Western multinationals have been accustomed to entering Asia's high-growth, emerging markets through partnerships or alliances with local companies. They offer capital, technology, and management skills in exchange for regional know-how and, often, political connections. But many find this approach no longer works as well as it did, and are struggling to establish themselves in Asian markets.

There are three reasons why. First, host countries now demand more in the way of technology transfer, local content, and skill development, and are less accommodating about market access and the price they want for natural resources. China, for example, increasingly requires access to proprietary technology in return for business, leaving companies such as GM and McDonnell Douglas wondering whether the technology transfers they made to clinch deals will come back to haunt them. Some day, they know, the Chinese will have the technology and skills to compete with them not only in China, but in other markets too.

The second reason is that western MNCs, which generally approach emerg-ing markets on a project-by-project basis, have discovered that each venture takes an enormous amount of time and energy to establish, yet represents only a fraction of the region's market. Each project is a drop in the ocean compared with what it would take to achieve a meaningful market position—let alone leadership. Even China's massive Three Gorges hydropower project, with its 26 sets of 700-megawatt turbines and generators and total capacity of more than 18,000 megawatts, represents less than 5 percent of the projected power shortage for 2019—the year the reservoir will be filled to capacity.

The same is true in India, where the Texas-based gas pipeline company Enron continues to try to establish its Dabhol power project in the state of Maharashtra. After three years of planning, negotiating, and renegotiating, the project stalled in August 1995, only to be revived early this year. But the five-month hiatus cost Enron about $250,000 a day, and renegotiation forced it to cut the project's price by 11 percent, or $300 million. Even if the project now proceeds smoothly and is commissioned as planned for 1997-98, Dabhol will meet only a quarter of Maharashtra's peak power requirements, and account for a fraction of India's total power needs.

The third reason why the old approach no longer works so well is that many of the best opportunities are closed to western MNCs. Take China's gasoline market. No MNC yet participates in China's highly lucrative Eastern Seaboard petroleum refining plan, although not for lack of trying. Société Nationale Elf Aquitaine of France, for example, pulled out of a $2.5 billion refinery project in late 1995 after years of negotiation. Industry observers say the Chinese insist on full control over downstream markets, where profit margins are higher. In short, companies invest on China's terms, not their own.

What works better?

Building the right relationships with the right partners makes all the difference. How "right" the relationships are depends not on whether the chosen partner brings the required ingredients to a single project. Instead, smart companies spin a web of relationships that open up a whole series of potential projects, add value to them, and improve risk management. For companies that understand this concept, relationship-building is the essence of strategy, not a by-product of it.

Although Asian businesses are more familiar with this notion than western MNCs, a few western companies have used relationship-building as a strategy for growth across the globe. US industrial concern Corning—one of the most successful companies in the world at building and maintaining relationships—is among them. Half of its corporate earnings ($280 million in 1994) comes from strategic alliances such as its Siecor partnership with Siemens in optical fibers. The relationship enables a small player like Corning to operate on a scale similar to that of a large industry contender such as AT&T. Siecor was built on the personal relationship between Chuck Lucy of Corning and Berndt Zeitler of Siemens. From their initial venture in Europe, they expanded successfully into the US together. In 1995, Siecor notched up $800 million in sales. And, contrary to evidence suggesting that most joint ventures do not last more than ten years, this one has been going for almost 25.

Samsung Corning, one of the world's largest manufacturers of television tubes, is another big success in Corning's stable of special corporate relationships. The alliance with the South Korean company is the result of the effort made by former Corning chairman Amory Houghton and his brother and successor, Jamie, to nurture a personal relationship with the late Samsung chairman, Lee Byung-Chull. Both went out of their way to show respect and affection for Lee. Amory Houghton was the speaker at Boston College when Lee received his honorary degree there; Jamie Houghton attended the ground-breaking ceremony (an auspicious event in Asian culture) for a Samsung Corning plant in Korea, then returned a year later for the official opening. Rituals such as these are important to Asians, and personal appearances such as Jamie Houghton made, give the host "face." When Lee died, Jamie Houghton cancelled a packed US schedule to fly to Korea for the funeral, then went directly to Paris for a meeting the following day. The message came across loud and clear: Corning cared about this relationship.

