roland berger continued attractive business opportunities in asia en 20130305

Beatrix Morath, Alex Stöckl Study

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Continued attractive business opportunities in Asia for market expansion services Report on the markets of Southeast Asia, Greater China and Northeast Asia – 2013 update

Published by: Roland Berger Strategy Consultants Holbeinstrrasse 22 8008 Zürich, Switzerland Tel. +41-1-38481-11 Fax +41-1-38481-19 www.rolandberger.ch

Continued attractive business opportunities in Asia for market expansion services


Report on the markets of Southeast Asia, Greater China and Northeast Asia – 2013 update

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Contents

1. Summary 3

2. Market expansion services in Asia 5 A. Introduction 5 B. Definition, scope and key industries 6 C. Market structure and size 8

3. Outlook and trends in the market expansion services industry 10 A. Growth perspectives in market expansion services 10 B. Competitive dynamics 12

4. Market expansion services in different industries 14 A. Fast moving consumer goods 14 B. Healthcare 18 C. Specialty chemicals 23 D. Engineered products 25

Appendix – Detailed tables at country level 29 Fast moving consumer goods 29 Healthcare 33 Specialty chemicals 38 Engineered products 40 Methodology 42

Authors 45

3 | Continued attractive business opportunities in Asia for market expansion services

1. Summary

With stagnating markets at home, Western manufacturers are increasingly looking to Asia for growth opportunities. At the same time, Asian manufacturers who previously targeted Western markets are now turning their attention back home in the quest for sales. Yet whatever their origins, companies operating in Asia encounter certain challenges, including high risks, market entry costs and a lack of local expertise and infrastructure when interacting with customers, especially in areas such as marketing, sales, distribution, logistics and customer support. This is where market expansion services providers come in: They offer companies help in these areas. This enables the companies in question to access new and develop existing markets more efficiently and effectively than if they had to rely on their own resources. Our first report on the market expansion services industry in Asia was published in 2011. Now, two years on, we look back on the predictions we made then and examine the current situation for the industry. As before, we look at four key industries for the market expansion services industry: fast moving consumer goods (FMCG), healthcare products, engineered products and specialty chemicals. Our geographic focus is on Greater China, Northeast Asia (including Japan) and Southeast Asia. Overall, our forecasts remain positive. All four industries show excellent growth prospects for market expansion services, with the total market in Asia expected to grow at 8.3% annually over the next five years (our forecast in 2011 was 8%). The main drivers of growth include a generally healthy economic outlook in Asia, increasing consumption levels (largely due to an expanding middle class), an ongoing trend toward urbanization, increasing intra-Asian trade, and growing levels of outsourcing. In general, the environment is positive. However, the market outlook differs between industries, segments and regions. While in the FMCG segment the Asian consumption market becomes increasingly important among global manufacturers, the healthcare market, for example, is strongly influenced by the regulatory environment in different countries. In specialty chemicals, companies are keen to raise the efficiency of their distribution processes and are increasingly turning to regional market expansion services providers for help. In engineered products, by contrast, companies are still generally rather relying on exclusive sales agencies, while there is a clear trend of distribution professionalization, leading to increasing demand for integrated market expansion services.

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Different geographic regions are also subject to different developments. In China, for example, the government plans to shift the country toward more spending-driven growth, as outlined in its 12th five-year plan. This has a specifically positive impact on consumer markets such as the FMCG and OTC segments. Japan is meanwhile showing signs of economic recovery. And the opening up of the highly populous country of Myanmar for trade will spur further investment and growth across Southeast Asia. Our study concludes with detailed tables for market size and growth projections through 2017 for 14 Asian countries in each of the four industries, as well as specific sub-segments. The figures, based on data and reports from leading institutes for the industries covered, offer valuable insights for both market expansion services providers operating in Asia and their clients.


