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Ben Simpfendorfer: A golden era for midsize companies

Midsize companies are Asia's new champions. Big multinationals and local conglomerates used to be the kings of the region's consumer goods business. They were able to build up in a way that no midsize company could hope to replicate.

     But size is less important in today's Asia. It is agility that counts.

     Why now? It is a combination of the region's growth and complexity. The bigger players will, of course, continue to account for a large share of the market, whether it is Unilever and PepsiCo or China Mengniu Dairy and Thailand's Charoen Pokphand Group. But there are good reasons why the door has opened to smaller companies.

     For a start, Asia has 250 cities with populations of at least 1 million. That is five times the number of million-plus cities in the U.S. The biggest companies are now realizing that building vast marketing and distribution networks is not only costly, but the structures cannot be easily replicated between countries or sometimes even regions.

     Yet the rise in purchasing power means each city offers a potential market. Take Shenzhen, Guangzhou and Foshan, in southern China. Close to Hong Kong, these three cities have a combined gross domestic product of $605 billion and, by my estimates, 5 million households earning at least $15,000 a year.

     For a multinational, the numbers might appear small. But for a midsize company with $50 million to $100 million in revenue, a few percentage points of market share in each city can really impact the bottom line.

     Focusing on just a cluster of cities is also a simpler business model. Too often, multinationals find themselves working with multiple partners to build scale, especially in China. With global regulators getting tough on graft, having multiple partners is a major governance risk.

     That hands an advantage to smaller companies. Think of an American food service company targeting the more than 55 five-star hotels in Shenzhen, Guangzhou and Foshan, or an Australian beauty care company opening outlets in Kuala Lumpur's near 30 high-end shopping malls.

Fragmented markets

For these companies, it is possible to work with a single local partner that can deliver domestic insights and relationships critical to success, and yet still enjoy financially meaningful growth.

     The digital revolution, meanwhile, is changing opportunities for midsize companies around the world. This is especially so in Asia, where consumers are increasingly going online to research and shop.

     Domestic companies are even bigger winners. In a recent conversation, the CEO of a major Southeast Asian online retailer cited the example of a furniture manufacturer in Indonesia that might have once targeted customers within a 100km radius but now sells nationally via the Internet.

     This, of course, means competition is also increasing, and it is a battle for any brand to stand out in an increasingly crowded online space. But the situation has also created openings for smaller companies to enter the market.

     The one-size-fits-all model is losing its allure in Asia. The growing number of affluent consumers means there is demand for products tailored to local tastes and lifestyles, from durian-flavored wafer cookies in Singapore to UV protective umbrellas in Shanghai.

     In my recent conversations with CEOs at some of the world's largest multinationals, many cited the agility of local companies as one of their major challenges. Privately owned and deeply entrenched in their communities, these companies are quick to respond to changes in consumer preferences.

     The chances are that multinationals will increasingly find themselves in competition not with other large incumbents but with numerous smaller rivals across a range of markets.

     The change is a positive sign that the region's economies are maturing fast. It implies a growing capability to not only manufacture products but also design, market and distribute. In addition, it points to a rise of a more powerful consumer, an important step toward the region's economic rebalancing.

     This will also result in a more fragmented Asia. For all the talk about the region accounting for half of the world's population and one-third of the global economy, these headline figures overlook the fact that consumer markets are highly fragmented not only between countries but also within.

     And that is the irony of Asia's expansion: The bigger the region becomes, the better conditions are for the world's smaller companies to make money. Companies like HStyle, a fast-fashion chain in China, and, a Muslim fashion e-tailer in Indonesia, will lead the charge and emerge as the region's next champions.

Ben Simpfendorfer is the founder and managing director of Silk Road Associates, which advises multinationals and midmarket companies on expansion strategies in Asia and the Middle East. He is the author of "The Rise of the New East" (Palgrave) and was previously chief China economist for Royal Bank of Scotland.

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