Current status of the startup ecosystem in SEA

In this report, after explaining the current state of the startup ecosystem in SEA, I would like to provide my views on how to work together with start-ups to gain results. There are two types of start-ups: “global type”, which has the potential to expand into the world due to its excellent technology and business model, and “local type”, which solves the problems specific to each country and region. When collaborating with SEA start-ups, unlike in Silicon Valley and Shenzhen, we must first understand that there are only basic “local” start-ups in SEA. GOJEK, one of Indonesia’s unicorn companies, is a typical “local type”, started its business from organizing regional bike taxis. In the past, users had to physically find a bike taxi, negotiate a price, and guide the driver to get to their destination. GOJEK has solved this complicated process for foreign travelers through this single app. In addition, by building a cash-on-delivery mechanism, GOJEK has overcome the problem of low credit card penetration, which has been an obstacle for EC growth in Indonesia. In addition to establishing a system for collecting money from users, GOJEK has established a mechanism for depositing money in an E wallet, and it has grown into a leading financial institution in Indonesia. This is just one example of GOJEK’s functions, and GOJEK has established its position in Indonesia by controlling the basic infrastructure of payment and logistics under a dominant strategy. Why is the “local type” business, GOJEK expanding into Vietnam and Singapore? The SEA startup ecosystem has a big influence on it. SEA, experiencing rapid economic growth, has been attracting attention from investors all over the world, but the size of the economy per country is small so it is not easy to find an investment target. For investments in early stage start-ups, it would be good if we could exit when start-ups grow to a decent size. But without exit, the ecosystem will not be maintained. To be an attractive company, such as Google, Alibaba, and SoftBank, it is necessary not to become a dominant player in one country but to become a regional player that operates in multiple countries and regions. Considering this background, GOJEK is attempting to expand overseas, but in SEA the number of supporters and management know-how to expand from one country to multiple countries is limited, so there are many start-ups forced to close their business. Such issues are particularly noticeable in Malaysia and Thailand, where the population is relatively small and social issues are rare. So how do Japanese companies and local conglomerates invest in start-ups to get results? There are three important points. These are ① Clarifying the issue you want to solve, ② Finding a reasonable startup, and ③ Using your own capabilities to support the global expansion of start-ups.

① Clarifying the issue you want to solve

It’s not just about collaboration with start-ups. You can’t get results if you just follow trend and do not clarify the issues. Cash flow management, balanced scorecards, IoT, AI, fintech, are examples of trend. Adopting these trends does not always mean that management will improve. These are just tools, and there will be no achievement without considering how to use them. It is very important to clarify “which problem you want solve”, and this will clarify “what you want from start-ups”.

② Finding a reasonable startup

Companies often focus on the uniqueness of technology and business models when making investment decisions, but the most important thing to get a return on investment is to buy at a reasonable price. Such start-ups are relatively easy to be find in Malaysia and Thailand, where the supply-demand gap in financing is huge.

