Strategy

The case for centralization in Asia

26 April 2017 by Feng Zengkun

Visit Singapore’s Central Business District and you’ll find the regional headquarters of many multinational companies, from networking and social media firms such as LinkedIn and Twitter to pharmaceutical giants such as GlaxoSmithKline.

With Asia projected to drive the world’s economic growth in the next few decades, more businesses are adopting a centralization strategy and setting up headquarters in the region to better serve their key markets there.

Global forecasting firm Oxford Economics, which advises governments and companies, for example, has estimated that the Asia Pacific’s share of the global gross domestic product will increase from 31 percent in 2015 to 36 percent in 2030, more than that of the United States and Europe respectively.

The region’s middle class is also expected to grow by about 2.7 billion people between 2009 and 2030, increasing its portion of the prized economic group worldwide from 28 percent to 66 percent, according to the international Organisation for Economic Co-operation and Development (OECD).

Beyond the obvious benefits of allowing businesses to serve the growing Asian market more efficiently through proximity, consultancies also extol advantages of centralization such as the reduction of costs through economies of scale, standardisation of processes to maximise efficiency and pooling of expertise to develop new innovations.

Success cases of centralization in Asia

As of 2016, thousands of multinational companies have set up regional headquarters in Asia, including engine maker Rolls-Royce, technology company Microsoft and pharmaceutical firm  Bayer Pharmaceuticals in Singapore, furniture retailer Ikea and consumer goods company Unilever in Shanghai and retailer Walmart in Hong Kong.

Since Bayer set up its Asia Pacific headquarters in Singapore in the early 2000s, the division has inked research partnerships with local and regional academics and government agencies, to successfully develop treatments for diseases prevalent in the region. It has since tripled its clinical trials in the region, from 21 in 2007 to 68 in 2015, including for two blockbuster products – an anticoagulant and an eye medicine – to tackle the rising incidence of stroke-related and eye diseases in the region.

It is clear the centralization strategy has reaped significant dividends for Bayer. The Asia Pacific division posted a fifth consecutive year of sales growth in 2015, netting 3.9 billion euros (S$5.8 billion) for the year – an increase of about 75 percent from 2010 – making its parent company one of the fastest-growing pharmaceutical multinationals in Asia Pacific.

LinkedIn enjoyed similar success after it set up a regional headquarters in Singapore in 2011. Arvind Jajan, its managing director and vice-president for Asia Pacific and Japan at the time, said in a statement then: “The headquarters will serve as a gateway to the rest of the region, enhance our local market understanding and help us develop further strategic partnerships.”

He added in an interview with technology website ZDNet that establishing the headquarters would enable LinkedIn to be closer to many of its major markets in the region, which include Japan, India, China and Indonesia.

Since then, LinkedIn has opened more country offices in the region, including in Japan, and manages their sales, finance, marketing and human resources from the Singapore headquarters for greater efficiency and consistency.

By August 2016, it had exceeded more than 100 million members in the Asia Pacific region, a doubling of the membership in just two years. The region now makes up 22 percent of LinkedIn’s global member base, and the firm expects the proportion to grow further.

Getting Asia’s strategy right

Such regional strategies, which strike a balance between local responsiveness and the advantages of economies of scale and corporate synergy, could be the key to success for companies seeking to expand their operations in Asia.

Sigrid Zialcita, consultancy firm Cushman and Wakefield’s managing director of Asia Pacific research, explained: “A multi-domestic strategy is too fragmented and can become unwieldy and duplicative, while a global strategy is too remote to leverage resources in the region. A company that centralizes operations in a location can avoid duplicating facilities across countries and at the same time develop products with a local perspective.”

“Furthermore, setting up a regional headquarters reinforces the company’s presence in the region,” she added.

Companies new to the Asia Pacific region could also benefit from setting up a regional headquarters first, noted Peter Giulioni, Jr, an associate professor at Nanyang Technological University’s (NTU) Nanyang Business School.

“This would be a solid strategy for, say, a Western company that would like to ‘test’ the Asian market before making a capital intensive commitment to the region,” he said. He added that firms considering such a move should have a clear and detailed business plan with numerous evaluation points and key performance indicators.

One of the most important decisions for companies that choose the regional strategy, is the location of their headquarters in Asia.

In 2016, Cushman and Wakefield published a report that found Singapore as the city of choice for companies looking to establish a regional headquarters in the Asia Pacific, although it faced growing competition from Hong Kong and Shanghai. About 4,200 firms had regional headquarters in Singapore at the time, compared to 1,389 in Hong Kong and 470 in Shanghai.

Singapore is in the same time zone as key Asian markets such as China and Malaysia, many of its residents are bilingual in English and Mandarin or Malay, it scores highly for the quality of life and its government policies to attract different multinational companies to establish their regional headquarters in the country, the report’s authors said.

Number of regional headquarters in Singapore, Hong Kong, Shanghai, Beijing and Tokyo in April 2016.

Sources: Cushman and Wakefield Research, Tokyo Metropolitan Government, Hong Kong Census and Statistics Department, China International e-commerce, Singapore Economic Development Board, people.cn

Singapore is also a key hub in the region for higher value-added business activities such as research and development and training, economists have said. Mr Harvey Koenig, head of consultancy KPMG’s ASEAN Incentives Advisory team, told news website Channel NewsAsia in 2016: “Sectors such as aerospace, biomedical science and financial services have continued to invest in Singapore by virtue of its political stability, right kind of talent and supporting infrastructure such as banking facilities.”

“Singapore also offers other elements such as a highly developed and desirable business environment and a strong legal system,” added NTU’s Giulioni.

Companies looking to capitalise on Asia’s growth should approach it with a regional strategy, and Singapore is a good base from which to do so. As Cushman and Wakefield’s Zialcita put it: “Regional strategies have become more important since the last financial crisis, especially as economic fortunes diverge and Asia emerges as a main driver of the global economy.

“While Asia is already an important production site for many companies, it now offers the potential of large and underpenetrated markets.”

Edited by Liew Hanqing and Tan Yi Xuan