How Canadian brands can build opportunities in Asia

Sunday 27th, March 2016

 

Published Saturday, Mar. 26, 2016 8:00AM EDT

Bruce Simpson is a director in McKinsey & Co.’s Toronto office. Sree Ramaswamy is a senior fellow at the McKinsey Global Institute.

The corporate world has entered a more volatile era of leaner profits and supercharged competition. Canadian companies have to adapt quickly to these new realities – and they can’t simply play defence, by relying too much on the growing U.S. economy and a cheap loonie. The world is going through some monumental shifts, and while some create a tougher operating environment, others are creating outsized opportunities for companies that move decisively. Canada can win big by showing more “muscle” abroad, beefing up a “Team Canada” approach between the government and private sector, and being “leaner” and more productive at home.

Xerago comment: The authors offer some useful suggestions to make Canada competitive and to tap opportunities outside the traditional North American market. Looking at the issues from a marketing perspective, we see the key challenges as follows:

– How Canadian companies and brands can look for growth opportunities in international markets, particularly Asia
– How Brand Canada and the country equity need to be built and how the Federal Government has to do its bit
– How Canadian companies can build technical, production and marketing efficiencies that will enable them to compete better

We now face a shrinking global profit pool. Although they may not have always felt it, global corporations have enjoyed an unprecedented boom for the past three decades. Corporate earnings (before interest and taxes) more than tripled from 1980 to 2013, and large U.S., Canadian and Western European firms were the biggest beneficiaries. Despite recent gyrations in the resources sector, in 2015, the average after-tax profit margin for Canadian firms is at a nearly 30-year high.

Xerago comment: Canada is in a vulnerable situation. Although the country has a substantial volume of exports, two factors are revealing. One, nearly all of its exports go to its neighbour the US. Two, a look at the top 5 exports from the country indicate that most of them are natural resources such as petroleum, gold etc. There is little or no scope for value-addition. And as any savvy marketer will tell you, the name of the game is value-addition.

Whether it is countries or companies, the ability to add value is what allows an entity to command a premium. Canada has a lot of catching up to do. Globally, the commodities market has been under pressure for the last several years and Canada cannot be sitting pretty for much longer. The US has found success in its efforts to reduce dependence on Middle East oil production by successfully tapping shale oil reserves. And the world is in the middle of a petroleum products supply glut which puts additional pressure on price realisations.

That run seems to have ended. Recent research from the McKinsey Global Institute projects that the after-tax profit pool could drop from almost 10 per cent of global GDP today to about 7.9 per cent over the next decade, practically reverting to its pre-boom level. And, as profit growth slows, there will be many more companies fighting for a slice of the pie. Executives once knew their competitors and how they operated, but today new challengers are arriving from around the globe and, increasingly, from the technology sector. There are twice as many multinational firms active today as in 1990, and the majority of that growth has taken place since 2000.

Meanwhile, the ranks of Canadian multinationals have barely grown in 20 years, and 85 per cent of Canada’s exports still go to the United States. Even 20 years after NAFTA, direct trade, investment and personal links between Canada and Mexico remain minimal.

Xerago comment: From amongst the major Western economies, Canada has probably no more than a half dozen internationally recognisable brands. The most important was probably Seagram’s till it went defunct. For a while, Blackberry was right at the top of the emerging world of mobile till it ceded that space to Apple. A few other names to round out the list are Bombardier in transportation, Corel and Matrox in software.

Industrial giants from emerging economies are proving to be hard-charging competitors. Some of them rank among the world’s largest firms, and they are now expanding globally, often through aggressive merger-and-acquisition strategies. Widely-held public companies in the West may be hamstrung by their shareholders’ focus on the most current quarter’s results. Because many of the new emerging-market competitors are state- or family-owned, they have flexibility to play the long game. They can prioritize revenue growth over short-term profits or engage in price wars for extended periods to build market-leading positions. Chinese firms, for example, have grown four to five times faster than Western firms in the past decade, yet their margins fell by more than five percentage points on average.

