ASEAN and Asian Emerging Markets:

From Exporting to Innovating

George Abonyi

Visiting Professor

Department of Public Administration and Executive Education Program

Maxwell School, Syracuse University

24 July 2015

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Overview of “the story”

Challenge

• Thailand’s manufactured exports stalled (macro, micro)

• “New normal” of global and regional growth

• China market is not (yet) the answer

Opportunity

• Asian emerging markets: ASEAN, China, India (ACI)

• But these markets and consumers are different

Response

• From exporting to innovating for Asian emerging markets

• But innovation with a difference

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MACRO CONTEXT

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Thailand: sustained development success

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”

Source: Pasuk (2014)

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Export-driven growth Source: NESDB, 2015

Critical role of exports

• 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

Dominated by Electronics and Electrical (E&E):

30% of manufactured exports (2014)

Automotive (parts, assembly): around to 10%

Compare with rubber products: under 3% of manufactured 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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From sustained development success

to Middle Income TrapSource: Ohno (2011)

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Income growth stalled• Manufactured exports stalled

Trap: between low-wage

manufacturers and

high-wage innovators

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 to create 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 = 100Source: Suehiro (2015)

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Market challenge: “New normal”

in the global economySource: IMF WEO, July 2015; October 2008

Slow-growth global economy esp. developed economies (e.g. EU,, US);

slowing but relatively faster growth in Asian emerging economies

• Especially ASEAN, China, India (ACI)

Source: IMF WEO, July 2015, October 2008

Note: IMF has continually overestimated growth since 2009

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East Asia’s export-driven growth is dependent on external

developed economies, particularly within framework of

global value chains, e.g. electronics

(e.g. Intra-ASEAN trade is less than 25% of region’s total trade)

Source: Lim and Lim (2012)

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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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China: key global and regional role

– limits on the role of the China market

Role in the global growth

• “Contribution” (China) vs. “driving (US)Source: IMF, 2014

Role in the region • China major importer of East/SE Asia’s

exports of parts and components – 50%

of all intra-regional intermediate

imports; for final export to developed

economies, e.g. iPhones to US and EU (Source: ADB, 2011)

• But not yet major market for region’s

final manufactures

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China market challenge (1)

Challenge: investment and export driven growth; and lagging consumption

• Investment-driven economy; primarily by State-Owned Enterprises (SOEs), local

governments, financed by State-Linked Banks

• But investment increasingly unproductive; e.g. excess capacity -- particularly in real estate,

increase in unproductive debt (i.e. decreasing capacity to service debt)

• Exports also key driver of growth (“export excess savings”) to now slowing developed economies

• Share of household consumption in GDP falling since 1990s from over 55% to less than 35% in 2014

Rebalancing involves:

• Shift in economic power, e.g. away from State-Owned Enterprises (SOEs) to

households higher wages; and to SMEs

• Reducing (SOE) unproductive investment and (bad) debt higher interest rates

Implementing reforms = challenge of political economy

Rebalancing to consumption-driven growth will involve significantly slower

growth – but more stable and sustainable –over medium/longer term

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China’s investment-driven growth:

increasing debt, declining efficiency

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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China market challenge (2)

China’s rebalancing from investment to consumption-driven growth 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 is major importer of Thailand’s/region’s exports of parts and components for its final exports

to developed economies, e.g. iPhones to US and EU; domestic value added less than 4%

• Not yet major market for final manufactures: around 60% of imports used, directly and indirectly,

for exports; 20-25% for investment; less than 15% for domestic consumption (Akyuz 2012)

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

• But average accounts receivable for consumer electronics retailers and manufacturers:123 days

• But average days of inventory for clothing companies: 174 days (Bloomberg 2015)

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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: Australian Government White Paper (2012):

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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ASEAN consumer expenditure is

increasing…but unevenlySource: Euromonitor (2015)

ASEAN’s Real GDP Growth and Total

Consumer Expenditure: 2000 – 2014

By 2030 ASEAN to be the 3rd largest

economy in the world, after US and

China, worth $3.1 trillion in constant

2014 dollars

ASEAN Economic Community:

Integration with Diversity

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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 (2014)

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ASEAN market compositionSource: Euromonitor (2015)

Household Income Distribution in

ASEAN: 2014

Households by Annual

Disposable Income Band in

ASEAN: 2014 and 2030

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The consumer is at the centre of

understanding market growth

Consumer Expenditure per

Household in ASEAN: 2014 and 2030• Note: growth vs. size (e.g. Lao, Cambodia)Source: Euromonitor (2015)

Growth for Lower Income Groups

Outpaces Middle ClassSource: AllianceBernstein (2015)

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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&DSource: NESDB, ADB

R&D as % share of GDP

Thai private sector's share of investment in total R&D is around 35-

45%, vs. 77% for Korea, 76% for Taiwan, 66% for Singapore

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Other constraints on innovation

Limited innovation-related knowledge transfer from multinational enterprises (MNEs)

to domestic suppliers, particularly SMEs

Education system, including training institutions, has not responded effectively to

market demands for innovation- related skills

Lack of clear and coherent policy priority and direction by the government in support

for innovation, constrained by fragmentation and limited cooperation among key

agencies and with the private sector

Many private sector associations have not placed innovation as priority

Gaps in innovation-related infrastructure, such as “technology and innovation parks”

of the type that have been particularly successful for example in East Asia

Significant shortage of appropriate financing mechanisms for innovation, particularly

for entrepreneurial SMEs

“Conceptual constraint”: relatively narrow concept of innovation driving

policies, programs, and corporate strategy

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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 not only from investment in high-level R&D and science and technology

(S&T): 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, e.g. frugal 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

• Provides insights on the use of the product and required adaptations for successful

commercialization.

“Breakthrough customer insights vs. (primarily) breakthrough technology”

• Disposable income distribution: from “value for money” to (also) “value for many”

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Wider concept of innovation:

frugal and reverse innovationSources: e.g. Zechsky et al (2014); Radjou and Prabhu (2014); The Economist (2014)

Frugal innovation

Cost Innovation: Same Functionality at a Lower Cost • Responds to constraints such as income, e.g. purchase price, servicing costs

• 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

• 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 and 800

Reverse innovation

• Innovation for emerging market consumers finds market in developed economies

• Example Haier refrigerator; Logitec M215 wireless mouse; GE ECG MAC 600

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Source: adapted from Stassopoulos (2013)

Redefining the market and consumer:

Meet the consumers “up close and personal”

Understand their aspirations, constraints

Understand their environment

Understand through “low cost experimentation"

Know the consumer

Forecast shape, size, and timing of

opportunity

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

Segment income groups

e.g. rural, lower, middle, high; age…

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Examples of

Frugal and Reverse Innovation

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Product innovation: RapooMouse (China) [and Logitech]

Product & Business Model innovation;: First Energy’s

Oorja Stove (India)

Reverse innovation: GE ECG MAC 400, 600, 800 (India & China )

Conventional vs. Frugal and Reverse Innovation:

Different paths to emerging regional and global

opportunities (e.g. GE Healthymagination)

Conventional Innovation

Frugal and Reverse Innovation

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Products modified

(“stripped down”) for

emerging market

consumers

R&D/innovation and

commercialization for

developed market

consumers & conditions

Needs and

conditions in

developed markets

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

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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THANK YOU

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