Asia’s growing second- and third-tier cities are an old story. Numerous articles and reports highlight the market potential, the vast inner hinterlands to be tapped, the impressive industrialisation and urbanisation policies being implemented, the gradually rising city GDPs and consumer incomes, as well as the infrastructure and logistics networks that are being developed. There is no argument there, but most of these academic writers, advisors or economists have not run corporate operations before, in international business development.
It is important to highlight the challenges, instead of merely touting the sometimes exaggerated hype, of the ‘glorious’ inner hinterland. ‘Show me the money’ alone is insufficient. ‘Show me the road map’ and ‘give me the tools’ are needed to slowly build inner hinterland business.
Developing businesses in less fragmented, albeit more developed top-tier Asian cities already face daunting challenges, including rising regulatory requirements; gathering fast-changing market information; keeping up to date with customer needs and buying behaviour; building a robust know-your-customer database; non-compliance to rule of law; infringement of intellectual property rights; operational and logistical difficulties in ensuring seamless supply chain and order fulfilment with regional distribution centres and cold storage; frequent truck stoppages along underdeveloped roads; partnering with the right parties; and managing vast cultural differences between headquarters staff and tier 1 staff customers, contractors and suppliers.
When moving into the surrounding inner hinterland, the top-tier single-focal entry and distribution mode now grows into a cumbersome spiderweb of multiple-modal networks, coupled with underdeveloped infrastructural logistics, such as often muddy or potholed roads, as well as poor access to energy, water and other supplies. Land transfers, which still often form the bulk of local government income in the form of debt reimbursement in local construction financing, may have poor policy design and settlement, causing future issues and delays in project construction.
Persuading experienced management and staff to relocate from top-tier to second-tier cities is difficult, mostly due to the quality of life, family and children’s education issues. Support industries are usually underdeveloped, thus increasing the difficulty of meeting product standards and other operational key performance indicators. In short, the logistical and operational difficulties increase manifold when developing inner hinterland businesses. Such issues are often not well addressed during macro strategic planning. This results in poor strategy formulation caused by headquarters-based senior management who lack solid operational and business development experience, and who then roll out these grandiose plans to the lower echelons and to smilingly urge the latter to win the coveted Malcolm Baldrige National Quality Award! I’ve been there before!
This reminds me of 'The Schlieffen Plan', which failed miserably. It was a 1905 German general staff – Count Alfred von Schlieffen – thought-experiment and intellectual exercise, which later became a deployment plan with only a set of broad recommendations for German commanders to launch an offensive into France, Belgium and Luxembourg, implementing using their own initiative. It was only a grandiose ‘hinterland’ expansion deployment plan and not a detailed operational plan filled with specifics. In the modern day business equivalent, international field commanders are well advised to research the specifics before implementing inner hinterland suicide mission orders. The market potential or money is always there, but needs regular field updates and requires waiting for the right time for conditions to largely make sense before moving out and carrying out assault orders.
Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services. E-mail: Lawrence@asiabizstrategy.com