2. Market expansion services in Asia

A. Introduction

Two years have passed since we published our first report on the market expansion services industry in Asia. It is now time to review the predictions and trends we made in that report. It is also an apt moment to analyze the impact of two years of steady global economic recovery on the market expansion services industry, and take a fresh look at what the future holds for the industry in Asia. Asia is firmly establishing itself as one of the most attractive markets in the world. Initially, companies shifted parts of their production to Asia due to the lower factor costs found there. Now, with most Western markets stagnant despite the global economic recovery, the trend is different. Asia is no longer the "extended workbench of the West", but increasingly a crucial sales market for both Western and Asian manufacturers. Combined with decreasing intra-Asian trade barriers and growing regional economic integration, this means that the market expansion services industry in Asia has a bright future.

Like its predecessor, this report focuses on Southeast Asia, Greater China and Northeast Asia (see Figure 1). Together, these regions account for more than USD 16.8 trillion in nominal GDP. This report does not cover Australia, New Zealand, India, North Korea or Southeast Asian countries that are very small in terms of their GDP or population, such as Brunei and East Timor.

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B. Definition, scope and key industries

Definition of market expansion services Market expansion services providers play an important role in helping businesses expand into new geographic areas. They also assist companies who already operate in these areas to develop their operations there further. Typically, they provide a range of market entry and development services, often focusing on primary business processes – in other words, procedures involving close interaction with customers. This focus on primary business processes is also what sets market expansion services apart from traditional forms of outsourcing. These processes include areas such as marketing, sales, logistics and distribution, and customer service and support (see Figure 2).

Market expansion services providers come in different shapes and sizes. In some cases, they offer a standard range of services; in others, they offer highly customized solutions, supporting businesses right along the value chain. The advantage of the latter type of provider is that they also channel valuable information from customers back to the company, allowing the company to optimize its business operations. Market expansion services providers versus single-service contractors The focus of this study is on market expansion services providers. These are companies that develop end-to-end solutions for their clients, covering different parts of the value chain and also managing the interfaces between them, resulting in less complexity and coordination costs. The study does not consider single-service contractors – companies that focus on specific services or parts of the value chain, leaving control of the value chain and management of its interfaces to the client.


Key industries for market expansion services Two main factors drive demand for market expansion services: (i) the need for companies to have a local sales/marketing platform and a capillary network, and (ii) the level of product customization and technical knowledge companies require along the value chain. (i) Need for a local sales/marketing platform and capillary networkThe key driver of demand for market expansion services is the need for companies to have a local sales and marketing platform. Frequently, manufacturers not only find it too expensive and risky to build such a network on their own, they also lack the local knowledge, resources and internal skills needed to do so. Single-service contractors (e.g. pure-play logistics providers) do not offer the range of value-added services required by companies hoping to penetrate markets. Consequently, these companies turn to market expansion services providers, who offer both value-added services and effective sales and logistics networks. The greater the need felt by companies in this area, the more likely they are to work with market expansion services providers. Industries that deal with manufactured goods need a local sales and marketing platform the most. These industries include consumer goods, healthcare and certain engineered products. Other industries do not require such help – industries such as fresh food that is not distributed nationwide, say, or tobacco, where distribution is frequently controlled by the government. We do not look at basic chemicals in this study as they are something of a special case: They are usually sold bulk and without additional services, and have dedicated distribution networks (pipelines, vessels, trains). However, we do look at specialty chemicals such as pesticides, surfactants and food additives. As a rule, these products are sold in low volumes and at high prices. They also require a capillary network and specialized services, including formulation, testing, product innovation and compliance management – making them an interesting target for market expansion services providers. (ii) Level of product customization and technical knowledge Another key driver of demand for market expansion services is the level of product customization and the technical knowledge required along the value chain. Some fields are highly technical or require a high degree of customization – plant engineering, for instance. Companies specializing in these fields must work closely with their customers, so having good customer interfaces is vital.

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In practice, most companies manage the relevant processes in-house, however, resulting in little demand for market expansion services. Accordingly, we do not discuss these industries further in this study. Standard products are different. It is here that market expansion services providers come into their own. Indeed, the more standardized the product, the greater the demand for market expansion services.

