Market Entry & Expansion in Southeast Asia: An introduction

Southeast Asia is one of the fastest-growing regions in the world, having a population of around 600 million people. Increasingly more companies, both in the B2C and B2B sphere, target the market to capitalize on its expanding manufacturing activities and booming middle class.

Yet, the region is also comparatively complex, comprising eleven countries with different languages and levels of development. Each market also has different demands in terms of product categories and price levels.

In this article, we review the most interesting countries for market entries in Southeast Asia and what sets them apart.

The Most Interesting Countries for Market Entries in Southeast Asia

Southeast Asia comprises eleven countries with different levels of development, languages, ease of doing business, and import regulations. This makes the region comparatively difficult to enter as pre-assessments are required to find the most suitable markets.

Compare this to China which is a single market and where the same language is spoken nationwide. Once you’ve managed to register your products locally, you have no obstacles to selling your products to local businesses or consumers.

Besides, not only do we have to consider country-specific characteristics when choosing a Southeast Asian market, but also your products. Selling machines and equipment for the wood industry is undoubtedly more suitable for Vietnam, considering its large exports of furniture and wooden raw materials.

At the same time, Singapore might be more suitable for exclusive skincare brands, as the market is more developed, and citizens have a stronger purchasing power.

Luckily, not all eleven countries are interesting for market entries in Southeast Asia, which makes the assessment easier. The countries we will review in this article include Singapore, Vietnam, Thailand, Malaysia, and Indonesia.

Singapore

Despite its small size and population of just 5.8 million, Singapore has built a robust and diverse manufacturing base in industries like electronics, aerospace, precision engineering, and biomedical sciences.

It’s also renowned for its manufacturing capabilities in chemical manufacturing, having more than 100 global petroleum, petrochemical, and specialty chemical companies present.

Manufacturing contributes to a whopping 20% of the country’s GDP, totaling SGD 372.4 billion (USD 270 billion) in 2020. That’s considerably high and on par with many of its developing neighbors.

In Hong Kong, for instance, the manufacturing output is less than USD 4 billion and 1.5% of Singapore’s.

What attracts businesses is the skilled and educated labor pool, English-speaking population, transparent juridical system, and ease of doing business. Singapore has continuously been ranked on top of the World Bank’s yearly reports on ease of doing business.

Moreover, it’s a tax haven with a flat corporate income tax rate of just 17% (with part of the first 300 000 SGD exempted) and no capital gain tax.

With that said, what makes Singapore a less attractive country for B2B sales is the small population, developed economy, and its focus on advanced manufacturing. Even if its neighboring countries are less developed and harder to navigate, the large populations, booming manufacturing industries, and developing economies make them more interesting for market entries.

Malaysia

Malaysia shares many advantages with Singapore such as the close distance to global shipping lines, its ease of doing business, and the English-speaking population. Disposable incomes are also higher on average here compared to other Southeast Asian countries.

Electrical products, electronics, machinery, and related equipment contribute to much of the country’s manufacturing industry. Chemicals and petrochemical production also accounts for around 10% of the output.

Just keep in mind that its population of just 33 million and lower economic growth is a disadvantage. Upcoming markets, like Vietnam, have a highly active manufacturing sector, including electronics, furniture, machinery, agriculture, and more.

This allows for market entry opportunities as local companies seek to buy foreign products.

Another challenge for Malaysia-based businesses is its taxation system. The corporate income tax is currently 24% and makes Malaysia one of the countries that have the highest tax rates in the region. By comparison, Vietnam has a corporate income tax of 15% to 20%, Singapore 17%, and Thailand 20%.

Indonesia

Indonesia is the second-largest beneficiary of foreign direct investments in Southeast Asia, accounting for around 14%. The manufacturing industry is a large contributor to the economy with a focus on the production of textiles, electronics, automotive, palm oil, petroleum, minerals, and coal.

Contrary to Malaysia, Indonesia also has a major benefit thanks to its big population and future growth prospects. This allows companies to access the wide and well-diversified pool of consumers.

As a result, market entries with a focus on selling products related to the above industries should be a priority. Besides, worth highlighting is the growth of Indonesia’s digital economy, which offers opportunities for FinTech companies, digital banking, and SaaS solutions.

Looking at consumer goods and B2C sales, companies now also seek to target Indonesia’s growing upper and middle-class, especially high-end goods and services.

Indonesia also has the highest number of Unicorns in Southeast Asia, including GoJek, J&T Express, and Traveloka. The ease of doing business has been improved in recent years, the corporate income tax reduced, and we’ve also seen an introduction of a single submission system for business registrations.

