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Business

Companies spread their wings to cope with competition

Workers at Siam Cement’s Cambodian plant in Kampot load plastering cement onto a truck. (Photo by Yukako Ono)

KAMPOT, Cambodia/DONG NAI, Vietnam/KUALA LUMPUR -- Siam Cement Group knows its way around Cambodia, having done business there for more than 20 years. But Thailand's largest building materials company cannot afford to take it easy: Competition in this once sleepy market is heating up. The launch of the ASEAN Economic Community at the end of the year is expected to prompt further inflow of foreign capital. Local ASEAN companies will have to deal with the new wave of competition by going beyond their home market.

     Last August, China's Huaxin Cement opened a plant in Kampot, where SCG also produces. Kampot is about 130km south of Phnom Penh, the capital, and the only province in the country that has the limestone needed for cement. Not only is Huaxin undercutting SCG's prices by about 10%, it is also luring away engineers and production supervisors the Thai company spent years training by offering higher wages, according to SCG.

     For China, the opening of the plant marked a return to Cambodia. A facility built in the 1960s ceased operations after a series of disruptions. SCG's domestic rival, Siam City Cement, is also slated to start production in Kampot by next year under a joint venture with local construction company Chip Mong Group.

     "Competition is coming up and we have to build our competitiveness," said Somwang Manpimonchai, who is in charge of SCG's Cambodian business. In June, the company spent $120 million on a second production line at its plant, doubling its capacity to 2 million tons annually.

     Infrastructure and housing are going up at a breakneck pace in Cambodia, with cement demand growing by double digits every year. 

Thais that bind   

The idea behind the AEC is to integrate the regional market where goods, services, investment and skilled labor flow freely among the 10 ASEAN economies. While Thailand is expected to remain the main regional hub for many manufacturers, thanks to its well-established supply chain and central location, other countries, including Cambodia, are seeing more investment as the AEC takes shape.

     When it comes to branching out abroad, SCG is ahead of the game. In 2014, 21% of its sales came from ASEAN markets outside Thailand and increased 18% year on year. The company's largest market outside Thailand is Indonesia, where it has operations in cement, ceramics and packaging, among others. A new cement plant is scheduled to be up and running in the country by the end of the year.

     "Cambodians now have a positive perspective on Thai brands and products," said Somwang. The AEC is expected to bring in competition from China and other parts of the world, but he remains confident SCG can maintain its leading position.

     Since entering the market in 1992, SCG has established 43 dealers around the country that provide after-sales service in every province, and an in-house logistics company that promises prompt delivery. "Foreign companies like the Japanese always use us," said Somwang.

     Although ASEAN has long been a popular destination for foreign investment, companies in the region are hoping to take advantage of the AEC to raise their profile. 

     Don Lam, CEO and founder of Vietnam's VinaCapital suggests ASEAN companies have "home field advantage." Global names such as Coca-Cola tend to be stronger in some regions, due to their larger marketing spending, but many consumers go for the long-established local brands, which are more familiar and often cheaper. "For some small markets, the big multinationals will not get in because it's not worth it for them, but for local ASEAN companies, the opportunities are still significant," Lam said.

     In Vietnam, another Thai company that is expanding quickly is industrial park operator Amata. It is planning two new industrial estates in the country, one in the south and another in the north. Amata wants to get the jump on the competition by getting hold of prime locations in the country, which it believes will become a vital export hub. Vietnam not only has access to China to the north but ports on the Pacific Ocean, the gateway to Japan and the U.S.

     Although the AEC's ultimate goal is to create a single market of more than 600 million consumers, many companies will treat it mainly as an export base, said Somhatai Panichewa, CEO of Amata VN, the Thai company's Vietnamese subsidiary. "The purchasing power [in the region] is not there yet and will take time to build."

Amata's industrial park in Dong Nai is part of its growing stable of properties in Vietnam, which it sees as a vital export hub. (Photo by Yukako Ono)

     Amata has been operating an industrial park in the southern province of Dong Nai, about 30km from Ho Chi Minh City, since 1995. Global names such as Nestle, PepsiCo, Bayer and Shiseido have factories there. Foreseeing more companies coming in with the AEC and the Trans-Pacific Partnership, a U.S.-led trade grouping that Vietnam is part of, Amata wants to speed things up. It has another industrial estate on the drawing board in the northern province of Quang Ninh, which offers access to China by both land and sea.   

     Myanmar is another place Somhatai has her eye on. The Dawei industrial zone on the country's west coast could open the door to India, the Middle East and Europe. "Thailand, Vietnam and Myanmar will become the big brothers of ASEAN," she said. "We love them and would like to take them all."

Taste of success   

Japanese companies, long the biggest foreign investors in Southeast Asia, are also eager for the AEC to take wing. They are sizing up the membership, trying to determine the best places to make and sell products as trade is liberalized and the regional economy grows.

     In January 2016, a shopping mall in Phnom Penh operated by Japanese retailer Aeon will start selling its private-label Topvalu fish sauce. Aeon Topvalu (Thailand), a Bangkok-based company founded in 2013, came up with its own version of the popular condiment. Aeon chose Cambodia as its test market.