Xerago comment: For decades, the Japanese brands in a variety of sectors such as automobiles, electronics etc created compelling value propositions that endeared them to the Western consumer. When the Japanese economy began to flag, its titans began to lose their lustre. By and large, most Japanese companies played by the rule book out-innovating their Western counterparts and producing products and services that delighted consumers.

All that changed with the entry of first, the Koreans and more recently the Chinese. While the Koreans beat the Japanese at their own game, they and the Chinese have been spectacularly successful primarily because of their vast production capacities. However, they have also quickly learnt that the best way to build long-term sustainable businesses is to build strong brands. Korean brands like Samsung and LG are household names; the Chinese are yet to understand the rules of the game but will probably do so soon enough with the backing of a benign government.

Technology firms represent another huge and even more unpredictable source of competition. By building powerful digital platforms and networks, the biggest tech giants have reached unprecedented scale in users, customers, revenue and profits. These platforms can drive marginal costs to almost zero, allowing the operators to add customers and new types of interactions at virtually no cost. Some digital disruptors are siphoning substantial value from industries and giving it away to consumers to build user bases. Technology-enabled firms are also expanding rapidly into adjacent sectors – and incumbents may be caught flat-footed. Consider the bookstores shuttered by Amazon, the video stores wiped out by Netflix, the travel agents rendered obsolete by Expedia.

Xerago comment: Technology may be a seductive proposition for governments and investors everywhere. Nevertheless, creating an environment where tech entrepreneurs can flourish is a daunting task. While Silicon Valley is often cited as an example, the fact is that the sustaining eco-system which made the Valley what it is today was created over several decades.

The Canadian government seems to be encouraging something similar in the Waterloo region where Blackberry was its most famous tenant. The initiative needs to be given time, resources and support for it to deliver results over a period of time. Nevertheless, we believe that each country must play to its strengths. Canada is resource-rich but manpower-starved and it would be impossible for it consider becoming a high-tech manufacturing alternative to say, Korea or China.

Canada’s share of Asia’s expanding trade has fallen by half over the past decade. And yet Canada has many of the strengths needed to compete in a tougher global marketplace. Not only does Canada have an educated labour force, but it has built an excellent track record in fields that are in demand all over the world: natural resources, clean tech, financial services, infrastructure, health care.

Xerago comment: While we do not have the numbers, we find it worrisome that Canada’s share of Asian trade has fallen. Clearly, the country has missed the bus at a time when most Asian economies and China in particular were on a massive infrastructure expansion spree. For years now, China has been the world’s leading buyer of coal, iron and steel and other essential resources to feed its construction frenzy. With the economy slowing, the Chinese have cut back and this is beginning to have a ripple effect.

Canada’s strengths make it uniquely placed to take advantage of a massive and continuing wave of global growth. About 1.8 billion people are expected to join the ranks of global consumers by 2025, with nearly all of the growth coming from emerging economies. The expansion of the middle class worldwide represents a historic opportunity to capitalize on the ties that Canadian immigrants maintain with their former homelands in the developing world, to develop the export capabilities of small and medium-sized firms, and to better market Canadian expertise.

Xerago comment: This may seem like wishful thinking. Immigrants tend to have strong emotive links with their countries of origin. Whether this will translate into any significant business opportunities remains to be seen.

But there will be intense competition for these opportunities, and complacency could lead Canadian industries to miss out. In the new battle for corporate profits, business and government leaders face three challenges in particular. Companies and policy makers alike will need to take a more collaborative approach to tackling these challenges and build Canada’s competitive muscle.

Xerago comment: A collaborative approach is essential. After all, there is only so much that private businesses can do to push their prospects. The nature of geopolitik is such that a lot of negotiations in sectors such as aerospace, petroleum and high-technology are typically facilitated and pushed by government-to-government exchanges. It requires politicians and bureaucrats alike to understand the agenda that most businessmen have in mind.

