Scaling up in Asia
The attraction of Asia’s growing markets for asset managers is clear. The continent’s emerging and frontier economies in particular have seen some of the world’s highest increases in GDP in recent years.
Just as importantly for asset managers, Asia is a region of savers. According to World Bank figures, China has the world’s highest national savings rate – with gross savings representing 53% of GDP – while the equivalent figure for each of India, Korea, Singapore, Indonesia, Thailand, Bangladesh, Malaysia, and Vietnam is more than 30%.
This burgeoning wealth represents a huge opportunity for asset managers that can find ways to scale their businesses across the region, writes Paul Khoury.
Not surprisingly, many firms have their eyes set on growth. For example, in State Street’s 2013 Asia-Pacific Asset Manager Study, 42% of respondents said they were considering expanding into new markets in the region.
Expansion across Asia will place huge strains on these firms’ operations, however. In the same survey, 69% of executives describe scaling up operations in the region as a serious or very serious challenge – making it one of their paramount concerns.
Asia is a collection of highly diverse markets, each one with its own unique demands and ways of doing business. This makes achieving efficiencies of scale, while tailoring your strategy to each market, a difficult balancing act to pull off.
Take national regulations, for example. More than half (52%) of Asian asset managers surveyed say that their companies will need to make significant changes to address the diverse reporting requirements of multiple jurisdictions, while 38% are very concerned about their ability to assure compliance with the continent’s fragmented and evolving regulation. Although proposed fund passport schemes – one for ASEAN countries and another linking Hong Kong and China – might alleviate some of these problems in the long run, rapid progress may be unlikely.
Regulation is only part of the issue, however. Separate cultures, languages and levels of investor sophistication add complexity, as do local investment opportunities and challenges. Accordingly, 51% of those surveyed say that their firms need to make substantial changes to develop robust risk management strategies tailored to each market, and 31% report the same about adapting products to local market needs.
Finally, distribution practices vary with, for example, the role of independent financial advisors and insurers changing from country to country. This is one reason why 60% of survey respondents describe the creation of efficient distribution strategies as a serious or very serious challenge.
Asia’s fragmented markets therefore pose some profound questions for ambitious asset managers. A key challenge is how to achieve efficiency and scale across your cross-border operations, while at the same time having the flexibility and expertise required to meet the unique demands of each particular market.
Companies can take a number of steps to alleviate the problems of growth in fragmented markets. Developing the right IT infrastructure to support regional growth will be a key priority, for example. Asset managers are seeking to integrate middle and back office processes across the region, but they also need systems that are sufficiently flexible to produce the reports needed for individual countries. More than half (52%) of asset managers surveyed report that they have to make significant changes in order to create systems and processes to meet reporting requirements in multiple jurisdictions.
Ultimately, however, creating a series of national operations can quickly become prohibitively expensive, especially if a company is trying to service rapidly growing frontier markets rather than just the largest established or emerging ones. Moreover, no single business model works in every country: each new venture is a voyage of discovery, made more challenging if the firm lacks access to local expertise.
For most firms, scaling up across Asia will entail finding partners that can help extend their reach and capabilities into less familiar markets. There is a need for smart outsourcing, where the goal is as much about augmenting expertise as it is about reducing cost. In particular, asset managers need to be able to plug in the right resources and connections in local markets to help them scale up their operations quickly and efficiently. This form of outsourcing may also entail tapping into specialist expertise on local regulations, given the particular complexities of this issue across Asia.
Asia’s markets create complex challenges for even the largest asset managers. Mastery of all areas – product manufacturing, distribution, local compliance and operations – would be a huge challenge. Finding partners who can augment their capabilities will allow companies to focus on their strengths and take advantage of Asia’s substantial – if sometimes hard to reach – opportunities.