, an American mobile-phone firm.

After the bubble burst in the early 1990s, corporate Japan lost its mojo. Its share of the world’s stock of outward FDI halved to 5%. There were still a few successes. Japan Tobacco quietly became a world-beater by buying abroad. Fast Retailing, which owns Uniqlo, a clothing brand, expanded ferociously. Some capital-goods-makers thrived, including Fanuc, which makes robots and automation equipment. But mostly Japanese industry was on the back foot.

That may be changing. The strong yen between 2010 and 2012 forced firms to become leaner and shift some of their production overseas. The reality of a shrinking Japanese market is sinking in. Military tensions and the threat of Chinese commercial competition have quickened pulses. And a big part of Abenomics consists of prodding companies to become more global and less stuffy.

Cross-border acquisitions have picked up. In January Suntory, a drinks firm, announced it would buy Beam, an American spirits-maker, creating a company that on paper rivals global giants like Pernod Ricard and Diageo. Outbound FDI in 2013 was almost three times the average level between 2000 and 2010.

Big firms are trying to become more outward-looking. In December Hitachi held its first board meeting abroad, in Delhi. It was the kind of thing most multinationals do all the time, but more unusual for a Japanese one. In late 2013 Tokyo Electron, which makes semiconductors, agreed to be bought by Applied Materials, an American firm, for $9 billion. As R&D bills rise and customers become more concentrated, joining forces made sense. The evangelist of Japan Inc’s renewed push abroad is Hiroshi Mikitani, the boss of Rakuten, a Japanese e-commerce company worth $16 billion. He wants to raise his firm’s international sales to 50% of the total, from under 20% today. In 2010 it introduced English as its main language of business.

Mr Mikitani thinks that Japan has reached a tipping point. “We need to be global, otherwise we are going to be in very bad shape…We need to bring in ideas and people from all over the world. In our headquarters. Not just at the executive level but at the entry level. You are competing against global companies.” Perhaps these ideas are gaining ground. In November Honda said it would start using English in all of its global meetings.

Japan is rich and mature, whereas much of Asia is poor and some parts of it are young as well. But the Japanese experience is relevant to all: in most industries it is hard to stay competitive without being active worldwide. Insularity does not work. So the drive to create more multinationals in Asia and increase its global corporate clout is certain to continue.