③ Using your own capabilities to support the global expansion of start-ups

Quick business synergies between companies and start-ups are not easy. However, it’s not difficult to leverage companies’ capabilities to help start-ups expand business globally. For example, companies can quickly lend their own free space or introduce an existing customer in a country where the startup has not yet expanded. We can say that gradually increasing mutual trust by supporting regional development of “local type” start-ups and then creating business synergies is one of the ways to minimize the burden on both parties Please feel free to contact us if you have any questions regarding collaboration with start-ups in SEA. Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
Few days ago, we conducted a seminar on “How to manage organization and human resource development”. At that time, we received some questions on the importance on conducting employee satisfaction survey and the method to utilize survey results. In this e-mail newsletter, I have summarized my answers to these questions. According to my acquaintance developing Japanese chess software, he analyzed all game records of Japanese chess using AI, and then found that the common thing among the best players, such as Mr. Habu and Mr.Fujii, is that they only made a few bad decisions during the game. Any professional Japanese chess players cannot avoid making bad decisions during one game, but the ratio of bad decisions by Mr. Habu and Mr. Fujii is extremely low. Japanese chess fans might know “Habu magic”, where he makes a comeback victory. However, the secret to maintain a high win rate is not odd hand and exquisite hand in the final stage but low ratio of bad decision. This is exactly the same for corporate management, and I think the key to excellent management is how to reduce risk. So far, I have provided wide range of support from startups to reforms and corporate revitalization in large corporations, and found out that while companies in momentum and high growth are struggling to solve problems every day with a sense of crisis, slower companies are more relaxed. As a result, growing companies are constantly mitigating risk by addressing new issues, while slower companies are unaware of risk, or by the time they realize it is too late and are more prone to make more failures. I first became president of a company about ten years ago. I supported the reform of a company’s management as an external advisor for about half a year, and after that, I became president due to a request from a shareholder. At that time, I received many advices from senior managers, and the most memorable one is the advice from the president of a tax accountant corporation. The advice is that “If you want to succeed as a president, the president should clean the company by himself.” After immediately practicing, I found that I could sharpen my senses and respond to slight changes in the company. For example, these are changes such as desks of employees whose desks are always tidy gets cluttered, and chairs in a conference room not in their original positions. As a result of continuing this practice, I was able to read needs of the customers from the lines in between customers’ emails and to imagine what is happening to the company’s management when I go to retail stores. I feel that this is a turning point for me, not only as a manager but also as a consultant. As is often the case with bad consultants, they don’t understand what is happening on-site and think they are right. As a result, they are not trusted by their clients or their team members. It is an essential skill for managers and consultants to look at the site and understand the whole picture based on the information on-site. Since then, I have always pursued how to utilize the information on-site in managing companies. This applies not only in managing my own company, but also in supporting clients’ companies. For example, does your company conduct an employee satisfaction survey? Many companies may conduct it, but can companies use the results to make management decision? HR department may check the result and then may reflect it in the HR system and enhance training, but can they change the strategy and improve the business process? In the company that I managed previously, I conducted an employee satisfaction survey every quarter related to strategies, customers, business processes, people/organizations, and based on the results, I decided to focus on areas for improvement. Problems in the organization can be detected early and countermeasures can be taken, so it directly improved employee satisfaction, customer satisfaction, and business performance. I have implemented the same strategy on client companies and made successful management reforms. The point here is that there are many hints on-site, but it will be meaningless if managers cannot get them. While confidential information is accessible only to management, management should notice the amount of information that is not visible for upper management. We provide custom solutions, including employee satisfaction surveys, to connect information on-site to management. It is not difficult to absorb information on-site by using IT tools. The issue is whether HR will keep such information for themselves or the management will use it to reform whole management and to reduce the bad decisions. ※ I would appreciate for your comments and questions regarding this e-mail newsletter.
Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp
 
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
Australia has a population of 25 million, which is comparable to Malaysia in South East Asia with a population of 32 million. The population density is 3 people/㎢, which is far lower than 333 people/㎢ in Japan and 34 people/㎢ in the United States. By city, there are 430 people/㎢ in Sydney, 453 people/㎢ in Melbourne, and 443 people/㎢ in Canberra, which are far below 15,428 people/㎢ in 23 wards of Tokyo, 8,358 people/㎢ in Singapore, and 11,000 people/㎢ in New York. Although Australia, a resource-rich country, has a GDP of $57,000, higher than that of Japan’s $39,000, its economy has been affected by the Dutch disease for a long period of time. Thus, there is an urgent need for Australia to diversify its industry for future economic development. The Dutch disease is an economic phenomenon where the trade surplus due to the export of abundant natural resources causes the country’s currency to rise and the wages of workers to remain high, which eventually causes the manufacturing industry to lose international competitiveness. In fact, Australia’s automobile industry, which was once a major industry, has ended in 2017. In that context, I would like to explain how Australia has achieved national operations despite its low population density and has created new industries.

① A clear investment and management policy that supports low population density

Many industries are not suitable for countries with low population density. For example, the installation of mobile phone base stations, electric vehicle charging facilities, retail chains, and public transportation systems are not cost-effective when the population density is low. So far, Australia has stuck to its own policy not to invest and manage such businesses. For example, trains only run to downtown Sydney and Brisbane from the international airport; to get to other cities, one will need to take either a taxi or a bus from the airport. Other than that, gas stations are unmanned, and retail stores close early or during times of lower foot traffic.

② Technology that supports low population density

Australia has developed many technologies that support low population density. For example, there are technologies that support gyms to operate 24 hours a day and technologies that automate agriculture. Among companies that provide or support such technologies, the company called Myriota that provides IoT satellite technology is attracting attention. The company is a venture company that spun off from the University of South Australia in 2015 and aims to build a large-scale, yet low-cost and low-power satellite communication network that uses micro-satellites. Its technology is currently being applied in a wide range of areas, from monitoring wind power plants to monitoring farm water tanks. It has raised capital of more than AUD 50M to date, backed by investors such as Singtel-run VC Innov8 and Boeing.

