Asia Major: Partners mean profits

08/01/2003

Paul A. Smaltz, Mallinckrodt Baker, Phillipsburg, NJ

Today, the media overflows with news of turmoil in Asia: war-posturing on the Korean peninsula, theft of intellectual property in China, ethnic unrest along the Pacific Rim. Then there are the horror stories about doing business in the East, articles that detail the convoluted government regulations, political landmines, inadequate infrastructure, and unskilled labor forces in many of these countries.

To focus on the headlines is to miss the opportunity. This is not Asia Minor with a lowercase m. Most nations along the Pacific Rim are developed, with the infrastructure and talent to support a growing business. Anti-American sentiment is not rampant. Business leaders take their work seriously, and it's business sentiment that counts.

Yes, the region is known for volatility and barriers to commerce, and no two countries are alike — a one-two punch that makes planning a foray into Asia very difficult. That said, the real risk arises from doing nothing, from being left behind by the competition. The real issue is not how to avoid risk but how to manage it.

To take advantage of the opportunities presented by Asia, a company needs to carefully analyze and minimize these risks. One way of doing that is to form partnerships with local business leaders.

At Mallinckrodt Baker Inc., continued growth requires expansion into a cost-competitive environment that is physically closer to the end user. Although we exported to the Pacific Rim for 20 years, Asia was a secondary market for us. Five years ago, around the time of the Asian financial crisis, it was recognized that companies were building new fabs in Singapore and Taiwan, not in the US and Europe. Although the company had been producing and packaging fab process and performance chemicals in the US and The Netherlands and providing technical support to Asia for years, we had little presence in Asia.

While projections showed growth in the US and Europe would remain flat for years, the compounded annual growth rate in Asia was projected to be 15–20%. In the search for a shorter supply chain and a cost-competitive manufacturing environment, Asia offered both.

Logic dictated building facilities closer to that growth, but this strategy presented risks in three areas: geopolitical, business, and cultural. To minimize those risks, partners who knew the politics, the market, and the culture of these countries were identified and cultivated. Eventually, a distributor in Malaysia was acquired to help us get closer to the market. An office in Hsinchu, Taiwan, was also opened, but initially, the market was entered through an even safer route — by way of a partner.

Geopolitical risk

The objective was to choose a stable company with competent business leaders and develop a relationship with them. In Japan, a licensing agreement was signed with Sumitomo Chemical Co. Ltd. of Tokyo. This allowed Sumitomo to sell select photoresist strippers in Japan, but the relationship also allowed Mallinckrodt Baker to sell Sumitomo chemicals outside of Japan.

The success of this relationship provided an introduction to Sumitomo's partner in South Korea, Dong Woo Fine Chemicals, a highly respected company on the peninsula. While the partnership began by importing Korean products, the strategic importance of doing business with a local manufacturer was soon realized.

Mallinckrodt Baker and Dong Woo agreed to build a plant to produce J.T. Baker photoresist strippers for the microelectronic industry in South Korea. Even before the agreement was finalized, Dong Woo built a plant using its capital and Mallinckrodt Baker's plans. One of the reasons we partnered with Sumitomo and Dong Woo was because both understand the clean-culture environment of microelectronic manufacturing. While Dong Woo engineers had to be shown how to blend solvents to create proprietary photoresist strippers, they made the product right the first time.

Partners like Dong Woo offer a number of advantages. First, they bring Mallinckrodt Baker closer to its end users. Korea offers specialty chemical makers a lot of business in the flat-panel LCD market for TVs, cars, and navigation systems, and it was necessary to be near that market to supply and service it. In fact, to support end users, an application laboratory in Seoul was also opened.

We also recover spent photoresist strippers so that localizing the manufacture and recovery of those chemicals in Asia allows for quicker and more efficient service to users there.

So far, the drawbacks have been few. Unlike in other parts of the world, Mallinckrodt Baker did not receive government incentives in South Korea because the company is essentially outsourcing the work. But finding a partner with expertise and vision similar to ours has more than compensated for the lack of incentives.

Business risk

While the experience in South Korea taught us how to minimize geopolitical risk, our experience in Malaysia illustrates both the business risks and rewards of operating in Asia.

Malaysia is an English-speaking country that offers good infrastructure, government incentives, and cost-competitive land, labor, and capital. Locating a plant there places us closer to Thailand's disk drive market and Singapore's and Malaysia's semiconductor markets. The drawbacks, however, have had more to do with the economy and the cyclical nature of the industry than with Asia itself. The initial plan was to build a production facility in Malaysia — plans placed on hold due to the downturn in the microelectronics industry.

In December 2000, the Malyasian distributor Machwolk Sdn Bhd of Petaling Jaya was acquired and opened an application laboratory there to serve local markets, with the option of manufacturing strippers and repackaging solvents as the sector improves. In this partner was found a business leader that understands both the culture and entrepreneurial spirit. As in Korea, there were no government incentives because we had yet to build a plant there. But partnering with an expert in the local market has provided a strong platform for expansion.

Cultural risk

Tune the television to a news network and you'll see flags burning in Indonesia and masked protestors in Seoul. The impression is one of hostile nations with little industry and a low standard of living. But personal experience in Asia has revealed the opposite. Just because protesters are seen on TV newscasts does not mean that all of the citizens of those countries are anti-American. Furthermore, the Asian business community is well educated and well equipped; they know how to do business.

One example of that focus comes straight from the headlines. While on the mainland when the Chinese captured a US spy plane, I noticed that the business people dismissed the incident as irrelevant. They were interested in commerce, not controversy. Every business plan needs to include an assessment of cultural risk, some of which is very real. Business leaders, however, must also put the negative news they see and hear in perspective and in context. When locating facilities, cultivate relationships before committing capital. Identify business leaders who understand the local government and culture; and show respect — they know how to do business in their own countries.

My behind-the-scenes conclusion is that Asia's market potential far outweighs the risks of doing business there. The challenge involves more than politics and business. It involves culture. Just as you use a translator to interpret the language, you can use a local partner to understand the culture.

Asians put it another way. If you like the people with whom you're dealing, you can work through any problem. That differs from the view in America, where we often tend to focus on the financial benefit of the relationship. Asian leaders will say while that's important, if the people don't work, the relationship won't work. And neither will the business.

Acknowledgment

J.T. Baker is a registered trademark of Mallinckrodt Baker Inc.

Paul A. Smaltz earned his BS in chemistry from the U. of Pittsburgh and his MBA from Lehigh U. He is the worldwide business director for Mallinckrodt Baker Inc. and served as director of the company's International Group for more than five years. He can be reached at 222 Red School Lane, Phillipsburg NJ 08865; ph 908/856-9342, fax 908/856-6904, [email protected].