For many times, our Singapore firm keeps encountering the same situation of the local branch director of a European company, usually a German, makes the decision to return to Europe from Singapore, for good. Then, it leads to the closure of the local branch and its activities are taken over by a business partnership with a local Singaporean firm. Based on our experiences, around 3 years after the commencement of venture into the Asian market, this tends to occur. Without even looking into company books, most of us Europeans generally no longer find such departures surprising.
How everything began
Let’s use a hypothetical example, starting back in the year 2011.
Imagine the successful owner of a lucrative medium-sized business from Böblingen, Germany has a stopover for three days in Singapore, en route to Australia. Then, during the visit, he planned to create a bank account in Singapore for transferring of legitimate and taxed deposits from his Swiss bank account. However, he ends up ditching this plan when realises that the process is not as straightforward as his expectation. (see here http://www.anwalt.de/rechtstipps/eroeffnung-eines-bankkontos-fuer-nicht-in-singapur-ansaessige-auslaender_054931.html).
With two days left in Singapore, the owner makes the most of the city by looking around, meeting new people, and also spending time in the area that is near to his hotel.
The business owner then identifies a business opportunity for the refrigeration equipment made by his German firm, while exploring the local supermarkets, like Cold Storage, Giant and NTUC Fairprice etc. He recognises that South East Asia as a region of ongoing and future market growth too. Based on these considerations, and having grown an initial investment of DM 25,000 in his company back in 1982 into a business with an annual turnover of 50 million Euros and 200 staffs in Germany, entering the Asian market seemed like a logical next step. Those savings in the owner’s Swiss bank account suddenly had a new purpose.
The owner contacts the President of the Chamber of Commerce in Stuttgart, who is also one of his personal contacts and is able to connect him with the Singapore-German Chamber of Commerce. The local Chairman meets with him, welcomes him in German language and establishes a well-priced market survey of South East Asia for him. By this point, the foundation for the Asian business expansion has been laid.
More specific plans are developed back in Europe
The business owner, upon his return to Böblingen, makes a successful pitch of his idea to the his company\\\\\\\\'s sales manager. Having long considered the benefits of obtaining work experience overseas, it is ideal for the sales manager that this opportunity would present itself in his existing firm, and in a country such as Singapore also. The sales manager agrees to take personal responsibility for the project rather than allowing it to be handed to one of his sales associates. However, there is one hurdle to overcome, which is the fact that his wife is hesitating to relocate to Asia. A plan to bring her around to the idea was developed by the two businessmen.
The sales manager and his wife are sent on a week of ‘working holiday’ to Singapore, expenses paid, followed by a private holiday spent in Bali for a period of two weeks. Over the course of these trips, the wife soon comes to terms with the relocation on the basis that any such move would be temporary.
Then, in the year before the establishment of the business in Singapore, the owner and the sales manager spend around 6 weeks in the country. After surveying the market and speaking with other Germans who have expanded their businesses in Singapore, the business plan starts to take more shape.
Upon moving to Singapore, the sales manager and his family love the atmosphere and the black and white houses in the district of Bukit Timah. As it would take a long time to travel to work within Singapore’s industrial area, the sales manager decides to set up a small office that is located near to Bukit Timah. Since the equipment he is selling is made in Germany, and all maintenance and repairs will be done at the buyer’s premises, this will be a feasible thing to do. Thus, no warehouse or workshop will be required for Singapore operations.
Intermediate Balance – Costs incurred during exploration stage
By 2012, visible costs of around €45,000 (Euros) have been incurred from the market survey, travel costs, as well as other expenses associated with the time spent in Singapore. In addition, there are also other hidden costs, like accountancy fees, and lost business opportunities due to the absence of both the owner and his sales manager from the European office. As a result, total costs reach around €80,000. The German-based accountant, in a discussion pertaining to these costs commented, "Well, you cannot have a new business without investment. How can you make an omelette without breaking a few eggs?”
“YES WE CAN!”
And so it starts. A decision is made.
In Singapore, the provisional business plan for the first year of operations is rather simple. Importantly, after relocating and setting up the Singapore office, the sales manager travels the region to sell his company’s refrigeration equipment in line with what was found in the initial market survey.
The estimated costs of the venture amount to about $790,000 (in Singapore dollars) for the year 2013 and 2014, which is equivalent to around €450,000. The sales manager has to sell one piece of equipment per month, to make up these monthly expenses.
During his first year in Asia, 150 visits to potential customers are planned by the sales manager in pursuit of identified targets in the region. From what we know so far, this project will definitely be a success - right?
Relocation and the first few months in Singapore
In early August 2013, the sales manager’s container is packed and outside his house in Herrenberg, which is near to Böblingen. He found that, during his previous visit to Singapore, he would be able to rent a beautiful house near the German school in Bukit Timah, organized by a German-speaking real estate agent. The period of rental was 2 years, and the option to extend for an additional year was available. Even though his wife knew that this fit perfectly with her plan to temporarily relocate for the period 3 years only, she withheld this remark in order not to quash his enthusiasm for the venture. After all, their new life in Asia is going to be exciting.
The business in Singapore begins with some hiccups
Soon, both the sales manager and the owner become somewhat disillusioned ...
The trips made by the sales manager quarterly, back to the German headquarter result in additional expenses and stress upon the Asian side of the business. Costs also emerge from setting up a local premise, especially as the real estate agent charges for finding both a location for an office for the business and also a home for the sales manager. Besides, costs are incurred for the fitting and furnishing of the new space as office space in Singapore usually comes completely empty. These costs are higher than would be for a local Singaporean, due to the fact that contractors tend to charge higher prices to foreigners.