③ The role of the federal government and state governments to create new industries

The key points in creating a new industry in Australia are the federal government’s management of industrial portfolios and the state’s focus on specific industries. Business areas of start-ups responsible for new industries are dispersed across regions even if there are some overlaps. For example, FinTech in New South Wales, Agri (Agricultural) Tech and Health Tech in Victoria, and Clean Tech and Space Tech in South Australia. The Premiers and their respective state governments are also devising ways to develop the towns so that the industries they focus on can grow to their full potential. For example, in South Australia, the Stone & Chalk, an incubation hub, is within a walking distance from University of South Australia, University of Adelaide, and research institutions. Myriota introduced in ② is a university-based startup was born and is evolving in such an environment. We hope that you can use the case study of Australia as a reference to create new business opportunities in the Post-COVID Era. If you have any questions or comments, please feel free to contact us. Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.

Digital transformation is about positioning companies to fully lever the opportunities new age technologies present

As interest around digital transformation heightened, we observed that companies have started to use digital transformation loosely for their digitization initiatives which have undermined the power and importance of digital transformation. Digitization essentially refers to the process of converting information from a physical format to digital one to automate processes or workflows without any different-in-kind changes to the process itself. Digital transformation, on the other hand, is about exploiting digital technologies to create new or modify existing business processes, customer experiences to meet changing business and market requirements. It means two things at the highest level. Firstly, digital transformation is about exploitation of what the company is already good at doing by transforming its core business using digital technologies to conduct business better, faster, cheaper and more effectively. Secondly and more importantly, it’s about building new businesses by stepping out of the core and creating something that did not exist by exploring new and adjacent business opportunities.

Irrespective of the industry, digital transformation is a business imperative

Even if the company’s business and mission don’t change much over time, we have seen time and again that companies always need to be looking ahead for new ideas and new ways to accomplish familiar tasks because technology is a massive value creation lever and traditional competitive advantages are becoming fragile.

Technology is a massive value creation lever

In the past 15-20 years, digital technology made it cheaper for businesses to store, process, and communicate information in digital form. We also noticed that there is a positive correlation between technology investments and gross margins of a company. Our observation also aligns with the Harvard Business Review study that focused on financial services industry, which found that digital leaders outperform digital laggards by 13% in developed markets and 15% in emerging markets in yearly revenue growth1

Traditional competitive advantages are becoming fragile

Technology has deconstructed the links in the vertically integrated value chains of established industries and lowered significantly the barriers for entry, especially for new digital attackers. This has led to a drastic change in the competitive landscape for established companies. New startups are becoming very good at capturing value from market leaders, especially those that felt a bit too comfortable in their stable, slow-growing plateau. For instance, telco operators face challenges from players such as WhatsApp, which drastically affected their traditional short messaging service business. The advantage that companies have historically enjoyed by being the share leader of their markets is not sustainable anymore. Today, only 7% of companies that are market share leaders are also profit share leaders, down from 25%in the 1960s2.

For a successful digital transformation, companies need a holistic approach

Exploit the core – automate existing processes and rethink how value is delivered to the end user With increasing pressure on companies to become leaner, companies need to manage legacy businesses efficiently. While digitization can help companies with efficiency and getting to operational excellence, it must go hand in hand with enhancing customer experience. A study from the MIT Sloan School of Management found that companies that increase both digital operational excellence and customer experience outperformed industry average net margin by up to 16%3. For instance in 2012, AIA Singapore, a leading insurance company launched the world’s first fully mobile interactive Point of Sales (iPoS) system on iPad4. The adoption of iPoS went beyond the company’s expectations. Within 12 months of launch, 80% of the new business came through iPoS and the net impact to the business was three fold5. Firstly, agents closed more deals, secondly, turnaround times were a fraction compared to paper based approaches and finally, back office costs were much lower.

