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To thrive in Asia, headquarters needs to understand the financial conditions on the ground.
Don Durfee, CFO Magazine
November 1, 2008
The shining glass building that houses the offices of ICI India would blend in perfectly in a U.S. suburban office park. But it's located in Gurgaon, India, a so-called special economic zone more than an hour's drive from Delhi. Inside an air-conditioned office, while sidewalk vendors carry on a lively trade in the midday heat, Sandeep Batra is explaining the peculiarities of the Indian paint business.
"We don't sell our paints through big retailers as you would in Europe or the U.S.," says Batra, the urbane CFO of Imperial Chemical Industries's Indian operations (British ICI is a subsidiary of Dutch chemical company Akzo Nobel). "We sell through mom-and-pop shops in the markets."
To do so, ICI must persuade store owners to make a costly investment: a tinting machine that enables them to mix the full range of ICI's paint colors. And because the company sells through hundreds of tiny shops instead of big home-improvement centers, ICI needs 60 warehouses in India instead of the 1 or 2 typical in most countries, as well as a sales staff many times bigger than the norm.
Such deviations from ICI's usual way of doing things cost money, but Batra and his colleagues in Gurgaon have learned how to overcome objections. "Our business situation is impossible to explain to someone who has never visited India," he says. "So when the CEO or any other senior visitors come, the first thing we do is take them to the market. We take them to the shops and to the warehouses where we sell materials. That's a very different India from what you see in this office. Once we do that, we never have any difficulty explaining about the need to put these tinting machines in, or the need to have feet on the ground, or whatever else is required to chase the opportunities we have here."
It's always been helpful for a regional CFO in Asia (or elsewhere, for that matter) to build this kind of understanding with headquarters. Now, it's becoming essential. The reason: as growth slows in the United States and other developed markets, CEOs are pressuring Asian operations to grow faster. If those applying the pressure don't understand the ground-level constraints of Asian markets, they may well impose unsuitable strategies and push for unrealistic results.
Indeed, many finance executives of Asian subsidiaries say they are being squeezed between demands from headquarters and the limitations of local markets. The China CFO of one American industrial company reports that because of poor business conditions in the United States, top management is asking him to raise his forecast by 10 percent. But his division is already growing at a 30 percent annual clip, and he has trouble getting his superiors to understand why even faster growth is difficult, if not impossible.
"I've worked in the U.S. office," says the CFO. "When it comes to China, they have no comparisons and no good analysis. They have too many countries to take care of. All they can do is give you targets and track your performance."
Rebecca Norton, vice president of finance, Asia Pacific, for software maker Business Objects (a unit of Germany's SAP), also feels the push for even higher results. "I get a little nervous that the pressure and expectations [from the home office] are not necessarily in line with actual market conditions out here."
A Structural Problem?
In part, such misunderstandings can be traced back to corporate structure. During the 1980s and '90s, the balance in multinational companies tilted toward greater global integration, with an eye toward seizing opportunities across business lines and saving money by doing things in a common way everywhere. One result was the global business unit, an arrangement that in many companies has replaced country-level units. This structure has often led companies to unintentionally shortchange their emerging-markets operations, says David Michael, managing director of Boston Consulting Group's Greater China practice.
"It gives you a global view on one hand, but when incentives aren't right, the high-growth markets fall off the radar screen," he says. The reason is that business-unit managers may be focusing on short-term global-performance indicators, and trying to hit their quarterly, one-year, or two-year targets. If most of the profit is coming from developed markets, it's tempting to allocate scarce resources to those operations first and neglect emerging markets that boast more potential than actual profit.
Exacerbating this head-office bias is the common practice of putting expatriates in charge of local operations and then shifting them out after just a few years. While there are good reasons for relying on expat managers, the arrangement can encourage short-term thinking. "We have a lot of expats come to China, and since their service period is just three years, they just want to make sure they do a good job for those three years and then return to receive a promotion in the U.S.," complains the local China CFO. "But I want sustainable growth here, and that means a longer-term focus on people and investment."
Satish Shankar, a partner with Bain in Singapore, argues that if multinationals are to earn significant profits from their emerging-markets operations, they must stop relegating emerging markets to second-tier status. "Most [multinationals] operating in Asia have built decent positions, but don't have the same market visibility and sustainability as they have in their home markets," he says.