C. Market structure and size The industries discussed in this report vary considerably in terms of both their overall market size and their relevance for market expansion services. We look at four specific industries, outlined below. Fast moving consumer goods (FMCG) continues to represent the largest overall source of demand for market services, accounting for sales of around USD 1,144 billion. Demand in this industry varies more between regions than in other industries. Engineered products represent the second largest source of demand for market expansion services. This industry generated sales of more than USD 1,100 billion in 2012 (imported goods only; see Section 4.D). In third place comes the healthcare market (prescription drugs, over-the-counter products and medical devices). Sales in this industry amount to more than USD 300 billion. Finally, we have specialty chemicals. This industry accounts for sales of some USD 177 billion (see Figure 4).


Market sizes vary by region as well as industry. In general, the more strategically relevant a market in terms of its size and growth rate for a manufacturer, the lower the penetration of market expansion services. This is because in large, fast-growing markets, manufacturers tend to invest directly in their own distribution. In terms of total market size, the Greater China region has further strengthened its leading position in Asia since our last report, and now accounts for sales of USD 1,306 billion. Northeast Asia comes a clear second, with sales of USD 1,024 billion. The dominance of these two regions reflects the fact that China and Japan are the two largest single economies among the countries analyzed. Southeast Asia is today the smallest region, mirroring the diverse and fragmented markets in its different countries. Total demand is around USD 420 billion. However – as expected from our comments further above – this is also the region with the highest penetration rate for market expansion services. In terms of penetration rates, it is followed by Greater China and finally Northeast Asia, where many manufacturers prefer to maintain control over much of their value chain. This is especially true for conglomerates, which tend to keep marketing and key account management in-house.

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3. Outlook and trends in the market expansion services industry

A. Growth perspectives in market expansion services

Our forecast for the market remains positive, as in our previous report. Good growth prospects are seen across all the industries analyzed. With forecast growth rates of 7.5% FMCG and healthcare in particular even outperform our previous expectations. On a regional level, Greater China retains its status as the most attractive growth region, with market expansion services growing more than 11% across all industries. Southeast Asia is still in second place, with growth expectations of almost 10% annually in the FMCG market and more than 10% in other industries. The most mature market region, Northeast Asia, has varying growth expectations: just over 1% for FMCG, 3% for healthcare, over 5% for specialty chemicals, and over 8% for engineered products (see Figure 5).


The total compound annual growth rates (CAGR) presented here are based on the two components of growth in the market expansion services industry: (i) expected growth in consumption, and (ii) expected increase in penetration rates for market expansion services. We look at each of these components in turn below. (i) Growth in consumption The general economic outlook in Asia remains positive. This will lead to a continuing rise in consumption across all regions. In Southeast Asia, countries such as Indonesia and the Philippines have potential to become the next "Tiger economies" of the region. At the same time, in Northeast Asia, Japan is showing signs of economic recovery following the 2011 earthquake and tsunami. The slight slowdown in China's expected economic growth does not affect forecast consumption in Asia, as it is countered by China's goal, outlined in the 12th five-year plan, of shifting the country toward more spending-driven growth. The government is supporting this effort with a stimulus package to incentivize consumer spending and boost domestic consumer markets.

Although the economic outlook varies from country to country, growth in consumption across Asia continues to be primarily driven by the expanding middle class. Over the past few years, average disposable incomes have been steadily rising – a trend that looks set to continue. Increasing disposable incomes lead to a two-fold change in consumption patterns: away from necessities and low-cost products, and toward optional and high-quality products. This has a major impact not only on consumer-oriented markets such as FMCG and healthcare products, but also on industrial verticals such as specialty chemicals and engineered products – in other words, the ingredients and machinery needed to produce these products.

