Consumer products: restructuring operations in Asia first step towards regionalization involves bringing together ... consumer behavior and expectations ... Consumer products: restructuring

How are consumer products companies restructuring their operations in emerging Asia?Leading practicesMarch 2015

Emerging markets have long been key sources of revenue growth for consumer products companies. Today, however, they must also be the engines of profitability. As we explored in our report Profit or lose, companies need to focus on profit in these markets, or risk losing out to competitors that instill this discipline from the outset.

This emphasis on profitable growth is prompting a renewed focus on how companies organize their operations in Asia to build platforms for long-term profitable growth.

An emphasis on regionalTraditionally, companies have tended to favor either a highly centralized model, with most major activities taking place at the head office, or a decentralized version comprising country-based operations with a thin regional headquarters. Both approaches have their drawbacks. A highly centralized “full principal” model facilitates economies of scale but hampers agility and responsiveness. By contrast, a highly decentralized model leads to duplication of effort and hinders the transfer of best practice.

The disadvantages of these two approaches are prompting companies to seek out a middle ground in the form of a regional model. This enables key activities to be centralized without jeopardizing the entrepreneurial capabilities of the market.

When considering how and where to regionalize their operations, companies need to ask themselves a number of key questions:

1. What location should we choose for a regional headquarters in Asia?

2. Which activities should we place in the regional office and which should we leave in the markets?

3. How should we handle innovation?

4. How can we best supply the market and reach the maximum number of consumers in the region?

What location should companies choose for a regional headquarters in Asia?Consumer products companies establishing a regional headquarters in Asia need to assess potential locations according to five key criteria:

• Proximity to clients and markets

• Favorable legal and regulatory environment

• Stability of the political environment

• Access to human capital

• Favorable tax environment

Traditionally, this assessment has led companies to favor two markets in particular. For many food companies, including P&G, Nestlé, Kellogg, Unilever and Johnson & Johnson, Singapore has been the location of choice. Meanwhile, many apparel and retail companies have tended to choose Hong Kong, on the basis that it is close to their export-based manufacturers in mainland China.

More recently, however, the choices facing consumer products companies have broadened. China is now so important that many companies recognize they need a local headquarters within the market. A common strategy is to set up twin regional hubs: one in Shanghai to cover China and North Asia, and another in Singapore to cover South Asia.

Other destinations are also emerging as potential choices. For example, the Malaysian Government has been working hard to attract multinationals through its Invest KL program. Malaysia offers the advantage of human capital that is both more plentiful and cheaper than nearby Singapore. This makes it an attractive market for activities that are human capital-intensive, such as procurement or shared service centers covering HR, IT or finance.

Which activities should they place in the regional office and which should they leave in the markets?The first step towards regionalization involves bringing together regional management, finance, HR and IT into a single service company for the region. Increasingly, however, we see consumer products companies moving beyond this basic stage to explore greater centralization. Each additional step brings greater potential benefits but also increased business impact and risk. A careful balance therefore needs to be struck between the two.

Companies will often start by bringing in activities, such as procurement, where scale benefits can be realized at relatively low risk. They may then look at centralizing other activities, such as the supply chain or R&D. The key stages towards greater centralization, beyond the basic service company, can be outlined as follows:

• A sourcing company, which brings in procurement

• A supply chain management company, which also centralizes manufacturing, logistics and supply chain activities

• An import/export company, which also incorporates regional account management, for companies with customers in multiple geographies

• An innovation company, which brings in R&D and brand marketing

• A sales principal, which adds sales, customer service, S&OP and trade marketing

• A full principal, which combines all the preceding models and adds intellectual property

ConclusionThe emphasis on profitable growth in emerging Asia is prompting consumer products companies to reconsider the structure of their operations across the region. Although there is no one-size-fits-all model, a clear pattern is emerging: the need for a strong regional headquarters that brings together not only the back-office services of HR, IT and finance, but increasingly procurement, supply chain and innovation.

Our experience has been that moving to the furthest point in this spectrum is too disruptive and costly to the business. Depending on the circumstances, we would advise companies to consider a supply chain management, import/export or innovation company as a happy medium between local and central.

How should companies handle innovation?In the past, many consumer products companies controlled innovation from a single global innovation center. Most have now realized, however, that innovation needs to happen closer to the market in order to take account of local consumer tastes and preferences. As a result, we are seeing more R&D moving out of the global headquarters into regional hubs across Asia. Recent examples of regional R&D and innovation include the following:

• Estée Lauder has opened an Asia innovation center in China to develop products tailored to the specific needs of Chinese and Asian skin.

• PepsiCo has opened a food and beverage innovation center in China to serve as a hub for new product and packaging innovation across Asia.

• Haagen-Dazs has launched products designed exclusively for the Chinese market, including a green tea flavor and ice cream cakes in the shape of designer Western perfumes for Valentine’s Day.

More broadly, multinationals are looking beyond the expat model and recruiting almost entirely locally to ensure familiarity with Asian consumers’ culture. At L’Oréal, for example, 95% of employees in China, including brand managers and marketing/sales executives, are local. At Unilever in Vietnam, around 95% of managers, 80% of directors and 40% of the board of management are local.

How can they best supply the market and reach the maximum number of consumers in the region? The manufacturing footprint for consumer products companies in Asia is changing. Four important trends stand out:

• Companies are closing plants in developed markets, such as Australia.

• Regional hubs are being established, usually in Thailand, Malaysia or Indonesia.

• A “China for China” strategy is becoming more commonplace in response to higher levels of domestic consumption and difficulties relocating cash from China. These plants do not need to be located in expensive coastal cities or export zones; instead, they can be established in the interior, where costs are lower.

• Companies are also looking at “India for India” strategies. In the past, an inefficient, province-based tax system made the movement of goods costly and bureaucratic in India, hampering the development of domestic manufacturing. The proposed introduction of a national goods and service tax would dismantle some of these barriers.

Wherever they locate their manufacturing, one key requirement is to reach as far as possible into rural areas, because these markets remain key drivers of growth. Distributors can only take products so far; in addition, consumer products companies are exploring a range of innovative, direct-to-consumer models that can extend their reach. Examples include the following:

• As part of Unilever India’s Shaktiman initiative, men from participating families were assigned responsibility to sell products to surrounding villages by bicycles.

• P&G (Vietnam) uses boats in the Mekong Delta to access rural consumers living on the water to sell low-cost lines, including sachets of its Downy Single Rinse laundry softener.

• Using a network of rural salesmen, Colgate India has tripled the number of villages where its products are sold, from 5,000 to 15,000.

Contact

Kimjin GanAPAC Operating Model Effectiveness Advisory [email protected]+ 65 6309 8552

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