Asia's buying habits could get us out of the global recession faster

Are we out of the woods yet? Here in Asia, people feel economies are not as bad as they might have expected, or has the worst yet to come?

The big question now is whether there is a decoupling of the economies among Asia, Europe and the US, and there is no doubt that the first six months of the year, they're much more positive somewhere in Asia especially in terms of private consumption. You have seen that reflected in stock exchanges. So the confidence is there. One of the reasons is perhaps because spending traditionally is less important in Asia than in the US and Europe.

There are two types of economies. One is the one you'll find in Europe and the US, which is what we call a replacement economy, which means that whenever people buy something it is to replace something they already have.

And then there are other parts of the world especially Bric (Brazil, Russia, India, China), Asia, Thailand, etc, where we're also in the "first buy" economy. When people want to buy things, but this is the first time they can have access to it. And it means they are not ready to wait too long in order to buy those products.

Which means when there are stimulus packages as you have now in Thailand, people will have a tendency to spend because they want to buy products immediately. When there are packages in the US and Europe, people have a tendency to save because they have already the products at home.

That's why we're optimistic about the recovery in Asia. Because private consumption will suffer less than in Europe and the US. Because people still want to buy.

And to finalise this question "are we out of the wood yet?", I think the recession is like a "U". We are at the bottom of the U but there are a number of full stops … it starts and it stops, it starts and stops … before we're getting out of the U and there is a real recovery.

I don't think it will get worse. Which doesn't mean it's a full economic recovery yet. We're just at the bottom. We will see a lot of good news after summertime, because a lot of companies are in the wait-and-see mood especially in the US, but you cannot stay on a diet all the time.

After summer, things will get better and we will see that in the statistics in the first quarter of 2010.

So, the stock markets haven't been too optimistic?

Let's be careful, it's a tough period of time. But I think we can get through.

After this crisis what will be the new rules of the game?

We're going to see more regulations than before because people want to avoid a new crisis in the financial and banking sectors. Second, we're going to see more government power than before because they're bailing out a number of industries. We're going to see more debts than ever from governments. The level of debt will increase massively everywhere.

Therefore I think also we're going to see, especially in the US and Europe, more taxes to pay for the debts. Therefore, I feel that the new rules of the game will be for a country like Thailand … to turn this crisis … it's a kind in English you say "a blessing in disguise".

Today Thailand has been very much depending on exports and foreign investment. Now Thailand will have to be also very much depending on the domestic market. And therefore you have to walk on two feet.

Now one foot is international trade and investment as Thailand has done well in the past. The second foot has to be now the domestic market, which means infrastructure, small and medium size enterprises and education. And this is a big challenge.

(As to implications) for companies (there will be) a lot of new global brands (and) global companies born outside the US and Europe, which means names coming from Southeast Asia, Thailand, China, India, Russia.

New companies, which did not exist 10 years ago. And these companies are going to be global very quickly and very powerful. This is names like Haier, Infosys, and so on.

And second, these companies will find finance with sovereign funds, which we find in Asia, in Russia, in the Gulf countries. So the new investment bankers of the world are not going to be anymore the Citi, Morgan Stanley, and so on.

It is not a quasi world anymore. The world is much more open. I think this is the biggest revolution. Ten years ago we were only speaking about the same companies that have been on the market for the past 50 years.

If you take all the sovereign funds together they are managing US$3.2 trillion(Bt109 trillion). Up to now the low risk approach was US treasury bonds, Citibank, Lehman Brothers, Morgan Stanley, etc. And that was what they have done.

 And then they discovered that during past two years, they lost a lot of money. So now they say rather than investing in the financial sector, what we want to do is two things: No 1, we want to buy companies abroad, and China, for example, is one of biggest investors in Africa and Latin America, buying companies, buying energy assets.

Second thing, you use your money to finance the growth of local companies. So you're going to say I don't want to finance the growth of General Electric, I prefer to finance the growth of my local companies so they become global companies quickly. And this is a very big revolution. Because if you are China you say I prefer to invest in Haier rather than to invest in General Electric.

What will be your advice to  Asian and Thai companies? What steps should they take to gain advantage of the new economic order?

Every country around the world has large companies. Where you make a difference is where you create small and medium size enterprises, which can compete in international markets.

You need some very good SMEs which is to say the niche strategies, technologies and the export orientation.

Actually the large companies are not the problem. So here the small and medium size enterprises are the name of the game. And the rules, the regulations to help that to develop are very important because when SMEs develop themselves, you develop the middle class, you develop stability of the economy.

