Value chains shouldn't be a bind

If you want to reach Asian consumers, it's worth taking time to find the right distributor. Photo / Thinkstock

Partnerships need due diligence.

The previous article in this series alerted us to the dynamics of collaboration, and simultaneously collaborating and competing (co-opetition).

A more complex form of arrangement involves collaborating across the value chain, such as Hong Kong's Li & Fung, a business that sources from a global network of suppliers and distributors and sells those goods to the ultimate customers. This complexity is compounded when the collaboration happens across borders.

Asia is a diverse region with countries in different developmental stages. This diversity requires a good level of localisation of goods, which has led to the proliferation of value chain partnerships in Asia.

The formation and dynamics of interaction in value chain partnerships are fundamentally the same as any other form of collaboration, so any differences are subtle.

It is easier to understand the business models, operations and motivations of a potential collaborator which operates in the same space as your organisation. Collaborating with a distributor - which can also be a supplier, depending on your position along the value chain - is another story.

The way a distributor operates may not be clear. Chances are, you do not have access to their financials, especially in Asia if a company is not listed. Furthermore, their business model may not be obvious, unless you know the local market equally well.

Not having access to all the information means you will have to adjust the structure and governance of your collaboration accordingly. Unfortunately, distributors sometimes bar access to their operations, making this adjustment difficult. Your organisation will probably end up having to take a very "distant" approach to managing this relationship.

As well, with this asymmetry, there's no way of stopping your local distributor from requesting lower-cost supplies.

Can we deal with this?

When you need access to local markets, in particular large ones such as China, India and Indonesia, this lopsided arrangement of value chain partnerships will almost always occur - unless the market is not really that important to your organisation, or unless it is possible for your organisation to enter the market alone.

Large markets are more than willing to accept good quality products. There are always going to be willing distributors for quality items - you just need to search patiently for the right distributor. Going into the relationship with this mindset is important, otherwise, as a foreign company, you will be on the back foot in the local market from day one.

One way to get around the bargaining power of your distributor is to involve more than one distributor. Exclusivity is often demanded by local distributors in Asian markets, but when the market involves more than one region or province, there are grounds for not granting it. This arrangement should be considered even if your local partner is not a distributor per se.

This "dream" arrangement might seem more easily said than done, but try to be insistent in these situations as losing this position can have mid- to long-term ramifications. The fact is that organisations often jump into value chain partnerships without a strong due diligence process.

Due diligence does not start from the moment your organisation is fixated on a potential partner. It starts way before that, when considering whether such a partnership is the only or best option for this overseas venture to work. It should also include an assessment of the range of possible partners. This due diligence process should not be done just once throughout a partnership, but on a more regular basis, with new options regularly explored. The tendency to be complacent with existing arrangements does not always end up well in value chain partnerships.

Professor Siah Hwee Ang is BNZ Chair in Business in Asia, at Victoria University of Wellington.