Establish a strategy to explore and exploit adjacent digital growth opportunities

Companies often focus on exploitation of their current (core) business activities and neglect the need to explore new territories and enhance their long-term viability. Instead of trying to cope with disruption when it happens, you can attack digital disruptors by creating a digital disruptor of your own by leveraging on your assets and brand to create a model disruptors cannot copy. Research shows that over a 10 year period, explorers grew 6% faster than exploiters, and delivered 2.4% higher total shareholder returns6. You can explore adjacent digital growth opportunities internally through R&D departments or setting up new independent business unit, or you can rely on your eco-system to source ideas externally through acquisitions, partnerships and running incubation labs. While exploring new business opportunities however, you need to avoid the perpetual search trap – continually searching for new ideas but failing to commercialize them – by engaging in relevant innovations, selecting opportunities that fit your capabilities and focusing on monetization of the innovation. Tetra Pak, market leader in the food processing and packaging business, best known for manufacturing of food and drinks packaging is a good example of how an established company is exploring and exploiting adjacent business opportunities. Leveraging on its market position, knowledge of the food and beverage industry, new advances in technology, Tetra Pak through its Industry 4.0 initiatives is preparing for the digitization of manufacturing. It has collaborated with other established players in the market like ABB to offer efficient energy management Industry 4.0 solutions to food and beverage industry which is expected to deliver US $5007 billion in value by 2022.

Define organization structure and processes that support digital transformation

Firstly, becoming digital requires a massive change in how an organization thinks and functions. For executing a digital transformation agenda, companies require a whole new set of capabilities –ambidextrous (the ability to foster both explorative and exploitative behaviors) leadership, fast execution, experimental mindset, trial and error approach. Secondly, companies need to ensure right structural framework is in place to support the digital transformation agenda. While there is no one right approach, based on our experience, it is ideal for companies to create a separate team that is independent from the established business units to explore new possibilities, while having access to its existing corporate assets (e.g. client base). The digital activities must be allowed to run in parallel and sometimes in competition with other business units. When the new business is proved viable, it can be quickly scaled and integrated into the organization. Last but not the least, organizations need to adopt new way of working suited to the needs of the digital age. Unlike traditional practice that follow a hierarchical structure where decision making is slow, companies must rely on small execution units and allow for more autonomy by practicing agile at scale to keep up with change. This allows companies to keep the organization adaptive over time, decreases the risk of taking the organization in the wrong direction, gives high visibility on what value every team is creating, allows companies to focus on minimum viable product at every stage and realizes business impact early with early releases and faster time to market.

Successful digital transformations in the industry are far and few

According to Forbes, 84%8 of digital transformations failed and more than 50% did not go right at all – the gap between expectation and actual implementation were so enormous that those implementations were considered a failure. Three major reasons for those failures are described below. Leaders fail to fully grasp the level of uncertainty in their industries when technology led disruptions are in play Unfortunately, many business leaders underestimate the exponential progress of environments they are operating in while embarking on digital transformation journeys. With large organizations operating in multiple markets with multiple lines of business that work in specific environments that change over time, leaders often miss choosing the right approach to winning in the right part of the business at the right time.While embarking on the digital transformation journey, it is critical that business leaders carefully evaluate the environment they are operating in and choose a combination of approaches their businesses need and run them simultaneously.

Companies take a technology first approach instead of business first approach

Many companies across industries are adopting digital technologies like analytics, cloud, mobile, social media and more recently Internet of Things (IoT) to engage customers innovatively, provide greater possibilities for their employees and optimize or redefine operational models. While it is fascinating and heartening to see how digital is revolutionizing several industries and the very nature of businesses itself, companies must also realize that digitalization potential varies across businesses and industries. A comprehensive view spanning front office, mid office and back office is essential to define and drive business and operational outcomes. Trying to adopt digital technologies just because your competitor or industry is doing so will not yield the desired benefits, especially in the absence of a business-focused goal.

Companies run a digital transformation agenda with traditional processes

Having a strategy and technology is insufficient for companies to achieve digital transformation fast enough or in a good enough way. Digital transformation is a fundamental shift in the way people think about how they interact, collaborate and work. According to Forbes, a large part of companies failed at digital transformation because these companies were not prepared to change traditional processes. Digital transformation efforts fall flat when companies do not spend sufficient time changing people’s behaviors, culture and how people make decisions. Companies that achieved successful digital transformation identified adaptation to agile ways of working as the critical underlying secret of their successful digital transformation.

Looking ahead

While successful digital transformations are hard to attain, the benefits are extremely rewarding. To stay relevant, companies need to balance both exploitation and exploration and adopt implementation strategies based on the environment their business is exposed to. While doing so, companies need to ensure that the right structures, processes and ways of working are adopted to support the digital transformation initiatives.

How can IGPI help you in your digital transformation journey?