Coca-Cola entered China also on the strength of a relationship, by linking with Kerry Beverages, part of a conglomerate led by Malaysian Robert Kuok, to set up bottling plants. Kuok, also known as the "sugar king" for his dominant position in the world sugar trade, has guanxi (connections) throughout Asia and China. With an initial investment of $100 million, he used these relationships to get a bottling plant up and running within eight months (12 is more usual). The speed with which Coca-Cola was able to establish its operations in key Chinese cities proved pivotal in a market where demand was growing rapidly. Its 23 percent share of the soft drink sector is more than twice that held by Pepsi, even though both companies came to China at about the same time in the early 1980s. In the past decade, Coca-Cola has doubled its business there every three years. It now has 16 bottling plants and 8,000 employees across the country.

How do smart companies achieve superior growth with relationships?

Smart companies use webs of relationships to create better opportunities and more value, and to shed unwanted risk

Smart companies use webs of relationships to create further and better opportunities, to create more value than they could on their own, and to shed unwanted risk. They achieve this in the following ways:

Co-investing

Relationship webs are not formed for single projects, but to co-invest in many projects over long periods. Members contribute to what are known as "proprietary deals." They can offer skills and assets, connections with government officials which help gain approval for projects or win concessions, and relationships with suppliers and customers; every essential ingredient for each deal is contained within the web. In effect, members pool skills and resources, and at the same time use the web to spread risk. Not only do they have the choice of spreading their investments across many different projects, they have the flexibility to decide how much, if anything, they wish to invest in any given project.

There are three common types of co-investment. The first takes the form of cross-shareholdings and directorships based on personal and business ties between family-owned businesses. Nowhere is this cross-ownership more extensive than within the top tier of Indonesian family-owned conglomerates. The Salim group, Sinar Mas, and the Lippo Group all have such arrangements, resulting in oligarchic markets dominated by the co-investors. The arrangements also give the conglomerates political clout. By one estimate, these linked groups represent 70 percent of the top 300 conglomerates and 75 percent of listed companies by market capitalization—a force for any government to reckon with. Each conglomerate has an interest in maintaining the interests of the others, since any development which harms one will ultimately harm the rest.

The second, probably commoner, type is direct joint investment in specific projects. Thus, Li Ka-shing, the multibillionaire head of Hong Kong's Hutchison Whampoa, and Robert Kuok co-invest in property developments in China and Japan, using their respective relationship webs to get in on the best deals.

The third type functions much like an investment club. Web members work together on many schemes, linked by a common theme—power projects, for example. Looking at the participants in any one project, an outsider might think some are just there for the ride: they might be putting in no more than 5 to 10 percent of the equity. As already noted, however, the co-investors look upon each other's contributions in terms of more than just capital. Connections with provincial or municipal governments, privileged access to decision makers, financing and operating skills—all can be part of their contribution.

Many co-investment webs have historically been closed to outsiders because the connections among members have developed over decades, and may be based on deep cultural roots. Participants neither need nor wish to share their opportunities with others. If one wants to get out of a specific deal it trades its position with another member for cash, or swaps it for different assets. Yet some MNCs are attempting to use their technological capabilities, other skills, and even the ownership of choice western assets as a bargaining tool for entry. To do this, they form contacts that blend Asian and western philosophies of ownership—the second way of using relationships to achieve superior growth.

Merging ownership philosophies

Most western MNCs are keen both to own and operate their assets, and their businesses are renowned for being well-managed. They measure success by yardsticks such as return on assets.

Western MNCs are keen both to own and operate their assets, and their businesses are renowned for being well-managed ...

Asian businesses, on the other hand, are happier in the role of principal investor: they invest their large pools of private capital in equity with a view to extracting maximum capital gains within the not-too-distant future—ten years, say. They look for deals that give them privileged access, but also the flexibility to sell down their position or recapitalize in order to recover some or all of their original investments at a profit. Theirs is essentially a market play: buy low and sell high.

... Asian businesses look for deals that give them privileged access and the flexibility to sell down their position or recapitalize

Although there is often no such rigid distinction between the ways the different cultures conduct business, clever companies understand that both approaches have their advantages. They form relationships that combine the two in order to open up more investment opportunities, and create additional value.

Overseas Chinese are already adept at merging the two philosophies. Orange, which provides the UK with personal cellular services, was first taken over as a joint venture between Hutchison Whampoa, which held a 68 percent stake, and British Aerospace, with 32 percent. Armed with technological and operating experience of the industry accrued through a previous joint venture with Motorola, Hutchison turned round what had been a poorly performing UK company. Within two years, and in a highly competitive industry, Orange had 7 percent of the UK cellular telephone market and 26 percent of the growing digital cellular services market. Last January, the partners made a public offering of 25 percent of the equity—diluting Hutchison's share to 50 percent and BAe's to 23 percent. Orange's market value as a result of this transaction in March was about $3.8 billion. Though Hutchison still controls the venture, its well-timed public offering means it has already recovered a significant portion of its original investment.

