Transcript ASEAN and Asian Emerging Markets

ASEAN and Asian Emerging Markets:
From Exporting to Innovating
The 2nd Seminar on Board of Trade of Thailand’ Strategy
Innovating Business Reform to Move Forward
George Abonyi
Visiting Professor
Department of Public Administration and Executive Education Program
Maxwell School, Syracuse University
30 September 2015
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Overview of “the story”
Challenge
Opportunity
Response
• Thai manufactured exports stalled (product/market challenge)
• “New normal” + ”greater divergence” of global economy
• China market is not (yet?) the answer
• Asian emerging markets: ASEAN, China, India (ACI)
• But these markets and consumers are different
• From exporting to innovating for Asian emerging markets
• But innovation with a difference
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Thailand: sustained development success
Source: Pasuk (2014)

Thailand has achieved a remarkable
combination of sustained rapid growth,
macroeconomic stability, economic
diversification, declining poverty, until
the Asian Crisis of 1997-98

Asian Crisis eroded but did not erase
gains from growth and development;
and the economy generally recovered

Since the Asian Crisis, economic
performance has been moderate; and
there are concerns that Thailand has
fallen into the “middle-income trap”
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From sustained development success
to Middle Income Trap
Source: Ohno (2011)


Income growth stalled
•
Manufactured exports stalled
Trap: between low-wage
manufacturers and
high-wage innovators
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MACRO CONTEXT
Key role of manufactured exports
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Export-driven growth
Source: NESDB, 2015


Key role of exports in driving growth to date
•
Import intensity of exports, e.g. hard disk drive (HDD)
Note: Significant drop in investment since Asian Crisis (1997/8);
particularly private investment
•
Key reason for infrastructure investment need, e.g. logistics
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Manufactures dominate exports
(% share of exports)
Source: Ministry of Commerce, NESDB 2015

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Electronics and Electrical: 30% of exports (2014)
•
Automotive (parts, assembly): around to 10%
Compare with rubber products: under 3% of exports
•
•
Yet Thailand is the world’s largest producer/exporter of natural rubber
But close to 90% of rubber exports is not manufactures – little value added
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CHALLENGE
Manufactured exports, key driver of growth, have stalled
•Product/production challenge
•Market challenge
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Product Challenge: What/How

Manufactured exports diversified and increased in
sophistication, e.g. hard disk drive (HDD)

Thailand is losing comparative advantage in low-wage
sectors (+ demography, e.g. migrant workers)

Most Thai firms, unlike in Korea or Taiwan, have not
used low-cost labour advantage for knowledge-based
capabilities to compete: upgrade (innovate), e.g. HDD
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Example: Thailand’s position in the Hard
Disk Drive (HDD) Global Value Chain (GVC)
Source: Hiratsuka (2006)
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Stuck in the middle of the GVC “smile curve”
with lagging productivity: challenge of
process and product innovation

Stuck in the middle?

Value Added per Worker in 1990,
2000, 2010: USA figure = 100
Source: Suehiro (2015)
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Market challenge: “New normal”
and “greater divergence” in
the global economy
Source: IMF WEO, July 2015; October 2008

Slow-growth global economy esp. developed economies; slowing but
relatively faster growth in Asian emerging economies
•

Especially ASEAN, China, India (ACI)
And political uncertainty of economic management (e.g. EU, China)
Source: IMF WEO, July 2015, October 2008
Note: IMF has continually overestimated growth since 2009
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Thailand’s changing export markets (%)
and the role of China
Source: Suehiro (2015), NESDB

China is now the largest single market for Thai exports – but
misleading
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Developed economies and
China as markets: slowing

Developed economies (particularly US)
driving region’s growth as final markets
•

•
China has imported 50% of all intraregional intermediate exports (parts,
components); but for final export to
developed economies economies, e.g.
iPhones to US and EU (source: ADB, 2011)
•
China: rebalancing and extended slow growth
From high (national) savings and related
investment- and export-driven model;
to domestic consumption driven growth
Challenge of “political economy”
Intra-ASEAN trade is less than 25% of its total trade
Developed economies’ anemic growth
Source: Lim and Lim (2012)
•
•
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China’s investment-driven growth:
increasing debt, declining efficiency,
most new debt is to service old debt

