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ASEAN and Asian Emerging Markets: From Exporting to Innovating The 2nd Seminar on Board of Trade of Thailand’ Strategy Innovating Business Reform to Move Forward George Abonyi Visiting Professor Department of Public Administration and Executive Education Program Maxwell School, Syracuse University 30 September 2015 1 Overview of “the story” Challenge Opportunity Response • Thai manufactured exports stalled (product/market challenge) • “New normal” + ”greater divergence” of global economy • China market is not (yet?) the answer • Asian emerging markets: ASEAN, China, India (ACI) • But these markets and consumers are different • From exporting to innovating for Asian emerging markets • But innovation with a difference 2 Thailand: sustained development success Source: Pasuk (2014) 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” 3 From sustained development success to Middle Income Trap Source: Ohno (2011) Income growth stalled • Manufactured exports stalled Trap: between low-wage manufacturers and high-wage innovators 4 MACRO CONTEXT Key role of manufactured exports 5 Export-driven growth Source: NESDB, 2015 Key role of exports in driving growth to date • 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 6 Manufactures dominate exports (% share of exports) Source: Ministry of Commerce, NESDB 2015 Electronics and Electrical: 30% of exports (2014) • Automotive (parts, assembly): around to 10% Compare with rubber products: under 3% of 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 7 CHALLENGE Manufactured exports, key driver of growth, have stalled •Product/production challenge •Market challenge 8 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 for knowledge-based capabilities to compete: upgrade (innovate), e.g. HDD 9 Example: Thailand’s position in the Hard Disk Drive (HDD) Global Value Chain (GVC) Source: Hiratsuka (2006) 10 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 = 100 Source: Suehiro (2015) 11 Market challenge: “New normal” and “greater divergence” in the global economy Source: IMF WEO, July 2015; October 2008 Slow-growth global economy esp. developed economies; slowing but relatively faster growth in Asian emerging economies • Especially ASEAN, China, India (ACI) And political uncertainty of economic management (e.g. EU, China) Source: IMF WEO, July 2015, October 2008 Note: IMF has continually overestimated growth since 2009 12 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 13 Developed economies and China as markets: slowing Developed economies (particularly US) driving region’s growth as final markets • • China has imported 50% of all intraregional intermediate exports (parts, components); but for final export to developed economies economies, e.g. iPhones to US and EU (source: ADB, 2011) • China: rebalancing and extended slow growth From high (national) savings and related investment- and export-driven model; to domestic consumption driven growth Challenge of “political economy” Intra-ASEAN trade is less than 25% of its total trade Developed economies’ anemic growth Source: Lim and Lim (2012) • • 14 China’s investment-driven growth: increasing debt, declining efficiency, most new debt is to service old debt 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 15 Key Chinese activity indicators Nearly every industry is at 30% or more overcapacity • • Average accounts receivable for consumer electronics retailers/manufacturers:123 days China’s import growth has declined significantly Average days of inventory for clothing companies: 174 days (Bloomberg 2015) Source: Haver Analytics, in Financial Times, 19 Aug. 2015 Source: OECD, 16 Sept. 2015 16 China market challenge China’s rebalancing from investment to consumption-driven growth even if smoothly successful, will mean extended slow growth; AND 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 has been major importer of Thailand’s/region’s exports of parts and components; but for its final exports to developed economies, e.g. iPhones to US and EU 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 17 OPPORTUNITY Over the longer term, Asian emerging markets – particularly ASEAN, China, and India (ACI); but different from developed economies, Thailand’s traditional final markets. 18 Future of Asia is bright By 2030 40% of global consumer spending from Asia, especially ACI Source for figures: Australian Government White Paper (2013) 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) 19 Future of ASEAN is bright Source: Euromonitor International (2015) Economy Market Youth $ • If ASEAN were a single economy it would be the 7th largest in the world; and could be the 3rd largest by 2030 • With 622 million people, ASEAN’s potential market size is larger than EU (502 million) and North America (354 million) • With median age of 28.8 years in 2014, ASEAN’s population is younger than EU’s (42.1), China’s (40.8) and North America (38) • Total consumer expenditure is expected to grow by 108% in real terms across ASEAN, 2015 - 2030 20 ASEAN consumer expenditure is increasing…but unevenly Source: Euromonitor International (2015) ASEAN’s Real GDP Growth and Total Consumer Expenditure: 2000 – 2014 • Averaged 5.4% p.a.; expanded by 117% in real terms to reach $1.4 trillion in 2014 By 2030 ASEAN to be the 3rd largest economy, after US and China, worth $3.1 trillion in constant 2014 dollars Consumer Expenditure per Household in ASEAN: 2014 and 2030 21 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 International (2014) 22 Consumer is at the centre of understanding market potential Source: Euromonitor International (2015) Household Income Distribution in ASEAN: 2014 Households by Annual Disposable Income Band in ASEAN: 2014 and 2030 23 RESPONSE From exporting to innovating for Asian emerging market consumers – but with a difference 24 The not-so-good news: Thailand is lagging on traditional measures of innovation such as R&D Source: NESDB, ADB R&D as % share of GDP Thai private sector's share of investment in total R&D is around 3545%, vs. 77% for Korea, 76% for Taiwan, 66% for Singapore 25 Other constraints on innovation e.g. UNCTAD (2015); Abonyi/ADB (2014) Institutional