Some big companies are indeed making such an effort, pushing responsibility back out to the country operations and building a full set of local business functions. One is General Electric. According to Murali Narayanan, Singapore-based regional finance manager for GE Energy's repair business, the company is making its Asia-Pacific operations more self-sufficient. To that end, GE is expanding and deepening functions like manufacturing, supply chain and risk management, and talent development. Also, more decisions are being made in Singapore rather than at headquarters. "This enables us to respond to customers and conclude deals faster in the region," says Narayanan.
Gaps in Understanding
Such examples are comparatively few, though. There is still often a gap between what headquarters knows about Asian operations and what it thinks it knows. Even a well-traveled executive like Brian Kenny, once the international finance chief of U.S.-based W.R. Grace, was unaware of a range of issues in the chemical maker's Asian operations until he moved to Shanghai.
"There is a lot that people have to do here — particularly in finance — that headquarters just doesn't see," says Kenny, now CFO of Grace's Asia-Pacific division. One example is the handling of credit terms. Many of the company's Asian customers regard a line of credit as a zero-interest loan, he says. "They'll borrow against it and then say, 'Let's talk about what we're going to do over and above that.'"
Some treasury issues fly under the radar, too. Customers in Asia often pay Grace via bank draft — a common method there, but almost unheard of in the United States. This approach typically means a company gets its cash slowly, creating potential working-capital problems. "If you sell to a customer on 30-day terms and on day 29 they give you a bank draft, that's three months more you'll have to wait," says Kenny.
Other challenges may be hard to see from headquarters. For example, forecasters in Asia are faced with rising inflation and commodity prices, unstable exchange rates, and a host of political issues that can disrupt supply chains. One CFO, B. Suryanarayanan of Mindtrac, a Singapore-based supplier of commercial tires, says he doesn't attempt anything longer than a three-month rolling forecast — and even that is unreliable, he adds.
Then there's human capital. The region's exceedingly tight talent market is leading to fast-rising pay levels and rapid employee turnover. Even if corporate managers acknowledge such churn, they may misattribute the cause."[At headquarters] they think that the turnover is happening because there's something wrong with our company or our culture," says Kenny. "Are we asking too much of them? Too little? Is there not enough training?" But the turnover is largely out of Kenny's control. Many employees, he explains, are products of China's one-child policy; as such they feel pressure not only to keep up with their peers, but also to earn money to support their parents during retirement. "In a sense, if the market is offering 25 to 30 percent pay increases, you aren't doing your family justice if you don't go for the money," says Kenny. "This is something I've had to instruct the Americans about."
Such instruction requires regular, clear communication between the home office and Asia (see "Getting Heard" at the end of this article). Kevin Zhou, retail CFO for Luxottica, a $6 billion Italian eyewear company, advocates complete transparency. Luxottica, which owns such brands as Ray Ban and LensCrafters, is aggressively expanding its retail presence in China, and Zhou is taking the lead in helping headquarters understand local financial issues and the country's rapidly evolving regulatory environment. "You have to always tell them the truth about what's happening in China, and keep updating them," he says. "Keep explaining, and before long people at headquarters will really understand what's going on in this market."
The good news is that as the business world's attention shifts to Asia, some CFOs report having a more receptive audience. "Three or four years ago, it was hard to get senior management to come to India," says ICI's Batra. "But now, when India comes up in a board meeting or a management-committee meeting, people will look foolish if they don't have a first-hand perspective on the country. That makes them want to come here."
Don Durfee is editor-in-chief of CFO Asia.
With demands on Asian operations escalating, some local CFOs there are brushing up on an old skill: expectations management. David Hui, senior client partner with talent management firm Korn Ferry in Hong Kong, says the ability to be persuasive when speaking with superiors at the home office is one of the defining features of a successful local finance chief. "You have to be able to argue your case," he says.
That requires regular communication. Most of the CFOs interviewed for this story speak with their boss at headquarters at least once a week. Rebecca Norton, vice president of finance, Asia Pacific, at Business Objects, makes it a point to participate in global conference calls as often as possible, in order to "wave the Asia-Pacific flag." That's necessary to ensure that her overseas colleagues understand the conditions under which the Asian business operates, she says.
Be careful, however, of appearing to make excuses. "A possible downfall is that you can start saying that Asia's different," says Norton. "And the more you say it, the less people appreciate it."
One solution is to encourage frequent visits from headquarters. "I'm a passionate advocate of making sure that the head-office people are given every opportunity to be exposed to the issues we face in our market," says Simon J. MacKinnon, president, Greater China, for Corning, a U.S.-based maker of specialty glass and ceramics. "You have to get them out of the five-star hotels and into the plants and out in front of customers." — D.D.