As explained in our separate article about manufacturing in Indonesia, one of the most challenging issues when doing business is bureaucratic inefficiency and red tape. Regardless of the attempts to simplify business procedures, companies still struggle with different regulations and required clearances.

Vietnam

Vietnam is the third-largest FDI recipient in Southeast Asia and benefits much from the recent trade tensions globally.

Various multinationals in the electronics and technology industries have relocated manufacturing facilities here, including TCL, Foxconn, and Sharp. Its growing trade relationship with the EU, especially after the execution of the EVFTA in 2019.

As a result, companies that sell machinery for production tend to have many benefits from these factory relocations. Apart from industrial production, the agriculture sector relies heavily on imported machinery, particularly from the EU, Japan, and South Korea. It’s estimated that 70% of the agriculture machinery used in Vietnam is imported.

Some companies also face challenges when entering the Vietnamese market. Foreign ownership is strictly limited in some industries, like logistics and banking. This impacts inbound merger and acquisition (M&A) activities.

The government’s attempt to introduce simpler and clearer regulations has also failed at some stages. Current regulations still overlap and are often opaque, as these are regulated by different governmental agencies.

Thailand

Sharing the same geographic advantages as other Southeast Asian countries, Thailand has been attracting foreign companies thanks to the continuous improvement of its business environment.

Thailand is now among the top three countries in Southeast Asia in terms of ease of doing business. Different advantages allow foreign businesses to reach their expansion targets by selling consumer goods or investing in local businesses.

Products with the highest growth rate are medical goods and F&B products. This is boosted by the increased middle class and as citizens become more health-conscious and more willing to pay for high-quality international brands.

However, companies expanding to Thailand should be aware of the political uncertainties within the country. Its politics has been volatile over the last two decades, with the involvement of many military coups.

In addition, imported products typically face strong competition from domestic Thai products. Thai consumers are relatively price-sensitive and mainly served by local suppliers. Hence, companies might face issues to remain competitive and profit-making at the same time.

The Philippines

The Philippines is known for its strong reliance on the service sector, which accounts for more than 50% of the GDP. Business process outsourcing (BPO) is one of the key drivers of the service sector.

Hence, foreign companies are strongly recommended to take the advantage of this foundation in the Philippines. This, firstly, provides foreign players access to a well-established BPO market. Also, international experience is a competitive advantage over the local businesses when it comes to providing services to multi-national companies (MNC).

Tourism is also another strength of the Philippines. This has opened the door for businesses in the hospitality industry, such as F&B, traveling, and more. With a long history as an agricultural country, the Philippines allows global F&B manufacturers to have cheap and locally sourced ingredients to lower the cost while taking advantage of its original international brand name.

However, companies expanding to the Philippines also need to consider some common foreseeable challenges there. Infrastructure inefficiency is at the top. Regardless of the Government’s growing spending on infrastructure, it’s common with overcapacities in the international airports, port congestion in many major seaports, and slow and costly internet services.

The Philippines is usually ranked below its neighbors in terms of basic infrastructures, such as roads, railroads, ports, and more.

Market Entry Strategy in Southeast Asia

You have several options if you intend to enter Southeast Asian markets. Here, we must consider whether you sell B2C and/or B2B, offline and/or online, whether you have limited knowledge and presence in markets, and financing capabilities. Let’s review the different sales channels and market entry strategies available.

Distributor channel development

One of the most common and time-saving options is to find a local distributor with extensive knowledge and experience in local sales and marketing. Here it’s important to have clear assessment criteria to choose the right partner. Examples include:

• The scope of business (general or industry-specific)
• Geographical coverage (certain cities/provinces, national or international)
• Focused channels (general trade, modern trade, or eCommerce)
• The scope of work (custom clearance, tax and duty payment, warehousing, required local certificates, and more)

A good distributor does not only have access to existing sales channels, but also a network with relevant authorities. This is important in emerging markets, where regulations are not as effective and transparent.

A partner who is familiar with normal business practices and relevant legal requirements can save massive time in bringing the products to the market.

However, this method of expansion also has its cons. Firstly, the company will lose control over the sales activities and mostly rely on the sales and marketing capabilities of the local partner. Besides, the sales commissions will also affect your profitability, making it harder for the manufacturer to build a competitive price advantage while maintaining a solid and profitable pricing strategy.

Mergers & Acquisitions (M&A)

M&A is another common way to enter new Southeast Asian markets. Businesses doing inbound M&A transactions have different motivations rather than just expanding sales. A typical one is the acquisition of an experienced company with established operations.