China’s increasing debt and composition –
mostly SOEs and local government
• Nearly 50% related to real estate
Source: MGI (2015)

Growing non-productive overinvestment:
i.e. declining efficiency of investment
(Marginal Product of Capital)
Source: Ha Jiming, Goldman Sachs China (2015)

S
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Key Chinese activity indicators

Nearly every industry is at 30% or more overcapacity
•
•
Average accounts receivable for consumer
electronics retailers/manufacturers:123 days

China’s import growth has
declined significantly
Average days of inventory for clothing companies:
174 days (Bloomberg 2015)
Source: Haver Analytics, in Financial Times, 19 Aug. 2015
Source: OECD, 16 Sept. 2015
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China market challenge

China’s rebalancing from investment to consumption-driven growth even if
smoothly successful, will mean extended slow growth; AND does not
automatically translate into increased imports of final manufactures

China as market for final goods is shaped not by size or growth of GDP,
but capacity to generate net demand for import of final manufactures
•

China has been major importer of Thailand’s/region’s exports of parts and components; but for its
final exports to developed economies, e.g. iPhones to US and EU
To become a growth locomotive for manufactures of Thailand and region
China would need to raise not only its domestic consumption as a share of
GDP, but also its imports of final goods from the region
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OPPORTUNITY
Over the longer term, Asian emerging markets – particularly
ASEAN, China, and India (ACI); but different from developed
economies, Thailand’s traditional final markets.
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Future of Asia is bright
By 2030 40% of global consumer spending from Asia, especially ACI
Source for figures: Australian Government White Paper (2013)
Note: assumes China will grow on average by 7% p.a. 2012 - 2025

Asia’s rising share of global GDP

Asia’s rising incomes (Bubble area
reflects size of GDP; income per person in PPP)
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Future of ASEAN is bright
Source: Euromonitor International (2015)
Economy
Market
Youth
$
• If ASEAN were a single economy it
would be the 7th largest in the
world; and could be the 3rd largest
by 2030
• With 622 million people, ASEAN’s
potential market size is larger than
EU (502 million) and North America
(354 million)
• With median age of 28.8 years in
2014, ASEAN’s population is
younger than EU’s (42.1), China’s
(40.8) and North America (38)
• Total consumer expenditure is
expected to grow by 108% in real
terms across ASEAN, 2015 - 2030
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ASEAN consumer expenditure is
increasing…but unevenly
Source: Euromonitor International (2015)

ASEAN’s Real GDP Growth and Total
Consumer Expenditure: 2000 – 2014
•

Averaged 5.4% p.a.; expanded by 117% in real
terms to reach $1.4 trillion in 2014
By 2030 ASEAN to be the 3rd largest
economy, after US and China, worth $3.1
trillion in constant 2014 dollars

Consumer Expenditure per
Household in ASEAN:
2014 and 2030
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Asian emerging markets and
consumers are different

But significantly lower disposable incomes in AEC in coming years as compared with developed
economies, region’s traditional final markets (source: Lawrence, ADBI (2013))

Fragmented markets,
growing income inequality,
and high proportion of
rural population will condition
consumer spending

Per Capita Real Annual Gross Income
in China and USA (1990–2030)
Reflects consumers’ purchasing power
In 2030: narrower, but US still 4.6 x China
Source: Euromonitor International (2014)
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Consumer is at the centre of
understanding market potential
Source: Euromonitor International (2015)

Household Income Distribution in
ASEAN: 2014

Households by Annual
Disposable Income Band in
ASEAN: 2014 and 2030
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RESPONSE
From exporting to innovating for Asian
emerging market consumers – but with a
difference
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The not-so-good news: Thailand is lagging on
traditional measures of innovation such as R&D
Source: NESDB, ADB
R&D as % share of GDP