We understand that technological changes and digital transformation are quite challenging for companies. With this article, we hope you get a deeper understanding of the key constituents necessary for a successful digital transformation program. While these are key underlying themes, there is also no “one size fit all” approach and companies need to employ different strategies based on the unique needs and environment they are operating in. IGPI is known for our corporate turnarounds and transformations and we will be delighted to assist you in strategizing your end-to-end digital transformation initiatives. Our non-exhaustive list of digital transformation capabilities include:
  • Assessment of company’s position in terms of its digital capabilities relative to competition by benchmarking with traditional and emerging competitors and making recommendations on areas of improvement
  • Market research on the technologies that can impact/improve the service offerings of the company and potential ways of implementation
  • Developing and validating existing and evolving consumer behavior and preferences
  • Reevaluate the existing processes and tools (to free up capital) that support businesses and identify areas of improvement
  • Conceptualize new business models through running ideathon to tap on market opportunities
  • Execute an incubator or accelerator program that suits the needs of your organization

Case study:

IGPI’s digital transformation advisory support from identifying opportunities to offering execution support

Our client, a global financial institution that serves customers in more than 30 countries wanted to explore opportunities presented by latest technological advances to drive both top line and bottom line growth

 
 Which segment to target?What is the mode of operation?Who should they partner?
IGPI’s involvementPerformed analysis of 3 key market segments in terms of market size and potential, government regulations and support, business operating environment etc.Analyzed options such as build in-house or leverage on the ecosystem, who should this new team report to, what are the key success factors, what changes are necessary in the organizationCreated list of potential targets for collaboration, contacted targets for collaboration and orchestrated collaboration with all the parties
OutcomeClient decided on exploring risky driving prediction using Artificial Intelligence (AI) as key area to explore based on holistic considerationRecommended client to work with partners within the ecosystem and separate the new team from current organizationPartnered with MNCs, Startups, and data providing agencies like driving schools, car sharing companies to develop AI based proof of concept

Key takeaways:

1. Exposure to technologies and understanding how those technologies can benefit the client is essential. IGPI was able to convince the management why it must look at AI and target automotive segment – to increase revenue and reduce costs

2. Companies often do not have the necessary skill set in technology required for exploring opportunities presented by advanced technologies like AI, IoT and big data. The Japanese client was convinced that it’s in its best interest to collaborate with the ecosystem

3. The new business idea can cannibalize the existing revenue of the company. IGPI was able to convince the management to separate operations

About the Authors

Chong Han is a Senior Manager at IGPI Singapore. Chong Han’s career started in 2008 in the M&A advisory arm of a global professional services firm, with a focus on valuation advisory relating to mergers and acquisitions, restructuring, financial reporting and litigation support. Thereafter, he joined a SGX-listed regional real estate player, investing in lands for development and properties for redevelopment or holding. His experiences and skills span across a wide spectrum of investment activities such as market analysis, due diligence, valuation, and financial modelling and transaction execution. Divya is an Associate at IGPI Singapore. She started her career with Tech Mahindra (then Satyam Computer Services Limited), a leading Indian IT services provider in their technology advisory services team. Later she worked with leading companies in Singapore – Prudential, AIA and Tetra Pak in their IT departments. In a career spanning 15 years in technology, she has participated in several digital transformation initiatives in various roles. After attaining her MBA from National University of Singapore, she joined IGPI where she works on strategy projects.

Notes

  1. What the companies on the right side of the digital business divide have in common; Harvard Business Review, Jan 2017
  2. Adaptability: The new competitive advantage; Harvard Business Review, Aug 2011
  3. Is your company ready for a digital future; MIT Sloan Management Review, Winter 2018 issue
  4. https://www.aia.com.sg/content/dam/sg/en/docs/press-releases/2012/AIA_Introduces_First-in-Market_Technology_to_Insure_Customers_as_Fast_as_Within_One_Day.pdf
  5. http://ecbeez.blogspot.com/2013/06/aia-singapores-ipos-on-ipad-first-in.html
  6. Tomorrow Never Dies: The Art of Staying on Top; BCG Henderson Institute, May 2017
  7. https://inside-packaging.nridigital.com/packaging_jan19/industry_4_0_how_tetra_pak_is_adapting_to_digital_manufacturing
  8. Why 84% of companies fail at digital transformation; Forbes, Jan 2016