Singapore is undoubtedly the leader in terms of both the number of deals and deal value made. Setting up a new business from scratch often requires significant investments, both in capital and time. Acquiring a local business can therefore be a preferable choice if you have the finances required and want to enter a market quickly.

However, managing M&As in developing countries is indeed complicated, especially for companies that have limited experience in the field. The challenges can come from local legal requirements, assessing the value of target companies, differences in management style post-acquisitions, and more.

Deal structure is also crucial, making sure that a suitable buying strategy is applied. Buyers need to decide whether they want to proceed with a complete buy-out or acquire a minority or majority share. This will determine whether you spend enough while meeting your expectations (veto right, financial consolidation, control over the business).

Joint Venture (JV) with a local partner

M&A activities allow foreign businesses to get control over existing businesses. JVs, on the other hand, allows for collaboration with local business to create synergies.

While companies in emerging markets have established sales channels and networks, foreign companies can bring expertise, technological knowledge, and brand reputation. If well-facilitated, the joint venture can utilize the strengths of both sides.

Let’s take agriculture as an example. A local partner will then have experience in farming and fishing, with great knowledge of the local geography and ecosystem. Meanwhile, the foreign partner can help to modernize the production exporting to international markets.

Like any other type of partnership, founding members of a JV, especially those from different cultures, should be aware of the conflict of interest. This is likely to happen when the JV grows and the founding members have their own visions and strategies for future development, either for their own company or for the JV.

Domestic eCommerce sales

Given the recent eCommerce boom in Southeast Asia, many foreign companies see online sales as the most promising sales channel. You have two options, either to import and have the products available locally or ship the products from a warehouse overseas.

Importing products and selling on local eCommerce websites is referred to as domestic eCommerce sales. For companies that sell lighter products such as in the fashion categories, cross-border eCommerce might be a more suitable option.

The entry and registration requirements will then be significantly lower, but you must deal with higher and longer shipping costs. This is not optimal for some businesses as consumers require shorter delivery lead times and lower shipping costs.

A local warehouse assures effective fulfillment of the orders as international shipping normally takes 3 – 5 times longer than domestic dittos. The lead times can be even longer if the country is under lockdown or faces restrictions of movement.

It’s therefore recommended to have locally ready products to meet growing demands and to save logistics costs in the long run. Yet, domestic eCommerce also requires that you have a local legal entity that can import products and manage orders.

Foreign companies must either set up their own legal entity or work with local distributors. Although this might require more effort and capital, it could be used as a foundation for the company to penetrate offline sales channels.

Cross-border eCommerce sales

If you don’t have a physical presence or work with a distributor in Southeast Asia, you can also sell your products cross-border. Major platforms like Lazada and Shopee have developed cross-border eCommerce capabilities and where you ship the products from overseas.

This is considered an effective way to examine the market’s reaction to a certain group of products while keeping the budget low. Shopee and Lazada are among the pioneers to enable cross-border sales functions. Tiki, a Vietnamese-based eCommerce startup has also recently allowed international sales, to catch up with this globalization trend.

However, not all platforms are available for cross-border sales. Tokopedia, the third most visited marketplace in Southeast Asia is only available for trading activities in Indonesia. Besides, Tokopedia is only available for a limited number of product groups.

Each platform has its own restrictions on eligibility for cross-border sales. Typical products are household and fashion goods, which bear less risk of being defective and are relatively easy to deliver. Worth mentioning is also that foods and supplements are not allowed to sell cross-border on platforms like Lazada.

Another disadvantage to consider in the long run is that cross-border eCommerce limits you to online sales. This also shares a mutual disadvantage with domestic eCommerce, which is generally not suitable for B2B products such as machinery.

Summary

Southeast Asia boasts a population of around 600 million people and is one of the fastest-growing regions globally. Foreign investments and diversifications from the Chinese supply market will allow for growth, increased disposable incomes, and expanding manufacturing activities in the coming years.

As a result, increasingly more foreign companies seek to enter and expand in the markets, either for B2C or B2B sales. You must also consider whether your products are suitable to sell offline or online. For instance, bulkier products for B2B are often more suitable for B2B sales offline and with the help of distributors.

Smaller products such as fashion items can be more suitable to sell online, sometimes cross-border from overseas. The most popular eCommerce platforms, Lazada and Shopee, allow cross-border sales and is something they prioritize.

The most interesting countries that foreign companies should target for market entries in Southeast Asia include Vietnam, Indonesia, Malaysia, Thailand, and the Philippines.

 

---

Read more about our market entry services or other consulting capabilities.