Brownfield Over Greenfield: The Strategic Preference in ASEAN Market Entry and M&A Partnerships

When considering market entry strategies in the dynamic and diverse ASEAN region, companies often find themselves at a crossroads: Should they pursue a brownfield or greenfield investment? Brownfield investments refer to the acquisition or leasing of existing facilities or operations, while greenfield investments involve building new facilities from the ground up. Both strategies have their merits, but there is a growing preference for brownfield investments. Companies need to assess their own preferences and understand the advantages of leveraging existing business operations to devise the right strategy. Once defined, companies need to decide on a suitable market entry approach, which may be phased, before identifying the right partners and acquisition targets where relevant.

1. Rationale for Preference

When entering new markets, companies must carefully consider the rationale behind their choice of brownfield over greenfield investments.

Speed to Market: One of the primary reasons companies opt for brownfield investments over greenfield projects is the speed to market. Establishing operations in a new market can be a lengthy process when starting from scratch. Brownfield investments allow companies to leverage existing facilities and infrastructure, significantly reducing the time needed to commence operations.

Lower Risk: Entering a new market inherently carries risks. Brownfield investments mitigate some of these risks by providing immediate access to established facilities, existing customer bases, and experienced local personnel. This familiarity with the local market environment can be invaluable in navigating regulatory landscapes and avoiding common pitfalls associated with greenfield projects.

Existing Infrastructure: Building new infrastructure can be a costly and time-consuming endeavour. Brownfield investments take advantage of pre-existing assets, which can lead to substantial cost savings and operational efficiencies. This existing infrastructure often includes not just physical assets but also intangible assets such as local goodwill and brand recognition.

Example: In a strategic maneuver to bolster its market presence in the dynamic consumer goods sector, Procter & Gamble (P&G) executed a brownfield investment in 2012 by acquiring a former Gillette manufacturing facility in Binh Duong, Vietnam. This acquisition enabled P&G to expedite production scaling without incurring the substantial capital expenditures typically associated with greenfield projects. By leveraging the existing infrastructure and implementing targeted upgrades, P&G realized considerable cost efficiencies and minimized the lead time to operational readiness. This strategic approach was instrumental in swiftly addressing competitive pressures and capitalizing on growth opportunities within the Vietnamese market.

2. Strategic Advantages

Understanding the strategic advantages of brownfield investments can help companies make informed decisions about their market entry strategy.

Established Supply Chains: One of the significant advantages of brownfield investments is the immediate access to established supply chains. This can enhance operational efficiency and reduce logistical challenges, allowing for smoother business operations.

Customer Base: Acquiring a company or merging with a local entity often means gaining access to an established customer base. This can provide a solid foundation for generating revenue and gaining market share quickly, as opposed to the time-consuming process of building a customer base from scratch.

Regulatory Approvals: Navigating regulatory requirements in a new market can be complex. Brownfield investments benefit from existing regulatory approvals, which can speed up becoming fully operational. This can be a critical factor in markets where regulatory environments are particularly stringent or bureaucratic.

Examples: When Heineken acquired Asia Pacific Breweries, it gained access to a strong network of local distribution and retail partnerships across the region. This strategic move allowed Heineken to immediately tap into established markets with high demand for premium beverages, facilitating faster market penetration and increased revenue streams.

The acquisition of Holcim’s Southeast Asian assets by San Miguel Corporation provided the latter not just with cement plants but also with all the necessary regulatory approvals in place. This was crucial in an industry like cement, where environmental and other regulatory approvals can be difficult and time-consuming to obtain.

3. Market Entry Modes

There is a continuum of market entry modes from low investment (e.g., export into the target market only) to setting up a wholly owned subsidiary from scratch (greenfield).

Exporting: For companies not ready to commit to full-scale operations in a new market, exporting is a viable initial strategy. This can later transition into a brownfield investment as the company gains better market understanding and confidence.

Licensing and Franchising: These modes offer ways to enter new markets with reduced investment and risk. Licensing agreements and franchising allow companies to leverage local partners’ capabilities and market knowledge while maintaining control over their brand and products.

Joint Ventures (JV): Joint ventures are a popular market entry mode in ASEAN. They allow companies to partner with local businesses, sharing resources, risks, and benefits. This mode can be particularly effective in brownfield investments where local expertise and established operations can be leveraged.

Acquisitions: Acquiring an existing business is a direct and often effective market entry strategy. It allows for immediate operational capability and access to established market positions. Brownfield investments through acquisitions can be less risky than greenfield projects as they involve taking over an already functioning business.

Greenfield Investments: While less common due to higher risks and longer periods, greenfield investments can be strategically advantageous in markets with limited available infrastructure or where specific operational control is necessary. This mode suits companies looking to introduce new technology or innovative business models that existing facilities cannot support.

4. Case Studies and Examples

Examples of successful brownfield investments can illustrate the strategic benefits and practical applications of this approach.

