Think again please: Why lose Money in Asia when You Could also Lose it at Home?

Think again please: Why lose Money in Asia when You Could also Lose it at Home?

Time and time again our Singapore firm encounters the same situation; the local branch director of a European company (often a German one) announces that he will soon permanently return to Europe from Singapore. The local branch is quickly closed and its activities are taken over by a business partnership with a local Singaporean company soon after. In our experience, this tends to happen around 3 years after this venture into the Asian market began. Without even looking into company books, these departures generally no longer come as a surprise to us Europeans.

How everything began

Let’s use a hypothetical example, starting back in 2011.

Imagine that the owner of a successful medium-sized business from Böblingen, Germany has a chance 3-day stopover in Singapore, en route to Australia. During this visit, the owner had planned to open a bank account in Singapore to allow for the transfer of legitimate and taxed deposits from his Swiss bank account. However, he abandons this plan upon realizing that the process is not as straightforward as he expected. (see here https://ip-lawyer-tools.com/bank-account-for-foreigners-in-singapore-how-does-that-work/).

With two days left in Singapore, the owner makes the most of the city – he looks around, meets new people, and spends time in the area near to his hotel.

In exploring various local supermarkets, such as Cold Storage, Giant and NTUC Fairprice, the business owner identifies a business opportunity for the refrigeration equipment manufactured by his German company. He also recognizes that South East Asia is a region of ongoing and future market growth. Based on these considerations, and having grown an initial investment of DM 25,000 in his firm in 1982 into a business with an annual turnover of 50 million Euros and 200 employees in Germany, extending the business to Asia seemed like a logical next step. Those savings in the owner’s Swiss bank account suddenly had a new purpose.

The owner calls up the President of the Chamber of Commerce in Stuttgart, one of his personal contacts, who is able to put him in touch with the Singapore-German Chamber of Commerce. The local Chairman kindly meets with him, welcomes him in the German language and sets up a well-priced market survey of South East Asia for him. By this point, the foundation for the Asian business expansion has been laid.

Back in Europe, more specific plans are developed

Upon his return home to Böblingen, the business owner makes a successful pitch of his idea to the sales manager of his company. Having long considered the advantages of getting work experience abroad, it is ideal for the sales manager that this opportunity would present itself in his existing company, and in a country like Singapore, too. The sales manager agrees to take personal responsibility for the project rather than allowing it to pass to one of his sales associates. However, there is one hurdle to overcome; his wife is hesitant to relocate to Asia. The two businessmen develop a plan to bring her around to the idea.

The sales manager and his wife are sent on a one week ‘working holiday’ to Singapore, expenses paid, followed by a fortnight spent in Bali on a private holiday. Over the course of these trips, the manager’s wife soon comes to terms with the relocation on the basis that any such move would be a temporary one.

Then in the year prior to formally setting up the business in Singapore, the owner and the sales manager spend around 6 weeks in Singapore. After surveying the market and speaking with other Germans who have expanded their businesses in the city, the business plan starts to take more shape.

Upon moving to Singapore, the sales manager and his family fall in love with the atmosphere and the black and white houses in the Bukit Timah District. The sales manager decides to set up a small office close to Bukit Timah, since it would be too long a commute to work within Singapore’s industrial area. This is feasible since all the equipment he is selling is manufactured in Germany, and all maintenance and repairs will be performed at the buyer’s premises. No warehouse or workshop is therefore needed for operations in Singapore.

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, and other expenses associated with the time spent in Singapore. There are additionally other hidden costs, such as accountancy fees, as well as lost business opportunities due to the absence of the owner and his sales manager from the European office. Total costs therefore reach around 80,000 Euros. In a discussion regarding these costs, the German-based accountant 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 begins. A decision is made.

The provisional business plan for the first year of operations in Singapore is relatively simple. Essentially, after the sales manager relocates and opens the Singapore office, he will travel the region selling his company’s refrigeration equipment in line with what was found in the initial market survey.

The estimated costs of the venture amount to around S$790,000 for 2013/2014, equivalent to around 450,000 Euros. In order to make up these monthly expenses, the sales manager must sell one piece of equipment each month.

In pursuit of identified targets in the region, 150 visits to potential customers are planned by the sales manager during his first year in Asia. From what we know so far, this project will surely be successful – right?