The next shock in terms of expenses arrives when it comes to obtaining a car, which the sales manager makes the decision to rent in order to protect cash flow of the company. The sales manager, for the ease of living, hires a driver for a reasonable price to drive the family around, perform small chores in the house and acquire any heavy groceries, for example, bottled water, for the household.
In his first three months in Singapore, amongst other things, the sales manager organises his daily life, the incorporation of the company, visas for himself and his family. He also lightens his workload by hiring a secretary and accountant. In terms of his home life, his container has arrived from Germany along with the furnishings for his new home. A membership of the local Swiss Club provides leisure facilities and an opportunity for his family to meet expats from other German firms. As all the other expat ladies at the Club have helpers, a maid is employed by his wife for a reasonable price to do household chores. Whilst living in Singapore, his family are able to visit their home in Germany around twice a year.
The business faces a worrying intermediate balance – but it’s not all bad, is it?
One year on, in August 2014, the business in Singapore is in a shambles. Costs that are unforeseen, have emerged over the course of the year mean that the costs of the venture twice have exceeded the estimated cost of S$790,000. In addition, despite that the sales manager was well received in the region, he was unable to secure one single sale over the first year of operations.
In spite of all of this, the owner stays silent. The savings from the Swiss account have now been deposited in Singapore and, luckily, this account balance does not reflect the German sales opportunities that are lost because of the absence of its sales manager from Europe.
The accountant assures the owner that everything in Singapore is kept under control. As he puts it: it is in the second year of operations that the first sales can be expected to start happening.
The second year – the catharsis begins
By the second year of the venture, the sales manager realises that even though potential customers are happy to talk to him, ultimately they will not make purchases from him. The reason is because generally, only local salespersons with the cultural know-how to make deals in the region are able to do so. As one potential customer confessed one evening over beer, the sales manager did not gain the full trust of potential buyers.
A local salesman is then employed to solve this problem. His experience is within another field of work but at short notice is the best option that is available. Additionally, as it has been found that the Singapore company cannot work with the absence of an exhibit machine and a small workshop, these are acquired alongside a local technician to adapt the machines to local conditions. As the workshop is also being used as a small warehouse, the relevant expenditure is not perceived as excessive. The sales manager makes the choice to set up the workshop across the border in Johor Bahru, Malaysia, rather than in Singapore, given that the costs there are lower. The poor skills of the Singapore-based accountant, despite her having trained in the position for one year, mean that the costs associated with this go unnoticed in the parent company in Germany. Instead, the business owner is left to evaluate the success of the Singapore company based on the balance of its bank account, which is not comprehensive in depicting the state of affairs of the Singapore business.
At the conclusion of the second fiscal year, the sales manager is left disillusioned at the state of the business. Even after making 5 sales, the total losses amount to S$2.5m and all original targets have been missed. The ‘Asia Project’ appears to be a failure and does not provide the worthwhile experience the sales managers had desired for his resume. Back in Germany, the associates of the sales manager mock him and calculate their odds of having him replaced, given their comparatively good sales in Europe. And with almost nothing left of the money which he had meticulously saved, the business owner becomes disappointed and risks having to send even more money to Singapore to cover the expenses, which is ongoing and associated with the project.
The sales manager eventually plucks up the courage to have a honest discussion with the owner. He explains that he wants to go back to Germany, as does his family, who are not enjoying the lifestyle in Singapore in comparison to their lives in Germany.
The beginning of the third business year and a cleanse to come with it
Abandon the ship! Soon enough, there are preparations being made to cease the Asian endeavour of a business that has experienced great success in Germany.
Whilst the sales manager’s family must return to Germany at the end of the year in time for the new school term, the local sales hire begins to conduct customer visits solo. Furthermore, after a suspected burglary and considerable losses go unnoticed at the Malaysian warehouse, it leads to the dismissal of the technician without notice. The secretary also resigns and takes up a position at another company as she starts to understand the dire situation the business is facing. Therefore, the dismantling of the firm’s office is left solely to the local sales employee.
The total costs, over the third year of operations, for that year plummet from S$2.3m to S$1m as compared with the year before, luckily these were just met by the remaining funds of the owner being held in the Singapore accounts.
The fixed assets are then liquidated and operations completely terminated by the end of July 2014. The local sales employee works voluntarily for a period of time before the sales activities are taken over by a local company, in return for a commission of 30%. All exhibit equipment and the remaining spares and tools from the Malaysian warehouse are also handed over to this new partner. Due to his departure from Singapore, any contacts of the sales manager remaining in Asia eventually have his local number deleted from their cellphones, leaving the business without a local contact number for any subsequent matters which may arise.
All things said and done, the relationship between the owner and sales manager is damaged, and the same goes for the relationship he has with his spouse.
The story above is a reflection of the experience of many businesses who make similar moves into Asia. More substantial figures can be found at https://www.dropbox.com/s/uuwi0n6pf6j4c14/typischer%20Fall%20290315.pdf?dl=0
Note: the figures shown in this article were realistic in 2015. At the time of reading the story, this may no longer be the case. Besides, it must be borne in mind that you can gain success in certain fields when you play your cards right, for instance, when taking up business in the services industry (??). Ultimately though, the big picture remains the same; to successfully expand to Asia as a mid-sized firm, you are required to have a large degree of staying power and you have to approach the project in a sensible manner.
In the next article, we will outline an alternative scenario in which costs can be saved and the outcome is far more successful. See: “How a Foreign Newcomer Company makes Money in Asia right from the Beginning”.