constraints Financial constraints Conceptual constraint • Public/government – programs, agencies • Private – domestic, multinationals • Education/research 26 Narrow concept of innovation driving policies, programs, corporate strategies Innovation-related policies and programs typically focus on supply-side interventions for “mainstream markets” • • Firm-level innovation geared generally for “advanced consumers” either in developed markets or higher income consumers in emerging markets Focus on links between formal science and innovation – i.e. science, technology, innovation or STI -- in particular, R&D-intensive higher technology activities • Inputs, e.g. PhDs, outputs: e.g. scientific publications (e.g. UNCTAD 2015) Traditional STI policies and programs inadequately support innovation that is not high-level ST-intensive, e.g. incremental or adaptive innovation; for lower-income groups (e.g. lower middle-income; upper end of lower income) • STI policy and corporate strategy generally fail to appreciate the potential contribution of such innovation to competitive export performance AND increasingly: New ecosystem of innovation: e.g. cheaper, faster, smaller, widespread ICT devices, stakeholder collaboration, allow for easier low-cost market experiments in product/service/business model innovation (“Big Bang Disruption”) New innovations can enter market cheaper, more customizable, than existing products 27 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 for these consumers/markets can come not only from investment in highlevel R&D and science and technology (STI): 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: requires also a focus on the DEMAND SIDE of 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 “Breakthrough customer insights vs. breakthrough technology” • Disposable income distribution: from “value for money” to (also) “value for many” 28 WHAT IS THE WORLD’S BEST SELLING CELL PHONE 29 Nokia 1100 Specifically for emerging markets, e.g. • Dustproof keyboard; • Front face built-in flashlight; • Non-slip slides; • Battery life (stand by) up to 400 hours! Over 250 million sold since late 2003 (to 2015) World's best selling handset and electronics device Example of “frugal innovation” • And of the nature of the frugal innovation process 30 Wider concept of innovation: frugal and reverse innovation Sources: 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 400/800; M-Pesa Reverse innovation • Innovation for emerging market consumers finds market in developed economies, where there is increasing demand for lower price/higher value • Example Haier refrigerator; Logitec M215 wireless mouse; GE ECG MAC 600 31 Constraints on frugal innovation Limited firm knowledge and therefore focus on the needs of lower income populations: not aware of market and revenue potential Infrastructure (hard/soft) – e.g. roads and distribution channels – is inadequate/constrained, making it costly and difficult for companies to serve lower income (e.g. rural) customers. • E.g. 79% of roads were paved in OECD countries in 2011, but only 53% were paved in middle-income economies and 21% in low-income economies (World Bank Development Indicators, 2014) Challenges of scaling up to viable business proposition • Implications: “business model innovation” 32 Examples of Frugal and Reverse Innovation Product innovation: Rapoo Mouse (China) [and Logitech] Product & Business Model innovation;: First Energy’s Oorja Stove (India) Reverse innovation: GE ECG MAC 400, 600, 800 (India & China ) 33 Source: adapted from Stassopoulos (2013) Know the consumer Forecast shape, size, and timing of opportunity Segment income groups e.g. rural, lower, middle, high; age… Redefining the market and consumer: Meet the consumers “up close and personal” Understand their aspirations, constraints Understand their environment Understand through “low cost experimentation" 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 34 Conventional vs. Frugal and Reverse Innovation: Different paths to emerging regional and global opportunities (e.g. GE Healthymagination) Conventional Innovation Needs and conditions in developed markets R&D/innovation and commercialization for developed market consumers & conditions Products modified (“stripped down”) for emerging market consumers Frugal and Reverse Innovation 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 35 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 36 General agenda for action: Toward innovation-led growth Policy commitment Coordination/collaboration Focus on key value chains, clusters Integrate demand and supply side factors • Particular focus on Asian emerging markets Innovative financing mechanisms (SMEs) Cross-border production linkages to upgrade 37 Facilitating frugal innovation Incentivize research institutions (public, private) to focus on frugal innovations Develop innovative financing mechanisms for frugal innovation initiatives by SMEs • Support intermediary institutions and means of knowledge exchange to provide technical and market/consumer-related expertise and information to frugal innovators • E.g. Honey Bee Network (e.g. India, China) helps frugal innovators by providing support needed to develop these innovators’ inventions including related to protection of intellectual property, and commercialization of marketable innovations, including connecting SME innovators with formal institutions such as universities and public research institutions Support partnerships between SMEs and large firms, which have scale but often limited insight into lower income consumers’ needs and constraints; and with NGOs that often have significant insight into and access to lower income (e.g. rural) consumers • E.g. India’s Inclusive Innovation Fund is a for-profit investment fund created to support enterprises (SMEs) and innovators India’s lower income groups E.g. Oorja Stove (NGOs; large firms) Support early and sustained market/consumer engagement by firms as the key to facilitating the frugal innovation process (e.g. information, financing, role of ICT) • E.g. Nokia 1100, Rapoo mouse, GE Mac 400/800 38 FRUGAL INNOVATION AS COLLABORATION ALONG THE VALUE CHAIN THANK YOU [email protected] 39