Academic journal article The McKinsey Quarterly

Prospering through Relationships in Asia

Academic journal article The McKinsey Quarterly

Prospering through Relationships in Asia

Article excerpt

In this part of the world relationships are the art of strategy Can Westerners join the "investment club"? From farming to China's biggest investor: the CP Group

Western multinationals have been accustomed to entering Asia's high-growth, emerging markets through partnerships or alliances with local companies. They offer capital, technology, and management skills in exchange for regional know-how and, often, political connections. But many find this approach no longer works as well as it did, and are struggling to establish themselves in Asian markets.

There are three reasons why. First, host countries now demand more in the way of technology transfer, local content, and skill development, and are less accommodating about market access and the price they want for natural resources. China, for example, increasingly requires access to proprietary technology in return for business, leaving companies such as GM and McDonnell Douglas wondering whether the technology transfers they made to clinch deals will come back to haunt them. Some day, they know, the Chinese will have the technology and skills to compete with them not only in China, but in other markets too.

The second reason is that western MNCs, which generally approach emerging markets on a project-by-project basis, have discovered that each venture takes an enormous amount of time and energy to establish, yet represents only a fraction of the region's market. Each project is a drop in the ocean compared with what it would take to achieve a meaningful market position - let alone leadership. Even China's massive Three Gorges hydropower project, with its 26 sets of 700-megawatt turbines and generators and total capacity of more than 18,000 megawatts, represents less than 5 percent of the projected power shortage for 2019 - the year the reservoir will be filled to capacity.

The same is true in India, where the Texas-based gas pipeline company Enron continues to try to establish its Dabhol power project in the state of Maharashtra. After three years of planning, negotiating, and renegotiating, the project stalled in August 1995, only to be revived early this year. But the five-month hiatus cost Enron about $250,000 a day, and renegotiation forced it to cut the project's price by 11 percent, or $300 million. Even if the project now proceeds smoothly and is commissioned as planned for 1997-98, Dabhol will meet only a quarter of Maharashtra's peak power requirements, and account for a fraction of India's total power needs.

The third reason why the old approach no longer works so well is that many of the best opportunities are closed to western MNCs. Take China's gasoline market. No MNC yet participates in China's highly lucrative Eastern Seaboard petroleum refining plan, although not for lack of trying. Societe Nationale Elf Aquitaine of France, for example, pulled out of a $2.5 billion refinery project in late 1995 after years of negotiation. Industry observers say the Chinese insist on full control over downstream markets, where profit margins are higher. In short, companies invest on China's terms, not their own.

What works better?

Building the right relationships with the right partners makes all the difference. How "right" the relationships are depends not on whether the chosen partner brings the required ingredients to a single project. Instead, smart companies spin a web of relationships that open up a whole series of potential projects, add value to them, and improve risk management. For companies that understand this concept, relationship-building is the essence of strategy, not a by-product of it.

Although Asian businesses are more familiar with this notion than western MNCs, a few western companies have used relationship-building as a strategy for growth across the globe. US industrial concern Corning - one of the most successful companies in the world at building and maintaining relationships - is among them. …

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