About IGPI Singapore

Industrial Growth Platform Inc. (IGPI) is a premier Japanese business advisory firm with presence and coverage across Asian markets. IGPI was established by former members of Industrial Revitalization Corporation of Japan (IRCJ) in 2007. IRCJ, a US $100 billion Japanese sovereign wealth fund, is known as one of the most successful turn-around fund supported by the Japanese government. In 2017, IGPI collaborated with Japan Bank for International Cooperation (JBIC) to form JBIC IG, providing investment advisory services and supporting overseas investment. In 2019, JBIC along with BaltCap has jointly established Nordic Ninja, a  €100 million venture capital fund to focus on deep tech sectors such as autonomous mobility, digital health, AR/VR/MR, artificial intelligence, robotics and IoT in the Nordic and Baltic region. In 2019, IGPI established IGPI Technology to focus in the area of science and technology. The company invests in technological ventures and provides hands-on management support. The company also provides business development support towards commercialization and monetization of technologies IGPI Singapore was established in 2013 to focus on management consulting and M&A advisory in Southeast Asia across various sectors. We act as a bridge between Japan and Southeast Asia, having advised on market entry strategy, potential target search, valuation, due diligence, M&A process management, post-merger integration and change management for leading Japanese clients. In addition, we have helped businesses in Southeast Asia enter Japan and acted as sell-side advisor for SMEs and private equity fund looking to divest. Get in touch with us on digital transformation, strategic planning and M&A related topics!

IGPI Singapore – contacts:

Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp
Kim-Lân Dang Senior Manager +65 91000273 k.dang@igpi.co.jp
Chong Han Lim Senior Manager +65 90692611 c.lim@igpi.co.jp
This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute as a digital transformation advice. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
We hear the term digital transformation often in the recent years but the concept itself is not new. Since 30 years ago, the term digital transformation is used to describe the transformation of business models by implementation of digital technology, and does not refer to the use of cutting-edge technologies such as AI and blockchain. I believe that promoting digital transformation in Southeast Asia that is tailored to market characteristics will further open new fields for Japanese companies to compete in. As mentioned in the previous report, so-called unicorns such as GOJEK and Tokopedia are rapidly expanding by solving local problem in the B2C area. Such rapid evolution without having to take steps that are present in developed countries is called the leapfrog effect. When asked if unicorns can solve any problem, this is never the case, and if legacies such as infrastructure and service providers already exist, then the leapfrog effect is unlikely to occur, and will take time for companies to evolve. Japan is often said to be inefficient with many players in each industry, but it is even more so in Southeast Asian countries. For example, in Thailand there are eight times as many F&B companies per capita as in Japan. This also applies in the retail industry. In countries like Vietnam where there are 1.3 million non-franchise small-scale (mom and pop stores) restaurants, the supply chain has become more multi-layered than Japan, and there are many small and medium-sized trading companies and wholesalers. The supporting logistics network is also composed of countless micro logistics companies. In areas where such legacy exists, the leapfrog effect due to going online is unlikely to occur, and it is necessary to reform the offline field first. So how can Japanese companies achieve results in the digital transformation space in Southeast Asia? Here, I would like to explain three points ① Not aiming to implement the latest technology, ②Roll-up of local companies, and ③ Collaboration with local partners.

① Not aiming to implement the latest technology

Solving issues in Southeast Asia does not necessarily require the implementation of cutting-edge technology. For example, in Southeast Asia where there is information asymmetry, there are many cases where digitalization of paper-based information and the aggregation of dispersed data itself can create value even if the technology has already been applied in Japan.

② Roll-up of local companies

The local industry in Southeast Asia is decentralized with many players, and it is understood that this is a factor that hinders the development of Southeast Asia. If these companies can be integrated by acquisition, the management can be more efficient. Especially in businesses that operate mainly on the balance sheet with large inventory and fixed assets, the economies of scale are advantageous, so the aggregation effect in Southeast Asian countries where interest rates are high could be higher than that in Japan. Also, if you can roll up virtually by providing a common platform without acquiring, you can achieve the same effect.

