One thing Asian companies are not reducing is their interest in innovation. (See “Profits Down, Spending Steady: The Global Innovation 1000,” by Barry Jaruzelski and Kevin Dehoff, s+b, Winter 2009.) Asia’s emerging economies, particularly India and China, are following the pattern originally set by Japan and Korea. They, too, were once known for low-cost manufacturing and mimicry of Western design. Over the years, Japanese and Korean executives deliberately built up their companies’ design and manufacturing skills and became global innovation leaders in everything from cars to mobile phones to plasma televisions. Now, the Chinese government’s five-year plan includes a similarly deliberate emphasis on creating an innovation-oriented economy. India’s innovators, although they have less government support, are active in such fields as health care, finance, agriculture, and public–private partnerships. (See “The Innovation Sandbox,” by C.K. Prahalad, s+b, Autumn 2006, and “Not Just for Profit,” by Marjorie Kelly, s+b, Spring 2009.)
Innovation is usually born of need and opportunity. And Asia has some of the greatest unmet customer markets and societal challenges in the world, with its vast rural areas, huge demands for natural resources, significant environmental problems, and aging populations. Many Asian governments will rely on private-sector innovation to help meet these challenges. For example, after paying little attention to air quality during its initial burst of industrial development, China has announced a plan to become the leading producer of hybrid and all-electric vehicles by 2012. Companies whose capabilities dovetail with this green strategy could find a lucrative welcome. Meanwhile, Toyota is developing personal-care robots that can perform housekeeping and nursing chores, which it intends to target to Japan’s growing senior citizen population. For the same reason, the Japanese pharmaceutical firm Kowa has set up a joint venture with Teva, an innovative Israeli drugmaker, to bring 200 new drugs to market by 2015. If such innovations succeed, other companies may follow.
Risk management is turning out to be another critical capability for many businesses entering Asia, where uncertainty and volatility are often part of the business environment. Consider, for example, the turbulence caused by exchange rate variations. The Korean won fell by 40 percent against the U.S. dollar from January 2008 to March 2009, when it reached its low, and then rose 26 percent in the following five months. Meanwhile, the yen strengthened 21 percent against other currencies throughout 2008 before falling 11 percent in the first eight months of 2009. Even the situation for the Chinese yuan is mixed: Although it has remained stable against (and effectively pegged to) the U.S. dollar throughout the crisis, it has appreciated 11 percent against the euro since January 2009, paralleling the euro’s strength against the U.S. dollar during the same period. Swings of this magnitude have a major impact on sourcing, manufacturing, pricing, and M&A decisions.
Policy uncertainties represent another question, especially because governments in Asia have traditionally played a strong role in determining industrial policy. The 2009 election in Japan, which brought the Democratic Party of Japan into power for the first time, and the complexities inherent in the U.S.–Chinese relationship have underlined these uncertainties. Many U.S. and other Western companies will need to improve their skills in working closely with policymakers as the recession gives governments a much greater hand in managing companies, industries, and economic investment.
The Shape of Asia’s Industries
As Asia recovers, a new series of mergers, acquisitions, and partnerships will be initiated by Asian companies, which will lead to newly consolidated global industries. No longer will the key economic benchmark for the region be foreign direct investment in China, India, and other parts of Asia. Instead, the future of Asian economies will be determined by an increasingly complex web of investments.