Some countries are lucky in being able to build their brand equity by a combination of implicit and explicit methods. The classic example is the US which has for decades perfected the art of soft power wielded in the form of films, music and other cultural exports. Korea has been experimenting with the same formula with some degree of success. The UK, France, Germany have their institutions such as the British Council, Alliance Francaise and the Goethe Institut to further their cultural agenda.

Ask the average man on the street what his perception of Canada is and it is unlikely that he will have a very clear answer. There is much opportunity to build the brand, but this is a process that the Canadian government must see value in and collaborate with the relevant stake-holders.

First, the firms that win in this new competitive landscape focus on high-growth markets. Canadian companies can expand their reach by targeting the hundreds of fast-growing megacities across Asia. Most Western leaders would be hard-pressed to point to these places on a map today, but they represent huge, untapped markets that are still up for grabs.

It’s time for Canada to play “offence” and tilt decisively toward Asia. For example, Canada could create a minister for Asia, build a stronger “Team Canada” approach abroad and increase the quantity and frequency of well-targeted public/private-sector trade missions to the most promising markets.

Xerago comment: A good marketer will first segment his markets to understand which ones offer the greatest opportunities. A ‘product strategy’ will have to have the right fit – both in terms of the capabilities that Canada brings to the table as well as what the target segments are looking for.

Canadian companies perhaps could make a start by competing more aggressively for businesses where they bring natural strengths or proprietary technology to score wins. They need to be far more visible at trade shows, they need to perhaps be more visible in the corridors of power where they matter and they need to cultivate influence in countries where they want to make an impact. All elements of a good brand strategy! It is hard though to make governments to understand these considerations and execute effectively; this must be backed by political will and the freedom to professionals to deliver the agenda.

The second challenge is to focus on competing in the knowledge economy. The highest profit margins are now in sectors such as finance, pharma, media and information technology – fields that revolve around talent, innovation, patents and brands. Western firms’ share of profits in these sectors has nearly doubled in the past decade, but Canada has not benefited to the same degree as the United States or European countries. These sectors will be the source of future profit growth, and Canada has to compete on these playing fields. The public and private sectors will need to work closely on new strategies for developing and attracting the skills needed to compete.

Xerago comment: Canada could perhaps learn from its southern neighbour. The US has for decades encouraged students and academics from other parts of the world to come to the US. They stay back lured by the promise of better research facilities, better funding and opportunities. This has given the US a headstart in its research efforts and kept the nation ahead in the technology race. Canada needs to encourage an entire eco-system consisting of academia, research and other supporting infrastructure to enable the process. This is unlikely to happen overnight, but will pay rich dividends in the long run.

Third, we must be leaner at home. The winning firms focus on productivity growth. Nearly one-third of Canada’s mid-sized and large firms are in the mining, energy and metals sectors. They are not only exposed to gyrations in global commodity prices, but under increasing pressure as emerging-market giants drive down margins across entire industries.

Productivity is not just a matter of survival for firms in capital-intensive sectors; given Canada’s aging work force, it is one of the most critical challenges facing the economy. Over the next 50 years, aging could slow Canada’s GDP growth rate by 50 per cent – the steepest decline of any advanced economy in the G20. Every sector that hopes to be globally competitive has to continuously seek ways to become more efficient. And Canada does not currently lead the world on productivity in any sector.

In a hypercompetitive world, many companies (and countries, for that matter) instinctively throw their resources into protecting their current market niches. But with emerging-market companies and high-tech firms bringing a new aggressiveness to the game, there’s no safety in inertia. Industry leaders could suddenly find themselves challenged by a startup, an unfamiliar foreign name, even a company from an entirely different industry that they never saw coming.

But if Canada can transform the way it does business, becoming leaner and more productive at home while aggressively pursuing growth opportunities abroad, there will be plenty of opportunity in this wave of disruption.

Link to original article: http://www.theglobeandmail.com/report-on-business/rob-commentary/canadas-winning-combination-for-the-new-global-economy/article29394854/

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