If you look at the success stories of countries like Germany, Switzerland and all that, it's not the large companies, it's the companies below the large, which are the real explanation of the success of these countries. I think this is what is going to be crucial for the future of Thailand.

Brain drain is important. You need a system to make sure that the very skilled Thai professionals you have abroad are aware there are job opportunities in Thailand.

If you look, for example, at Switzerland, we have in our consulates abroad especially in the US, a system where we regularly contact Swiss expatriates and tell them there are job opportunities back home. The Chinese are doing that very well now in Silicon Valley.

You have a very big advantage. You have a large domestic market and you have a young population, which is very entrepreneurial. Which means the second foot or the second leg of economic development is very important.

Singapore cannot do that. Singapore is stuck with the strategy of being outside-oriented, export oriented. They have no alternative.

In Thailand, you have the possibility to work very much also on the domestic market. (It) should not replace being outward-oriented. And I think the crisis now is opening the eyes of many people. We have very much value at home.

Otherwise you have stop-and-boom policies. You go very quickly and everything stops. What people want is something more predictable.

But how can SMEs become more innovative?

Government needs to help. No. 1: simplification of procedures, for example to export. No. 2: make sure you have credit available in a simple way also especially in export guarantees. These have to be government sponsored. No. 3 is what Germany did at the end of the war: school. Teaching companies how to export.

The relationship with universities is essential. Innovation campus. If I'm a small enterprise, I don't have the means to do research, to have access to labs. If I can use the labs of universities, if I can have an innovation campus where we get together many SMEs and then we share what we call pre-competitive technology, and once we have discovered something, we can compete on products.

The relationship with university campuses is very important for SMEs because by themselves they are too small to conduct research and innovation most of the time, but inside the university, they can do something innovative.

(Students) they go directly (to start up a business). This is the success of MIT (Massachusetts Institute of Technology). In the US, MIT was built on all these little things, with Silicon Valley, with Stanford … and this is a very powerful model.

What should be the current focus of top management?

No. 1 in the period of economic crisis, the CEO should be very close to people. When the economy's doing well, every employee is motivated by the success. When things do not go well you need to be close to your leaders again. You need somebody that explains to you what's happening.

Management by walking around - again, this is very important. It's time now to be visible, to manage by example, to speak to people, to tell them: yes it's tough, but together we'll get out.

Second, be close to your customers: What we call customer intimacy. Because customers are exactly in the same situation. There are problems. They don't know what will happen, and this is the time for you to speak to them even if you have no business.

Meet them, talk to them, try to help them if you can, give access … maybe you can give a guarantee to the bank if there is room. This is now when you're in need. Be close to your customers, even if you know you are not going to sell anything. Because what you do now they'll never forget. They will be friends for life.

It has become a controversial issue in Thailand that some Middle East investors are lining up to invest in the Thai agriculture sector. What is your opinion on this topic?

It's also in Africa. It's a very big issue.

Last year there were seven million hectares, which were bought all over the world in terms of these ... I think if it's just having people coming to Thailand, making crops and shipping them back home, this is very bad. Agribusiness is going to be a business of the future.

If you look at the fishing industry last year, 58 million tonnes of fish were taken around the world to feed people. But this was the first year where there were also 58 million tonnes, the same number, of fish raised in farms, farm fishing and two-thirds of that is in Asia.

This is an enormous opportunity for Asia to start, to go to farm fishing. Because we know one thing. The world will need more water, more food and more energy. So energy efficiency is important. But agribusiness is going to be huge in Thailand.

We don't pay the right prices for food. We will have to feed more people. We will have to feed people better because the middle class is going to eat differently. To ask people to eat just rice wouldn't be enough. They will want more, they will want protein, they will want fish, they will want meat, they will want milk, they will want plenty of things.

I'm amazed to see in China, the consumption of cow milk in China multiplied seven times in 10 years.

And that's where innovation will come from also. You don't need always to be innovative in computers. You can be innovative in fish farming and plenty of things.

pichaya@nationgroup.com

Stephane Garelli was in Bangkok last week to give the keynote speech to the Thailand Competitiveness Conference, organised by the Board of Trade of Thailand, Thailand Management Association, Thai Institute of Directors and the National Economic and Social Development Board.

This is the first of a two-part series. The next part, which concerns a new set of competencies and mentality required for companies and individuals to become successful, will be published on Wednesday.