     Shinobu Washizawa, managing director of Aeon Asia, the group's regional headquarters in Kuala Lumpur, envisions creating Topvalu products at research and development units in Malaysia and Thailand, and selling them throughout Southeast Asia. "Even if countries are different, the needs of middle-income households are similar in nature," he said. 

Customers shop at Aeon's store in Kuala Lumpur. (Photo by Hiroshi Kotani)

     Aeon's regional business was for years mainly centered on Malaysia. In 2011, Aeon changed tack. In 2014, it opened its first general merchandise stores in Cambodia and Vietnam, following on in Indonesia this year. As of the end of August, it had about 170 GMS and supermarkets in Southeast Asia.

     Locally developed Topvalu products will be the common thread in Aeon stores operating around the region. Aeon's fish sauce made in Thailand received halal certification from Jabatan Kemajuan Islam Malaysia, a body affiliated with the Malaysian government that determines whether foods comply with Islamic dietary laws. Aeon is considering selling the sauce in Malaysia and other Muslim countries in the future.

     To boost sales, Aeon is widening its procurement network. Kenji Horii, managing director of Aeon Topvalu (Thailand), frequently visits neighboring countries, searching for entrepreneurs eager to do business. Aeon has executives meet with local food processing manufacturers to explain the types of products it is looking for. The same strategy has helped Topvalu build its brand in Japan. The company is taking a similar approach in Southeast Asia as it readies for the AEC.

     There are still many hurdles. Product safety standards, for example, vary from country to country, creating reams of paperwork. The fish sauce is not sold in Thailand first is due to the local regulation. Progress is slow, but Horii remains upbeat. "The AEC will create business opportunities," he said. "I will turn Topvalu into the No. 1 private-label product brand in Asia." 

Motoring ahead  

For years, Thailand, "the factory of Southeast Asia," has been the main investment destination for Japanese companies in the region, especially among auto and electronics manufacturers. But in recent years, money has begun flowing to neighboring countries.

     Toyota Motor is preparing to set up sales units in Laos and Myanmar. This will allow the world's largest carmaker to make decisions locally, tailoring marketing and inventory to each market. Up to now, Toyota's Thai subsidiary has been responsible for sales in these countries.

     Car parts are also coming from more countries. In Koh Kong, a Cambodian province bordering Thailand, Yazaki, a Japanese automotive component maker, is turning out wire harnesses as fast as it can. These vital components supply power to the various devices spread throughout the car and relay data from sensors to the control unit -- the car's brain.

     Electrical wires and tapes are imported from Thailand duty free, thanks to the scrapping of tariffs under the AEC, and assembled into wire harnesses in Koh Kong. These are then shipped back to Thailand. A Yazaki truck shuttles between Thailand and Cambodia once a day.

     It is difficult to automate the assembly of wire harnesses. As labor costs surged in Thailand, Yazaki moved into Cambodia about three years ago.

     The manager of Koh Kong factory is Thai; technical assistance and worker training is basically provided by Thai staff. That is cheaper than sending engineers from Japan and makes it easier to resolve problems because Thailand is right next door. "We are benefiting more than we would than by producing only at our Thailand factory," said Kenji Uematsu, director of manufacturing planning division of Yazaki's Thai unit.

     Companies from elsewhere have similarly high hopes for the AEC. DHL Global Forwarding, a division of the German delivery company, is promoting a freight service that handles small-lot deliveries of less than a truckload. In August, it added Hanoi and the southeastern Chinese city of Shenzhen to its route linking Singapore, Malaysia's Penang and Bangkok.  

     The five-city service, called DHL AsiaConnect, is aimed at catering to customers with transnational delivery needs, as companies spread their manufacturing across multiple countries to take advantage of the free flow of goods across the AEC.

     Shipping goods overland is faster than doing so by ship, and is cheaper than air freight. Deliveries between Shenzhen and Bangkok take just five days by land, compared with 13 days by ship. "We are confident that intra-Asia trade will continue to grow," said Kelvin Leung, CEO of DHL Global Forwarding Asia Pacific. In the five years through 2019, DHL is forecasting a compound annual growth rate of 8.3% for road freight in the Asia-Pacific.

     Making it easier to do business across borders will benefit U.S. industrial conglomerate General Electric, too. GE has been in the region for over a century and is present in all countries except Laos. ASEAN accounts for 5-6% of its global sales, most of which are in power generation, aviation and oil and gas production systems.

     Wouter Van Wersch, president and CEO of GE's ASEAN business, predicts the AEC will "make movement between countries easier in terms of transmitting electricity, transport and open skies aviation."

     The company is looking into opportunities such as installing more high-voltage direct current systems to transmit electricity to countries with differing power grids. At the moment, it is working on an undersea connection between Singapore and Indonesia.

     In October, it committed to spending $1 billion on infrastructure in Indonesia over the next five years. The investment will be in power generation, oil and gas production and rural health care.

     "We are a big industrial company, especially now with the acquisition of Alstom" of France, Wersch said. GE is eager to bring its global expertise to the region, especially the knowledge it has gained from working in the European Union.

     The AEC "is a tremendous opportunity and I think it is going to be a great success, although we need to speed things up a little," Wersch said, stressing that all big businesses need stability. "We need to avoid surprises like changes in regulation."

Nikkei staff writer Tamaki Kyozuka in Bangkok contributed to this report.

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