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Opinion

Asia's aging manufacturers must innovate

Focusing on asset-heavy old businesses will drag companies down

Many of the industries that laid the bedrock for economic success in Asia in the 1970s and 1980s now face the same pressures as their older rivals in the West. Whether it is auto parts, machine tools or transport, they are seeing margins squeezed as demand stagnates or shrinks while technological change advances. Although Asia is still growing faster than Europe and North America, that growth is now benefiting new industries.

Alibaba Group Holding and Tencent Holdings have already revolutionized shopping and payments in China. The transportation industry is also undergoing global transformation, which can be seen in Asia in the growth of companies such as Malaysia's Grab, India's Ola and Indonesia's Go-Jek.

Until now, Asia's manufacturing companies have appeared to be safe from the "big-bang" disruption that has radically changed the global consumer goods, information technology, financial services and transportation industries. But accelerating compression of both revenues and operating profits in the heart of industries such as automotive and industrial equipment makers suggests that they are about to enter a difficult period. This may prove terminal for companies that fail to detect the signs and act early.

The danger lies not only in the obsolescence of core businesses, but also in a constrained capacity to invest in relevant new businesses. Ironically, when performance begins to fall, management teams' responses often hasten decline by failing to tackle the underlying issues.

The substantial decline in the performance of shipping companies shows how quickly fortunes can change under myopic management. Despite sluggish growth in the wake of the 2008 recession, companies continued to invest in new, ultra-large vessels to boost scale and reduce slot costs. Executives anticipated a boom in international trade that has never appeared.

Companies today must "rotate to the new" in a conscious and deliberate act of renewing and transforming their core businesses while also growing into new businesses and industries.

Some companies are already doing this. As competition has intensified in the telecommunications industry, Singapore Telecommunications has moved away from the role of a traditional telco to becoming more competitive, diversified and resilient, offering multimedia services ranging from cyber security to analytics, digital mobile advertising and marketing. The group is also active in bridging startup ecosystems worldwide to drive innovation.

Transforming the core business to drive up the capacity to invest in new activities is essential to this process. This requires the creation of greater competitiveness and improved cost structures, through measures such as zero-based budgeting (where all costs must be justified from scratch), better sourcing, cloud technologies and intelligent automation. New profits can then be used to build and innovate in other parts of the business.

Companies also need to drive incremental growth in their core businesses. This can be done through digital marketing and analytics, and web-based interactions, which can help businesses to become closer to customers. That in turn can provide insights that might drive new business.

Companies also need to build up new businesses, and to manage the capital flows from core activities to new ones. If they pivot too quickly from the core to the new, they will over-invest and financially stretch themselves too thinly. If they pivot too slowly from the core to the new, they could become obsolete. That means they must plan carefully and execute decisively.

Best practice

An example of thoughtful transformation is how the Chinese industrial company, Shanghai Zhenhua Heavy Industries, is turning its heavy assets into smart ones to rejuvenate its flagging business. The company is reinventing its business model away from traditional equipment manufacturing to become a service provider of port solutions.

As part of this transition, the company is collaborating with Microsoft to build an intelligent data retrieval and monitoring platform for its global fleet of machinery. The planned predictive maintenance capability is expected to deliver greater customer satisfaction while reducing operational workload and cost.

In Australia's Pilbara mining region, Rio Tinto's use of autonomous haul trucks was found to be 15% more efficient overall than using manned trucks. The benefits are increased utilization, fewer stoppages and more efficient driving.

Mining and metals companies must also develop new market offerings to maintain demand. This may mean shifting to new commodities such as lithium, as demand for electric vehicles grows, or moving upstream in the value chain to enter the recycling business -- for example, recovering scrap metal from production. Ultimately, the winners will be those that move beyond selling commodities to those that understand how to meet the evolving needs of their customers.

In Japan, the insurer Dai-ichi Life has recognized that supporting clients in their everyday lives is an essential part of life insurance in the new world order. It offers an app to anyone -- not just its customers -- that helps to monitor well-being, with services such as analyzing photographs of medical examination results and instant health age assessments.

It also offers an innovative FaceAI feature that enables users to simulate what they might look like in the future, based on smartphone photographs. These new services show that Dai-ichi Life recognizes it needs to offer more than its traditional core business to remain relevant to customers.

These companies are meeting the challenge, and diversifying their businesses now. While "big bang" disruption has grabbed the headlines for some time, compression represents a more malevolent threat. Rather than blowing up specific product or service offerings within an industry, compression renders entire industry segments irrelevant, gradually at first, then quickly.

Asia's companies at risk of compressive disruption from new challengers may not recognize the real threat to their core businesses. Many falsely believe that they are protected by the assets they own and the assumption that competitors would need to commit significant capital investment to mount a challenge to them. But these assets are part of the problem, because they are often expensive and underused. Should the industry's profit-making ability become outweighed by liabilities such as debt, operating leases and pension plans, the very thing needed to rescue it -- innovation -- will be stifled.

Innovation is the key to future success. But executives need to understand that it requires a shift away from core businesses. For some companies, this is a bitter pill that management teams will find hard to swallow.

Omar Abbosh is chief strategy officer of Accenture. Gianfranco Casati is the company's group chief executive for growth markets.

Accenture works with a number of the companies mentioned in this article, including Dai-ichi Life.

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