Hutchison could of course have entered the UK in the traditional principal-investor manner, looking for low-value assets and then the right opportunity to sell. In an unfamiliar environment, however, where it was unsure of buyers' interests and less adept at timing the market, it would have been a risky strategy. It therefore chose to merge the western philosophy of creating operating value with the Asian philosophy of selling part of the company for capital gain.

One western MNC which has discovered this principle of merging ownership philosophies as a way to penetrate Asia's relationship webs is US telecoms group Nynex. It joined CP Group, an overseas-Chinese conglomerate based in Thailand with total sales of more than $5 billion and turnover growing by 33 percent a year, to form Telecom Asia. Telecom Asia's market capitalization is currently about $8 billion, and has at times exceeded $10 billion. Through its minority holding, CP Group—which has as its core businesses agriculture and manufacturing—has got into a high-growth business from which it would otherwise have been excluded. Nynex's gains are more valuable still: besides being a runaway financial success, Telecom Asia has given it an opening into a relationship web that could bring opportunities elsewhere in Asia.

In search of similar access, one western petrochemicals company went so far as to offer an Asian company an equity position in its US manufacturing facility. In return, it sought participation in a chemicals venture to which the Asian company had proprietary access, and, more important, an entry into the Asian company's relationship web.

Disaggregating opportunity and participating selectively

To create value and spread risk, clever companies build relationships that enable them to disaggregate an opportunity into four component flows: financial flow, physical flow (products and assets), people flow, and technical flow (including ideas and other know-how). They then decide which to exploit and which to invite others to participate in, thus "managing down" unwanted risk and creating opportunities for web members better equipped to handle it.

One North American resource company recently persuaded its Asian operating partner to participate in more expansion opportunities, principally in China, by inviting an Asian financial company, a global equipment manufacturer, and the Chinese government to join them as partners. The financial partner has excellent relationships with the Chinese government and access to advantageous funding in Asia (the financial flow element); the local operating partner is supplying Chinese-speaking managers (people flow); the global equipment manufacturer has agreed to take a portion of the equity through ownership of some of the ventures' assets (physical and financial flows); and the resource company is adding operating know-how, technology, and global marketing capabilities (technical and physical flows), thereby assuming only the risks it is best equipped to take on.

MNCs will find disaggregation particularly helpful when hiring suitably qualified local managers in Asia. Sending expatriates abroad is expensive: a leading oil company spent $1 million just to move a North American executive to run an Asian affiliate. Yet hiring locals is problematic. It is not just an issue of skills and knowledge, but also of knowing the parent company's system and culture in order to get things done in an acceptable way. Training local people can take a decade or more.

Becton Dickinson, a US-based manufacturer of hypodermic syringes and other healthcare products, overcame the problem by drawing on managers and trained workers from its Singapore operation to man its factory in Suzhou, China. Employing Singaporean managers (many of whom speak Chinese, but are western-educated), who are sensitive to both cultures, is a big plus for Becton.

Replicating success in other markets and businesses

Once they know how to build relationships, successful companies generate further opportunities by applying the formula elsewhere

Successful companies do not limit their relationships to any single market or business. Once they know how to build relationships, they generate further opportunities by applying the formula elsewhere.

Hong Kong-listed China Strategic Holdings (CSH) is the second-largest foreign investor in China, controlling more than 80 companies and owning stakes in well over 100 others. Like many Asian businesses, CSH has long adopted relationships as strategy, and has used its skill in this area to establish itself in China. Its chairman Oei Hong Leong—whose father is chairman of Indonesia's Sinar Mas—studied in China during the cultural revolution. The relationships he cultivated then opened up opportunities that snowballed as his web extended and his business experience in China mounted. The government has repeatedly sought CSH's participation in its efforts to make state-owned enterprises in various industries, including tyres and paper, viable. CSH also acquires cheap assets which it quickly reorganizes, privatizes (or "corporatizes" in Chinese terminology), and floats in public offerings.