Case Study 1: VinFast’s Rapid Market Penetration

VinFast, a subsidiary of Vingroup, has successfully navigated the Vietnamese automotive market through a combination of greenfield and brownfield strategies. By constructing new manufacturing facilities (greenfield) while also acquiring existing automotive expertise and supply chains (brownfield), VinFast accelerated its market penetration. This hybrid approach enabled VinFast to swiftly establish itself as a key player in the automotive industry, underscoring the strategic advantages of leveraging both greenfield and brownfield investments.

Case Study 2: Unilever’s Expansion in Southeast Asia

Unilever’s expansion into ASEAN markets exemplifies the efficacy of strategic acquisitions and joint ventures. By acquiring local brands and companies, such as the Indonesian brand Kecap Bango, Unilever has seamlessly integrated established supply chains, regulatory approvals, and customer bases into its operations. This strategic acquisition model has driven rapid growth and bolstered Unilever’s market presence across Southeast Asia.

Case Study 3: Nestlé’s Brownfield Investment in Myanmar

Nestlé’s entry into Myanmar through a brownfield investment, specifically the acquisition of Myanmar Dairy, provided the company with immediate market access. This approach granted Nestlé instant integration into existing distribution networks and established consumer trust, facilitating a swift and efficient expansion of its footprint in the region.

5. Market Entry Approach

A structured market entry approach can help companies successfully navigate the complexities of entering new markets.

Market Research and Due Diligence: A successful market entry, whether through brownfield or greenfield investments, starts with thorough market research and due diligence. Understanding the local market dynamics, competitive landscape, and potential risks is crucial. This step involves detailed analysis of the target company’s financial health, operational capabilities, and strategic fit.

Negotiation and Acquisition: Once a suitable target is identified, the next steps involve negotiation and acquisition. This requires a clear strategy and a thorough understanding of the local business culture. Effective negotiation can ensure favourable terms and conditions, while a well-structured acquisition can facilitate a smooth transition and integration.

6. M&A Partner Search

Identifying and evaluating potential M&A partners requires a strategic approach and local expertise.

Leveraging Local Expertise: Identifying and evaluating potential M&A partners requires leveraging local expertise. Local consultants and advisors can provide valuable insights and facilitate connections with key stakeholders. This local knowledge can be instrumental in assessing the compatibility and strategic alignment of potential partners.

Assessing Compatibility: Compatibility is crucial in M&A partnerships. This involves evaluating not only the financial and operational aspects but also the cultural and strategic fit between the entities. Ensuring that both parties share similar values and goals can enhance the likelihood of a successful partnership.

Ensuring Strategic Alignment: Strategic alignment ensures that the partnership will support the long-term objectives of both entities. This includes assessing synergies, potential for growth, and the ability to achieve competitive advantage through the partnership.

7. Future Trends

Future trends in market entry and M&A in ASEAN are influenced by numerous factors, including economic, political, and technological changes.

Economic Factors: The economic landscape in ASEAN is continually evolving, with rapid growth and increasing integration. As Free-Trade Agreements are picking up pace, such as between Vietnam and the EU, more foreign firms are looking to enter ASEAN countries to benefit from both a favourable manufacturing context, such as low wage levels, in combination with smooth export into key target markets. Brownfield investments remain the preferred alternative to minimize entry risks and costs.

Political Factors: Political stability and regulatory frameworks in ASEAN countries can influence market entry strategies. E.g. in the EV space, ASEAN countries are currently collaborating to achieve common standards, which will make it easier for investors to manufacture their products in one market and sell into other ASEAN markets with minimal localisation efforts.

Technological Advancements: Technological advancements and digital transformation are reshaping industries across ASEAN. For example, in FinTech, ASEAN is ahead of many developed markets in terms of adoption of e.g. QR code payments, owed due to a less developed banking and cards system to begin with.

Example of a Successful Acquisition: For instance, Unilever’s acquisition of Kecap Bango in Indonesia was identified through a detailed assessment of the local market, strategic fit, and potential for synergy. This acquisition allowed Unilever to rapidly scale its operations and integrate into the local market effectively.

Conclusion

Brownfield investments offer a strategic advantage for companies looking to enter the ASEAN market, particularly in countries like Vietnam. With quicker market access, lower risk, and the benefit of established infrastructure, this approach can be a game-changer for businesses aiming to expand in this dynamic region. By following a comprehensive market entry approach and leveraging local expertise, companies can navigate the complexities of brownfield investments and secure successful M&A partnerships.

At ARC Consulting, we specialize in guiding companies through their market entry and M&A strategies in ASEAN. With our deep local knowledge and extensive network, we help businesses identify the right opportunities and execute their strategies effectively. Contact us today to learn how we can support your business growth in ASEAN.

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References:

• ASEAN Economic Community – Overview of economic integration and market dynamics in ASEAN.
• World Bank Reports – Detailed economic and regulatory insights for ASEAN countries.
• Unilever Case Studies – Analysis of successful market entry and M&A strategies.
• VinFast Company Reports – Insights into market entry strategies and business development.
• Nestlé Annual Reports – Information on strategic acquisitions and market expansion.
• McKinsey & Company – Reports on global market entry strategies and trends.
• Ernst & Young – Guidance on due diligence and M&A best practices.
• Harvard Business Review – Articles on strategic advantages of brownfield investments.