Corporate Venture Building

Why European Corporates Should Venture Build in Asia

Being part of the next decades of growth in this region will require local approaches. Innovation-from-Europe won’t cut it anymore.

It is no secret that Asia has been and will continue to be one of the vital growth motors of the global economy in this century. With China making leaps and bounds over the last four decades to becoming the world’s second-largest economy and India steadily raising their output, South-East Asia as a region is often overlooked but just as important. The potential is significant, with more than 400 million people and comparatively young labor forces combined.

In our observation, European companies have often looked at Asia through three regional lenses — China, India, and the rest of Asia. Strategically, they started working with countries and companies in this region to build resource supply and manufacturing capabilities. They then started focusing on sales and marketing as budgets and affluence grew to levels they felt make a good market for them.

While these strategies, particularly the first, have led to a level of success, they will not address the real market potential this region has to offer that way. Therefore, if European corporates want to be a part of the growth story in this region over the following decades, they will have to rethink their approach and strategies.

The Problems with Innovation-From-Europe

In our experience with helping European companies innovate in various countries in Asia, there are several critical challenges that their European-designed products and services face in the local markets:

A) Diverging Consumer Preferences

While the globalization movement of the last decades has introduced many consumers in Asia to Western products, which have been seen as aspirational for a good part of that time, local preferences are diverging. With more local offerings in mid- and high-end markets and local creatives finding their footing, there is plenty on offer that reflects consumers’ tastes here. We see an increasing move towards diverging local preferences, which require adaptation.

B) Differing Cultural Norms and Industry Structures

For B2C companies, cultural norms and values are an essential factor in the appeal of their products, whereas for B2B companies understanding the structure of industries locally and where their place can be is critical. Both elements are significantly different in (and in between) Asian markets compared to Europe. And where in the past local customers adapted themselves to the offerings from the West, increasingly, they will need the other way to be successful.

C) Different Approach to Value Capture and Creation

In the eyes of European corporates, customers in Asian countries are notoriously price-sensitive. There is the perception that they will only for the lowest price and that premiums are hard to come by. In our experience, we do see that unit prices are essential. Yet, there is a strong interest and willingness for innovative pricing and collaboration models, which create a win-win and increase value creation and capture for all parties. This might involve sharing particular risks and expenses, yet working towards mutual success and sharing in that upside.

D) Trust Networks and Reliability

As financial, political, and legal systems and landscapes were not the most reliable for an extended period of development in many Asian countries, business is done with a heavier reliance on trust. While in Europe, good faith in a counter party tends to be given upfront, and the collaboration principles encoded in contracts and formal agreements, trust in South-East Asia needs to be earned.

In Asia, repeated display of goodwill and transactional reliability, will be rewarded with deep relationships of trust. This however implies a new market entrant to actively invest in building these relationships, through taking risks, and providing value to the counterparty.

This is hard to achieve by putting a sales or marketing resource in a new Asian office, and for the company executives to fly in once in a while. Instead, local teams need the resources and the autonomy to build these trust relationships, and assume the ownership and risk that are associated with them. This is why it might be better to build these relationships through a capable venture team, rather than to assume the equity of a European brand will translate into business in Asia.

The Strategic Case for Venture Building in Asia

Many of the problems that currently slow down SEA growth are problems European companies have experienced in the past (e.g., irrigation and support of agriculture). In addition, many solutions created in Europe can be applied in SEA differently allowing for potentially even better impact in the region. This opens opportunities for new products and innovations coming from Europe to open new markets and add significant value to the region. Yet that alone is not sufficient to succeed.

Given the listed challenges increasing in intensity, European corporates have several strategic options in response.

Core Innovation: Innovating around existing products and services locally by adapting them to local requirements and structures is critical in staying competitive with that business. Resources and autonomy are needed in the region to pursue those innovation projects close to customers and work with them.

M&A and Investments — Portfolio expansion through investments and acquisitions in/of local companies can help to acquire key trust holders and local capabilities at speed strategically, to be able to respond faster to changes that are happening, and help to move the core forward.

Venture Building — Building new ventures locally, leveraging the corporate advantage for new, market-specific value propositions, allows corporations to truly innovate local-for-local (with the potential of globalizing the ventures that started locally). Venture-type innovation is focused on business models and offerings very different from the core, which can evolve quickly with a dedicated team and standalone entity, that does not have to bear the brunt of the corporate overhead.

While all three strategies have their Pros and Cons, we see an increasing opportunity for European corporations to build investable, risk-aligned ventures locally in Asia. This opportunity is driven by the growing availability of regional entrepreneurial talent, a maturing market and funding landscape for ventures, and the need for speed in emerging market opportunities, which corporates can not deliver on.

Several European multinationals, such as Bosch, Yara, Engie, Schneider Electric, Bayer, and more, have already built corporate ventures in Singapore for the region, seeing the need for local innovation to address and capture new market opportunities locally fast and build the future businesses where the prospective customers are.

Conclusion

Given the myriad opportunities that exist or are yet to arise in South-East Asia, there is enormous growth potential. If European companies want to be a part of that growth, the playbook has to change from “Innovation-from-Europe” to “European-Innovation-In-SEA”. A local approach is required to succeed in these markets where consumers are increasingly spoiled for choice and local competitors are faster and more adapt to what is desired.

Venture building is a great strategic tool to accelerate this progress, as it allows a relatively standalone entity imbued with the corporate advantage to move fast locally and iterate towards attractive and successful offerings for local markets. When given the necessary resources and freedom, the entrepreneurial approach to building new businesses yields superior execution power to a remote market-and-ship model.

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Authors:

Sebastian Mueller, Co-Founder at MING Labs

Joachim Vandaele, Founding Partner at Wright Partners

Ziv Ragowsky, Founding Partner at Wright Partners