Governments too can get in on the act. A significant portion of the Singapore government's foreign reserves (which amount to more than $60 billion) are invested in the region's fast-growth markets. Recently it encouraged the Vietnamese government to facilitate a joint venture between state-owned Singaporean entities and the German car maker, Daimler-Benz. For more than a year, Daimler had been struggling to get investment approval for a car and light truck plant in Ho Chi Minh City but, despite several application fee payments, had still not been granted a business licence. Yet when the Singapore government intervened by taking a 22 percent stake in the $80 million plant, the project was approved within two weeks. The episode illustrates both how much easier it is for those skilled in relationship building to repeat their success, and how MNCs can use experienced partners to enter deals from which they would otherwise be barred.

The CP Group started out in the 1970s forging relationships with local farmers and contracting them to raise chickens ...

Relationship building can start at a much humbler level, of course. The CP Group started out in the 1970s forging relationships with local farmers and contracting them to raise chickens. It provided supplies and know-how (originally gained from its joint-venture partner, Arbor Acres in the US) and in return agreed to buy the chickens at a guaranteed price. The scheme was enormously successful, increasing demand for CP's animal feeds and indirectly raising overall market demand for chicken because economies of scale brought down prices. Convinced the formula could be applied elsewhere, CP expanded into China. Today, it is the largest animal feed provider in Asia and the third largest in the world. It is also one of the world's biggest chicken producers, and aspires to be the leading producer of frozen chickens.

... Today, it is the largest animal feed provider in Asia, and probably the largest single foreign investor in China

The local relationships CP Group nurtured while building its agri-feed and chicken businesses became the platform for a second generation of opportunities during the 1970s and 1980s. These included chicken processing, distribution (through its 7-Eleven, Makro, and Sunny stores), and chicken restaurants (including Chester's and Kentucky Fried Chicken). Since the mid-1980s, its special web of relationships has been equally important for its expansion into industrial activities such as motorcycle and component manufacturing. In the course of extending its business, CP brought in other technology hosts such as Honda in motorcycles, Oscar Mayer in processed meats, and Nynex and NEC in telecommunications. Today, the CP Group is probably the largest single foreign investor in China.

Challenges for Asian partners

It is easy for western MNCs to be despondent about their chances of becoming market leaders in Asia given that relationships count for so much. Although they might recognize the opportunities to build links with Asian counterparts, they cannot escape the fact that huge effort is required.

But it would be wrong to think that Asian companies have the upper hand entirely, and that it is up to the westerners to make all the running. Asian companies' success locally has not been repeated in their attempts to expand into North America and Europe. Without established webs in the West, they have had to attempt geographic expansion on their own or with new, unfamiliar partners. The results in these intensely competitive markets have been mixed.

They are unlikely to want to stop trying, however. Some assets in mature markets are relatively cheap given current market capitalization levels compared with book values, and many Asian businesses have vast surplus funds available for investment. Western assets represent a good opportunity to diversify risk into more stable markets, and a chance to expose second-generation owners of what are usually family-run businesses to western ways of thinking and operating. The answer is for Asian businesses to cultivate their own relationships in the West—perhaps by taking advantage of MNCs' willingness to swap equity stakes in their home markets for an entry position into Asia.

Challenges for western MNCs

At least two intellectual challenges remain for foreign MNCs trying to cultivate personal relationships in Asia. The first is that many still view relationships as a derivative of strategy; they worry about which relation-ships they need to cover only after they have determined which projects are attractive. This approach creates a time-lag. By the time they discover the critical relationships required to advance a project, the opportunity will probably have been lost.

The second challenge is that westerners tend to look at relationships in an institutional light—to be nurtured by the person in the relevant position and passed on when he or she moves. But this approach seldom develops the personal trust and bonding required to become a true insider in the east, a problem exacerbated by the fact that most MNCs move their executives every three or four years. The solution here is for companies to encourage executives to maintain their personal relationships from one job to another.

MNCs concerned about winning in Asia in the long term must therefore form relationships with a view to supporting not a single project, but a whole range of growth opportunities. Smart players have shown that having the right relationships can yield real competitive advantage, allowing participants to create value at the same time as managing risk. The web of special relationships brings forth opportunities that are accessible only to those who co-invest; they allow participants to merge the best of being an owner/operator and a principal investor; they allow players to choose to participate in any of the disaggregated flows; and they generate further opportunities in different markets and different businesses.

Adopting relationships as the cornerstone of an Asian growth strategy is a powerful way to capitalize on Asia's enormous growth prospects. It is not an easy strategy, given the deep cultural links that govern many business dealings in Asia, but it is not impossible, as some of the smartest players have already shown. And the longer MNCs delay in starting to build their relationships, the more opportunities will pass them by.