Investment Strategies
GUEST ARTICLE: The Revival Of Asia's Original Equipment Makers
.jpg)
This article examines a specific part of the Asian economic landscape.
The following article drills down into the details of the Asia ex-Japan business world. This commentary is from Elizabeth Soon, portfolio manager, Asia ex-Japan small cap equities, PineBridge Investments. The views are those of the author and not necessarily endorsed by this publication. The editors here invite readers to respond.
The wheel of fortune has turned and turned again for the original equipment manufacturers (OEMs) that, three decades ago, drove the spectacular growth of Southeast Asia’s “dragon” economies.
So strongly have their once-flagging prospects revived that it is
no exaggeration to note that the largest, strongest and
best-managed OEMs, as well as supplying the components and
finished goods that underpin the world’s best-known brands, have
in effect become brands in their own right.
How this has happened makes up a fascinating case study in the
ebb and flow of commercial advantage in a globalised era. It also
illustrates the dramatic changes wrought by the financial crisis
that struck in 2008.
The story begins in the 1980s, when the manufacturing OEMs were
the biggest and most significant of the foreign direct
investments that transformed the economic landscape of the region
and drew admiring observers from round the world, eager to learn
the lessons of success.
It was the OEMs that gave Southeast Asia the capacity and
expertise in sectors such as electronics, textiles and car parts
that were to become hallmarks of its spectacular economic rise to
prominence.
But the appearance of low-cost Chinese competition in the run-up
to the millennium and beyond chilled the climate for the OEMs.
With a rigorous focus on business expenses, their customers,
major multinational corporations, gravitated towards their
Chinese competitors. In this colder climate, it made decreasing
sense for the OEMs to invest in what was progressively turning
into a low-margin business.
All that changed in 2008, and within a short space of time, low
cost was not the only factor weighing on the minds of those
running multinational corporations. In a new, highly uncertain
business climate, with much of the world mired in what would
become known as the Great Recession, these companies could no
longer confidently order two to three months ahead.
With volatile demand and a clouded outlook, the multinational
corporations shortened their order times dramatically, to just
two or three weeks. In very many cases, the smaller, low-cost
manufacturers that had given the OEMs such a run for their money
could not meet these new, much shorter deadlines. They did not
have the cash or the versatility to turn around the orders within
the new timescales.
Certain OEMs that tended to be the larger, more efficient and
better capitalised could thrive in the tough, demanding business
environment by giving the multinational corporations what they
wanted.
Unsurprisingly, they have not only clawed back market share in
the last seven years but a number have become so large that they
can plausibly be described as “branded OEMs”.
Nor is their size the only measure of their importance in the
post-crisis world. Far from being mere contractors, the “branded
OEMs” are, increasingly, in partnership with their multinational
customers, involved in strategy, planning, innovation, product
quality and product development.
Helping the process along is a new focus by Chinese companies on
brand building, with heavy investment in innovation and research
and development in the hope of creating premium products that
will be able to command higher margins.
Furthermore, Asian companies have led the way in a recent wave of
mergers and acquisitions in which brand names have been
consolidated, such as Lenovo’s takeover of IBM’s PC business five
years ago and another Chinese company, TCL Corporation, emerging
as the dominant partner in a joint television-manufacturing
venture with France’s Thomson SA.
An additional source of impetus for “branded OEMs” is the growth
of genuine brands in the emerging markets, such as Tata in India
and Geely in China. Considering that it took 40 years to build
trust in Japanese brands such as Nissan and Panasonic, but just
20 years for Korean names such as Samsung, LG and Hyundai to
become established, it is clear that gestation periods are
shortening.
Tomorrow’s top names will certainly be hoping so, and seem likely
to strive for rapid brand-building by outsourcing production to
reliable OEMs. One powerful example to follow is that of Fast
Retailing, the Japan-listed parent of casual-wear designer
Uniqlo, which has outsourced its garment manufacturing to a
listed producer company and seen profits rise by more than 1.5
times over four years.
This producer firm, in turn, has prospered, helped by other
outsourcing contracts from the likes of Nike and
Adidas.
Meanwhile, the region is not standing still; the proposed
12-nation Trans Pacific Partnership raises the prospect of a
huge, US-led free-trade area. This, in turn, seems likely to
accentuate the trend for increased domestic consumption across
the region, with burgeoning middle classes eager for branded
goods.
Those companies that can position themselves to work alongside
the owners of the new brand names, who can deliver both cost
efficiency and reliable, high-quality production, will be well
placed to join the ranks of the industry elite, the “branded
OEMs”.