Thai private sector's share of investment in total R&D is around 3545%, vs. 77% for Korea, 76% for Taiwan, 66% for Singapore
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Other constraints on innovation
e.g. UNCTAD (2015); Abonyi/ADB (2014)

Institutional constraints

Financial constraints
Conceptual constraint

• Public/government – programs, agencies
• Private – domestic, multinationals
• Education/research
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Narrow concept of innovation
driving policies, programs,
corporate strategies

Innovation-related policies and programs typically focus on supply-side
interventions for “mainstream markets”
•
•
Firm-level innovation geared generally for “advanced consumers” either in developed
markets or higher income consumers in emerging markets
Focus on links between formal science and innovation – i.e. science, technology,
innovation or STI -- in particular, R&D-intensive higher technology activities
•

Inputs, e.g. PhDs, outputs: e.g. scientific publications (e.g. UNCTAD 2015)
Traditional STI policies and programs inadequately support innovation that is not
high-level ST-intensive, e.g. incremental or adaptive innovation; for lower-income
groups (e.g. lower middle-income; upper end of lower income)
•
STI policy and corporate strategy generally fail to appreciate the potential contribution of
such innovation to competitive export performance
AND increasingly:

New ecosystem of innovation: e.g. cheaper, faster, smaller, widespread ICT
devices, stakeholder collaboration, allow for easier low-cost market experiments in
product/service/business model innovation (“Big Bang Disruption”)
 New innovations can enter market cheaper, more customizable, than existing products
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The good news: wider concept of
innovation for Asian emerging markets

Consumers in Asian emerging markets have high aspirations, relatively low incomes,
and a variety of constraints

Innovation for these consumers/markets can come not only from investment in highlevel R&D and science and technology (STI): many entry points exist for Thai firms to
“add value” along the value chain

Challenge to is to strengthen innovation suited to consumers and conditions of Asian
emerging markets: requires also a focus on the DEMAND SIDE of innovation
•
•
Investments in marketing, and product-related interactions with consumers may be as or more
important to a firm in commercializing new ideas
Interaction with consumers at early stages of product development is especially important in
shaping innovation for emerging markets: innovation as (low cost) experimentation
 “Breakthrough customer insights vs. breakthrough technology”
•
Disposable income distribution: from “value for money” to (also) “value for many”
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WHAT IS THE WORLD’S
BEST SELLING
CELL PHONE
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Nokia 1100
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Specifically for emerging markets, e.g.
• Dustproof keyboard;
• Front face built-in flashlight;
• Non-slip slides;
• Battery life (stand by) up to 400 hours!
Over 250 million sold since late 2003 (to 2015)
World's best selling handset and electronics device
Example of “frugal innovation”
•
And of the nature of the frugal innovation process
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Wider concept of innovation:
frugal and reverse innovation
Sources: e.g. Zechsky et al (2014); Radjou and Prabhu (2014); The Economist (2014)
Frugal innovation
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Cost Innovation: Same Functionality at a Lower Cost
•
Responds to constraints such as income, e.g. purchase price, servicing costs
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Example: Huawei (China) smart phone; Hindustan Unilever (India) detergent powder
Good-Enough Innovation: Tailored Functionality at a Lower Cost
•
Responds to specific customer needs and constraints
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Example: Mettler Toledo scale (China); Wireless computer mouse (Rapoo, Logitech)
Frugal Innovation: New Functionality at a Lower Cost
•
Responds to specific needs of emerging markets/consumers
•
Example: MittiCool clay refrigerator (India); GE ECG (electrocardiogram) MAC 400/800; M-Pesa
Reverse innovation
•
Innovation for emerging market consumers finds market in developed economies,
where there is increasing demand for lower price/higher value
•
Example Haier refrigerator; Logitec M215 wireless mouse; GE ECG MAC 600
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Constraints on frugal innovation

Limited firm knowledge and therefore focus on the needs of lower
income populations: not aware of market and revenue potential

Infrastructure (hard/soft) – e.g. roads and distribution channels –
is inadequate/constrained, making it costly and difficult for
companies to serve lower income (e.g. rural) customers.
•

