Dawn Smith, Managing Director, South-east Asia, AnnaPurna Consulting
I walked past Paul, the French bakery, in Jakarta this past week and noted that at 5pm, it was packed to the gills with well-off Indonesians enjoying themselves. Granted, this was arguably Jakarta’s most upscale mall (a property owned by a notorious businessman), but it is emblematic of how Southeast Asia’s emerging economies are proving fertile ground for Western consumer brands. I reflected on the fact that not so long ago, the local clientele could not have afforded expensive croissants. The Westerners would have been unlikely to congregate at an outside café – a leading hotel brand at this shopping center and the neighboring stock exchange were both targets of radical Islamic bombers in the last decade. So if security may be a lingering concern, affordability isn’t. The legacy of soon-to-retire President Susilo Bambang Yudohyono will undoubtedly be a substantial increase in per capita incomes, a five-fold increase in the stock market and domestic stability. As if there were any better confirmation, IKEA is planning to enter Indonesia.
In a similar vein, fans of McDonald’s may have read this month that their favorite chain has just opened in Vietnam, where they will offer the now internationally popular banh mi sandwiches in addition to their more standard fare. But if you are visiting Saigon as a tourist or business traveler, you are unlikely to see it, as it is not located in the heart of District 1 near the Opera House or Hotel de Ville. Vietnam’s first McDonald’s is a drive-in, catering to the city’s rising middle class. (Of note, the drive-in is McDonald’s model for developed markets.) McDonald’s first foray will not remain solo for long. The areas around Saigon and Hanoi are being transformed as foreign investment from Japan and Korea floods into the electronics assembly sectors. When an export-oriented economy like Vietnam’s moves up the chain from garments and toys to electronics, the average worker’s wage in those sectors doubles. This spending power is now being directed to McDonalds – and soon Starbucks.
Vietnam is not alone in attracting foreign brands. Later that week I had the opportunity to lunch with the Philippines Undersecretary of Trade and Industry. A long-term Colgate executive before joining government, he spoke confidently about the Philippines’ economy to our small group of business people at an American Chamber of Commerce lunch. The main complaint of the executives was the slowness of decision-making in government and – from representatives of high-tech sectors – the gap between college graduates and the skills required for employment with multinationals. It struck me that these topics could have been just as easily raised to representatives from the US or UK government. Gone from the conversation, however, were the weighty issues of the past: power shortages, financial stability, or potential coups. Harley Davidson has recently opened its first dealership in Manila and is scouting for more locations.
Perhaps many will read this and recall the run-up to the Asian financial crisis of 1997-98, and foresee an end to this consumptive spree. I disagree. Certainly the region – and indeed the global economy as a whole – has benefited from the easy monetary policies of the past decade. Commodity-based economies such as Indonesia’s have benefited from record high prices (that have recently reversed). But this is not 1997. Consumer and national debt is generally low. As China’s workforce ages and shrinks, these emerging markets with the classic “demographic bubble” are benefiting via competitive wages. These wages, in turn, attract foreign direct investment – especially from Japan, Korea and even China (where manufacturing wages have increased five-fold in the last decade). Indeed China has in many instances moved from being a competitor to being Indonesia’s largest export market and foreign investor. Indonesia is the largest foreign market for China’s Huawei; Foxxcon is planning a multi-million dollar investment.
In a similar vein, much has been written about the commercial potential of Myanmar since its political opening in 2011. But here, a word of caution. No matter how appealing a largely untapped market of 60 million is to consumer brands like Pepsi, Unilever and Ford, do not underestimate the challenges of exploiting a market with limited physical and human capital, a dysfunctional legal system and sub-Saharan levels of per-capita income. It will take a generation for Myanmar to begin to show the consumption power of markets like Indonesia, Vietnam or the Philippines.
The ASEAN 10 – with a population larger than the EU – is a diverse group. It includes fully developed Singapore (with more millionaires per capita than anywhere on the planet); G20 member Indonesia, which boasts the world’s 4th largest population and a USD1 trillion GDP; and just emerging Myanmar. These markets are all different. Yet they share a strong common feature – they are the frontiers for foreign consumer brands.