Relocation and the first few months in Singapore

Come early August 2013, the sales manager’s container is packed and outside his house in Herrenberg, near Böblingen. On his previous visit to Singapore, the sales manager found that 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 rental period was 2 years, with the option to extend for an additional year. Although the wife noted that this fit perfectly with her plan to only temporarily relocate for 3 years, she withheld this remark so as not to quash his enthusiasm for the venture. After all, their new life in Asia is going to be really exciting.

The business in Singapore takes off with some hiccups

Soon enough, the sales manager and owner become somewhat disillusioned…

The sales manager’s quarterly trips back to the German HQ lead to 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 an office for the business and a home for the sales manager. Further, since office space in Singapore generally comes completely empty, costs are incurred for the complete fitting and furnishing of the new space. These costs are higher than would be for a local, given that contractors tend to charge higher prices to foreigners.

The next shock in terms of expenses comes when obtaining a car, which the sales manager decides to rent in order to protect company cash flow. For ease of living, the sales manager also hires a driver for a reasonable price to drive the family around, complete small chores at home and acquire any heavy groceries for the household, such as bottled water.

Over his first three months in Singapore, amongst other things, the sales manager organizes his daily life, the incorporation of the company, visas for himself and his family. To ease his workload, he hires a secretary and accountant for the business. In terms of his home life, his container has arrived from Germany 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 companies. Since all the other expat ladies at the Club have helpers, his wife hires a maid for a reasonable price to help around the home. Whilst living in Singapore, his family are able to visit their home in Germany around twice per year.

The business faces a worrying intermediate balance – but it’s not all bad, is it?

One year on, in August 2014, the Singapore-side of the business is in a shambles. Unforeseen costs which have emerged over the course of the year mean that the costs of the venture twice have exceeded the estimated S$790,000. Additionally, although the sales manager was well received in the region, he was not able to secure one single sale over the first year of operations.

Despite all of this, the owner stays silent. The savings from the Swiss account have now been deposited in Singapore and, fortunately, this account balance does not reflect the German sales opportunities lost due to the absence of its sales manager from Europe.

The accountant assures the owner that everything is under control in Singapore. 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 although potential customers are happy to talk to him, ultimately they will not make purchases from him. This is because generally only local sales persons 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 simply did not have the full trust of potential buyers.

To fix this problem, a local salesman is employed. His experience is within another field of work but at short notice is the best option available. Additionally, as it has been found that the Singapore company cannot work without an exhibit machine and small workshop, these are acquired alongside a local technician to adapt the machines to local conditions. Since the workshop is also used as a small warehouse, the relevant expenditure is not seen as excessive. The sales manager chooses 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 a year, mean that the costs associated with this go unnoticed in the German parent company. Instead, the owner of the business is left to evaluate the success of the Singapore company according to the balance of its bank account, which is not at all 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 he has made 5 sales, 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 sales managers’ associates mock him and calculate their odds of replacing him given their comparatively good sales in Europe. And with almost nothing left of his meticulously saved money, the business owner is disappointed and risks having to send even more money to Singapore to cover ongoing expenses associated with the project.

Eventually, the sales manager gathers the courage to have a frank discussion with the owner. He explains that he wants to return to Germany, as does his family, who are not enjoying the lifestyle in Singapore when compared to their lives in Germany.

The beginning of the third business year and a cleanse to come with it

Abandon ship! Soon enough, preparations are made for finally terminating the Asian endeavor of a company that has experienced such 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. Further, after a suspected burglary and considerable losses go unnoticed at the Malaysian warehouse, the technician is dismissed without notice. The secretary also quits her job for a position at another company as she begins to understand the business’ dire situation. The dismantling of the firm’s office is therefore left solely to the local sales employee.

Over the third year of operations, the total costs for the year decrease from S$2.3m to S$1m as compared with the previous year, luckily these were just met by the remaining funds of the owner being held in the Singapore accounts.

All fixed assets are liquidated and operations cease completely by the end of July 2014. The local sales employee works voluntarily for some time before a local company takes over the sales activities, in return for 30% commission. All exhibit equipment and the remaining spares and tools from the Malaysian warehouse are also passed to this new partner. Given his departure from Singapore, any contacts of the sales manager remaining in Asia soon delete his local number from their mobile phones, 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 left tatters, as is the relationship he has with his wife.

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 indicated in this article were realistic in 2015. At the time of reading the story, this may no longer be the case. Additionally, it must be borne in mind that you can achieve success in certain fields when you play your cards right, for example 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 need to have a large degree of staying power and you must 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”.

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