E.g. 79% of roads were paved in OECD countries in 2011, but only 53% were
paved in middle-income economies and 21% in low-income economies
(World Bank Development Indicators, 2014)
Challenges of scaling up to viable business proposition
•
Implications: “business model innovation”
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Examples of
Frugal and Reverse Innovation
Product innovation: Rapoo
Mouse (China) [and Logitech]
Product & Business Model
innovation;: First Energy’s
Oorja Stove (India)
Reverse innovation: GE ECG
MAC 400, 600, 800 (India & China )
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Source: adapted from Stassopoulos (2013)
Know the
consumer
Forecast shape,
size, and timing of
opportunity
Segment
income groups
e.g. rural, lower,
middle, high; age…
Redefining the market and
consumer:
Meet the consumers “up
close and personal”
Understand their
aspirations, constraints
Understand their
environment
Understand through “low
cost experimentation"
How does a
business:
Succeed in this market
Access this opportunity
e.g. product innovation,
process innovation,
business model
innovation (e.g.
marketing and
distribution)
Identify and
understand
companies:
Succeeding today in
this market; how; why
Likely to succeed in the
future
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Conventional vs. Frugal and Reverse Innovation:
Different paths to emerging regional and global
opportunities (e.g. GE Healthymagination)

Conventional Innovation
Needs and
conditions in
developed markets

R&D/innovation and
commercialization for
developed market
consumers & conditions
Products modified
(“stripped down”) for
emerging market
consumers
Frugal and Reverse Innovation
Applications in
developed markets
(Reverse innovation)
Innovation for emerging
market consumers and
conditions: translate “voice”
of consumer into
products/services (Frugal
innovation)
Aspirations and needs
in emerging markets
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Thailand:
Toward innovation-led growth

Thailand has enormous potential for innovation, reflected in the inherent
capacity for design, and globally admired crafts, products and services

Moving from potential to performance requires strengthening “national innovation
system”:  government + business + education + NGOs
•
•
•
Starts from broad concept of innovation, not just high level R&D/S&T
Includes investments in early stage product-related interactions with consumers on the
“why” and “what” of a product or service; production process improvements; technology
adaptation; and new types of business systems -- including key services (e.g. product
design, marketing, distribution)
For SMEs: adapting existing technology to local (regional) user needs is a practical way
to commercially viable products and services
 Widens greatly scope for innovation and exports for Asian emerging markets
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General agenda for action:
Toward innovation-led growth

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
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Policy commitment
Coordination/collaboration
Focus on key value chains, clusters
Integrate demand and supply side factors
• Particular focus on Asian emerging markets
Innovative financing mechanisms (SMEs)
Cross-border production linkages to upgrade
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Facilitating frugal innovation


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Incentivize research institutions (public, private) to focus on frugal innovations
Develop innovative financing mechanisms for frugal innovation initiatives by SMEs
•
Support intermediary institutions and means of knowledge exchange to provide technical
and market/consumer-related expertise and information to frugal innovators
•

E.g. Honey Bee Network (e.g. India, China) helps frugal innovators by providing support needed
to develop these innovators’ inventions including related to protection of intellectual property, and
commercialization of marketable innovations, including connecting SME innovators with formal
institutions such as universities and public research institutions
Support partnerships between SMEs and large firms, which have scale but often limited
insight into lower income consumers’ needs and constraints; and with NGOs that often
have significant insight into and access to lower income (e.g. rural) consumers
•

E.g. India’s Inclusive Innovation Fund is a for-profit investment fund created to support
enterprises (SMEs) and innovators India’s lower income groups
E.g. Oorja Stove (NGOs; large firms)
Support early and sustained market/consumer engagement by firms as the key to
facilitating the frugal innovation process (e.g. information, financing, role of ICT)
•
E.g. Nokia 1100, Rapoo mouse, GE Mac 400/800
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FRUGAL
INNOVATION
AS COLLABORATION
ALONG THE VALUE CHAIN
THANK YOU
[email protected]
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