Market insights

Guanxi key to doing business in Southeast Asia

11 August 2015 by Francis Kan

Developing connections with officialdom is vital to doing business in Southeast Asia’s emerging economies. As AEC 2015 approaches, the region’s business leaders weigh-in on the importance of relationship building to getting ahead.

Foreign companies planning to do business in the emerging markets around the Mekong river must learn the art ofguanxi, a Chinese concept of building relations with officials and influential business partners, to help smoothen otherwise bumpy paths to commercial success.

As costs of production rise in the region's manufacturing powerhouse, China, more businesses are looking to leverage the low labour costs, large markets and rising consumption in the Southeast Asian economies of Cambodia, Laos and Myanmar. 

The spotlight on the region has also intensified as the deadline for the formation of a single market unifying the 10 members of the Association of Southeast Asian Nations (ASEAN) – known as the ASEAN Economic Community (AEC) – approaches.

Doing business in China with guanxi

"In China, the factor that differentiates you between a winner and a loser is guanxi with the government. If you have that, then the rest of the market will carry you, whether in terms of cheap labour or good resources," said Chia Kim Huat, regional head of corporate and transactional practice at Rajah & Tan Singapore, one of the region's leading law firms.

Similarly, in certain Southeast Asian markets such as Cambodia and Myanmar, spending time establishing good rapport with officials can help foreign businesses wade through a frustrating tangle of red tape to get businesses moving in the right direction.

Chia was one of several senior Singapore-based executives discussing their company’s experience operating in the Greater Mekong subregion (GMS) at a recent conference held to discuss the AEC. The GMS comprises Cambodia, Laos, Myanmar, Thailand and Vietnam, as well as the Yunan Province and Guangxi Zhuang Autonomous Region of China.

"Decision making is done at a provincial level and the interpretation of the officer in front of you can differ from another one. So even though it’s stated in the rules that something can be done, he may refer you to a higher level," explained Chan Yoke Ping, head CLMV (Cambodia, Laos, Myanmar and Vietnam) region for Singapore logistics company YCH Group.

She added, "You have to persevere to the next level and the next. There is a huge amount of bureaucracy and we have to break through that. So guanxi is inevitable."

Get to know authorities

The importance of having the right connections was not lost on Goodhill Enterprise, a distributor of international brands in the consumer and industrial segments in Cambodia. The Singapore-owned company has been operating in the country for more than two decades.

Goodhill Enterprise managing director, Teoh Oon Kiat recalled one situation where the company’s warehouse was sealed by the economic police, who then spent half a day searching the premises and eventually found fault on trivial matters.

"We negotiated with the customs authorities and through this process we got to know each other better. Subsequently, when there was any customs issue, we would call this contact and things would get resolved easily."

Reflecting how far they have come, Goodhill Enterprise was only one of eight companies in Cambodia to be awarded the ‘Best Trader Group’ status by the country's customs department in 2014.

Build relations with suppliers and unions

Outside of government, building relationships with suppliers and unions is central for operations to run smoothly, advised Felicia Gan, director of Ghim Li Global. The Singapore-based company is a global supplier of knitwear apparel to major US retailers, which employs 12,000 workers across Asia, including Cambodia.

"Union management is key to make sure the employees are happy and have a good working environment. We also must maintain good relationships with our mills, otherwise why would they give you the best price," she said.

About AEC

ASEAN members have targeted the AEC to become a reality by the end of 2015. The AEC 2015 blueprint envisions a single market and production base, a highly competitive zone and a region of equitable economic development that is fully integrated into the global economy.

The areas of cooperation include human resources development and capacity building, recognition of professional qualifications and closer consultation on macroeconomic and financial policies, among others. The initiative ultimately aims to transform ASEAN into a region with free movement of goods, services, investment, and skilled labour, and  greater flexibility in flow of capital.

However, a survey of some 100 C-suite executives conducted last year by consulting firm Deloitte found that most of the respondents believed the AEC will not happen by end-2015 as scheduled, but rather some time three to five years after that. Delays aside, 96 percent also felt that the AEC is an opportunity for their business.

"Don't go into ASEAN just to save costs, but look at the 650 million people and you will find many opportunities," said Tay Woon Teck, a director at consultancy Stone Forest Corporate Advisory.

To capitalise on the opportunities presented by AEC, however, businesses must be prepared to work within a system where relationships with the right people is central to success.

Edited by Claire Slattery and Goh Wei Ting