③ Collaboration with local partners

Rolling up a local company seems easy in theory, but it is not that simple. While it is worthwhile for Japan and other developed nations that have undergone reorganization in the past to roll up companies in Southeast Asia, local management is key after the integration. In such situation, it would be effective to collaborate with local conglomerates and large companies. IGPI has received similar inquiries from many local companies. It is effective for Japanese companies and local partners to work together for rollups and we hope to be a bridge between the two. If you have any inquiries regarding digital transformation in Southeast Asia, please feel free to contact us. Kohki Sakata Chief Executive Officer +65 81682503 k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
First, the impact of covid-19 is very different from the “Lehman shock”. This time, the local industries such as the food-service, retail, and tourism were the first ones to be affected. In the global industries represented by the automotive and electronics industries, factory operations have been suspended due to disruption in supply chain and difficulty in securing labor, but these are most likely to be resolved in a few months. The decline in demand expected over the next few years is likely to affect the global industry even more than the covid-19. In addition, the stagnation of the stock market and the increase in non-performing loans resulting from covid-19 will have an impact on the financial system. The order was different from the “Lehman Shock”, which affected the financial system first and then the global and local industries. As corporates strengthen their management by developing business restructuring strategies to overcome this difficult situation, CX will become even more important. In Southeast Asia, it has increasingly become more important for regional headquarters to take the lead. The regional headquarters established in Singapore mainly serves as a support company and/ or a coordinating company. This is a convincing trend given the history of many companies in Southeast Asia. However, regional headquarters are required to have more than just support and/or coordination function with rapid progression of globalization and digitalization. For example, regional headquarters may be required to manage business portfolios, to make timely decisions on M&A, to launch new businesses, and to respond to emergencies such as the covid-19 impact. We propose 5 high priority functions from the perspective of business restructuring.

① Cash flow management capabilities

Many companies still manage their profit and loss statement (P&L), such as revenue and operating profit, which indicates the profits of their main business. However, to improve corporate value, it is necessary for companies to switch to management that focuses on the cash flow. Companies should increase current operating cash flow and consider ways to increase future investment cash flow. Also, in an emergency like this, where the future is uncertain and demand is expected to fall in the global level, corporates should concentrate on ways to increase cash on hand since P&L is not useful at all. Increasing the sales of the long-term accounts receivables to increase sales on P&L can worsen the cash position in the short-term. In addition, even though corporates can make decision on timing of debt payments, incoming cash flow cannot be controlled, so corporates need to manage their accounts in terms of gross income, not in net cash. If corporates are not able to manage the cash flow of each business unit and each offices in the region at this time, corporates should thoroughly develop such system at this time.

② M&A driving force

Southeast Asia’s M&A is not limited to large-scale deals like those in Europe and the United States. However, rather than aiming for large-scale projects, there are many cases where roll-up of the industry with a legacy that is decentralized can be more value-adding. For example in Thailand, there are seven times more F&B companies than in Japan per capita, and in Indonesia, there are thousands of micro logistics companies. If corporates could successfully roll-up by these companies, there will be an improvement in asset efficiency due to economies of scale. However, there are not that many companies with the human resources capabilities right now. Execution process and effort will be the same for all M&A deals, big or small, and will be a good learning experience for companies. The recession is a unique opportunity for corporates to recruit new M&A talents to gain more experiences.

③ Ability to launch new businesses

To start a new business, corporates will need to go through an incubation period after coming up with a business idea. As we know that most startups in Southeast Asia are local type, meaning they aim to solve local challenges, incubation does not rely on technology, but on persistent efforts on human tactics for expansion. Not many companies have such function at this stage. The next few years will be a good time for companies to hire the best talents from startups, and it can be an opportunity to enhance their organizational skills.

④ Local management skills

In order for the regional headquarters to have the functions described in ② and ③, local management skills are also important when undergoing business restructuring. Decision making is the process of acquiring information, processing it correctly, and making decisions. Local management is the key for quick decision making in Southeast Asia. In addition, increasingly more companies are reviewing their missions, visions and values in the past several years. Nevertheless, companies will also recognize the importance of reviewing daily decisions and routines to check whether all employee are following the corporate philosophy during the recession.

⑤ Group governance capabilities

In order to make business development activities by local management even more effective, it is important to strengthen group governance at the head office and regional headquarters. Regarding group governance, regional headquarters must control and operate based on the global rules established by the head office. Governance does not mean internal audit or research on individual decisions. It should not allow personnel who has not been involved in the business execution to give opinion on individual’s decision-making, but the emphasis should be on how to select and utilize local management, and how to dismiss people who were not able to achieve their goals If you have any questions regarding CX or business restructuring in Southeast Asia, please feel free to contact us. Kohki Sakata IGPI Singapore CEO k.sakata@igpi.co.jp This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.