We are often asked whether an organic expansion or an acquisition is the best entry model in Asia - and obviously there is no single answer. First, it depends on the market. In general, acquisitions are the preferred option in the more mature markets where organic expansion is very difficult for latecomers and will take a long time. In the high-growth markets on the other hand, such as China and India, and also Vietnam, organic growth is a more likely vehicle for success.
Second, it depends on the availability of acquisition targets - which are generally scarce in Asia. Against the backdrop of high industry growth, consolidation in most markets might still be many years away. And valuations continue to be very high - despite the recent volatility in equity markets. On the other hand, life insurers in many Asian markets are still suffering from high-interest-rate guarantees on their in-force books and are, subsequently, taking on a lot of risk on the investment side (Taiwanese insurers are a good example). This dramatically increases their exposure to market volatility and might open up opportunities. The acquisition of ING's Taiwan business by Fubon is a prime example of such opportunistic acquisitions.
Third, timing is an important factor for consideration. Given the lack of availability of attractive targets, we often find strategies successful where life insurers start building a business organically and use this as a bridgehead to prepare for future acquisitions. This has the advantage of building a network within the industry - rather than just relying on investment bankers - by establishing relationships with local regulators and building a local management bench that will be required in case of a later acquisition anyway.
Finally, players should be very clear about their acquisition objectives: Is this "to get a toe in the water" or is it a transformational deal? In many markets in Asia, there are some small local, and also foreign, companies that might be up for grabs for the right price. The logic for such a deal is not so much the attractiveness of the target itself, but the timing of entry for players who have decided to enter the market. Buying into an existing company can often accelerate the start of operations in a specific life market, and the value is mostly derived from obtaining a license and accelerating the business plan rather than from the existing franchise. At the other end of the spectrum is the possibility of making a transformational move. Insurance Agency Acquisition
Local Asian companies who want to branch out of their local markets should consider a substantial acquisition. Given that their home management teams may lack the experience of operating in foreign markets, a major acquisition of a player with a good management team could be a transformational move to internationalize the company. Often, taking some minoriry stakes to get to know the target better is a good way to start this journey. We have not seen any examples yet for this kind of bold move in the Asian insurance industry, but the aspirations of many of the local Asian players suggest it is likely that over the next several years we will see some of these transformational deals.
Regardless of whether organic or inorganic measures are employed to build a pan-Asian footprint, winning players will be those who systematically build on their strengths while expanding. Whether this is a particular skill in channel management, (for example, agent management, experience in bancassurance), or know-how in direct-response models, or product know-how - such as The Hartford with its variable annuities that led to a market-leading position in Japan - building on existing strengths is a good recipe for success.
Cultural Adaptation
One of the key challenges for a successful expansion is managing cultural differences. This is as true for local Asian companies expanding across the continent as for multinationals. In particular, Asian companies from markets such as China, South Korea, and Japan find it very hard to operate successfully outside their own territory. Why is this? First, there is a language problem. Many top executives, not to speak of the more junior levels, are not comfortable in English, which makes an international expansion much more difficult. Second, the business culture in these markets is substantially different from international practices in many aspects.
The communication style, the organization model, and the decision-making processes are highly idiosyncratic - they are grounded in the cultural and historical context of these countries, but very hard to apply in other markets. Third, many companies in these markets have no history of making foreigners successful in their own organizations - which is a major obstacle when setting up an international operation. But this does not mean that it is impossible to change.
In all three of these markets there have been initial moves from the leading incumbent players to set up businesses outside their home markets. For example, Dai-ichi in Japan has decided to demutualize and to deploy more capital in other Asian markets; in South Korea, Samsung Life has started to build businesses in China and other markets; in Taiwan, Shin Kong has begun hiring non-Taiwanese for its top executive team and has started to expand into China and Vietnam; and Ping An of China has acquired stakes in foreign companies while building the most international management team in the region, with three-quarters of the top 100 having a foreign passport - many of them have an ethnic Chinese background, but not all. Insurance Agency Acquisition
Compared to the Asian incumbents, multinational life insurers have much more experience in building international operations. Nevertheless, many of them have struggled to adapt to the Asian environment. This has much to do with the cultural differences described above. Many MNCs also struggle with building a local management team. It is a common perception within MNCs that they can trust Western managers more - in particular, those from the same country of origin - which, true or not, is often an obstacle to putting the best management talent on the ground to do the job. Furthermore, many MNCs find it hard to adjust to the highly entrepreneurial environment in high-growth markets such as India or China.
In India for example, almost all private life companies set up since deregulation in 2000 are foreign-local joint ventures. But in most of them the Indian partner took over full control and currently runs the operation. The foreign partners were often unable to put the required management talent on the ground to manage the enormous entrepreneurial task of building huge agent forces, numbering hundreds of thousands, in only a few years. Some blame the 26 percent cap on foreign shareholdings for making it not worthwhile to the MNC partner to do all the work but only receive a quarter of the rewards. However, it is unlikely that this is the full story; there are successful examples such as BAJAJ-Allianz, where the German insurer is clearly in the driver's seat and has created one of the largest life insurance joint ventures in India.
One way for MNCs to improve the leadership and management of their local Asian operations is to set up a strong Asian headquarters. AIG and Prudential (UK) have led the way here, with strong Asia CEOs running the Asia business from their respective Hong Kong headquarters. But many other multinationals have not created this management layer, and still have their various Asian country operations reporting directly to a global head office. This often slows down decision making, makes it difficult to build market insights and understanding at European or US headquarters level, and often leads to frustration on both sides. These MNCs should ask themselves if they are really the best owner of these Asian businesses in this kind of set up - and what is the group adding to the individual country operations?
Strategic decisions on the expansion of the footprint across Asia, capital allocation across markets, product guidelines and margin requirements, centralization and regionalization of operations, and talent management are topics where a regional headquarters can add a lot of value - as long as this management layer has real market insights, still encourages local entrepreneurship, and stays close to decision-making in these fast-moving markets. The Asia CEOs of AIG and Prudential (UK) are both members of their global executive board and others will surely have to follow this pattern if they want to become successful pan-Asian players. To find out more, you can check out Insurance Agency Acquisition.