Ongoing urbanization in Greater China and Southeast Asia and the aging population particularly in Northeast Asia also continue to drive consumption. These two factors will lead to increased consumption in Asia as a whole. (ii) Increase in penetration rates Asia's growing importance as a market for both Western and Asian products will lead to strong additional demand for market expansion services in the various regions. In addition, Asian manufacturers are expected to increasingly expand their regional footprint, leading to a steady rise in intra-Asian trade and thus demand for market expansion services.

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Equally important still, however, is the ongoing pressure faced by Western manufacturers due to stagnation in their home markets. This pressure is driving them to enter new markets, raise efficiency and focus on core competencies. As a result, they are outsourcing their non-core activities along the value chain, rather than keeping them in-house. The result is increased demand for market expansion services providers – the logic being that it is less complex and consequently more efficient for manufacturers to outsource to one full-service partner than to coordinate various single-service contractors for each step along the value chain.

This trend is supported by the increased number of innovative services offered by market expansion services providers, such as market insights and customer relationship services. This extended service portfolio makes market expansion services providers more attractive to clients, as they are now able to cover even more steps along the value chain.

B. Competitive dynamics

The competitive landscape in the market expansion services industry remains highly fragmented. However, a number of factors are driving consolidation. One such factor is that the distribution industry for market expansion services is becoming increasingly professional in most countries. Manufacturers are striving to become more efficient and effective all the time. This is leading to a greater demand for full-service providers on a regional level. Managing various local partners for different steps along the value chain is simply too complex. This tendency toward regionalization, coupled with general consolidation across all industries in Asian markets, leads us to believe that the market expansion industry will see further consolidation in the coming five years.

Generally, the market expansion services industry can be divided into four different types of service providers:

Pan-Asian cross-industry market expansion services providers: These providers have operations in several countries and also offer their services to companies in several industries. Their value proposition is rooted in their regional coverage and the ability to realize synergies. In this market, they are the only providers that can benefit significantly from economies of scale (e.g. investment possibilities and relationship networking) and offer their clients solutions for an entire region. Since these attributes are difficult to replicate entry barriers are relatively high.


Pan-Asian single-industry market expansion services providers: These providers operate in several geographic markets but only in one specific industry. Their value proposition is their industry specialization coupled with cross-border activities. Especially for industry-focused providers, however, it is very important to achieve a critical mass in each country. Otherwise, an inability to exploit economies of scale will hinder their efficiency.

Local cross-industry market expansion services providers: These providers operate in only one country but cover several industries. They are much smaller than broad-based pan-Asian market expansion services providers and are usually family-run. Their focus is geographically limited due to a lack of regional market knowledge and insufficient financial resources to build up additional infrastructure abroad. Their distinctive value proposition is a strong local foothold and access to local customers.

Local single-industry market expansion services providers: Local niche players act in a single country and provide services in one specific industry. Similar to local cross-industry players they lack regional market knowledge to build up additional infrastructure abroad. Though negligible on an international scale, niche market expansion services providers can still grow to a respectable size in large countries such as China and Japan.

Since our last report, the competitive landscape has not changed dramatically. Among pan-Asian cross-industry market expansion services providers, DKSH continues to be the leading player in terms of transaction value and the sophistication level of services. Other market participants includes Li & Fung Distribution (formerly known as IDS, also appears as LF Asia in some markets), Jebsen & Jessen and the Getz Group. Major pan-Asian market expansion services providers with a single-industry focus remain Zuellig Pharma and Connell Brothers.

As the market expansion services industry is highly diverse, the current trend toward consolidation is expected to pick up further speed. In this context, pan-Asian cross-industry market expansion services providers are best positioned to profit from this development. They have the necessary resources, the capacity to manage bolt-on acquisitions and the ability to take business and people from competing companies. They are also best positioned to benefit from M&A transactions, due to their network and client/customer interfaces.

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4. Market expansion services in different industries

A. Fast moving consumer goods

The FMCG industry produces affordable finished goods that are consumed by the majority of the population. This includes food, drinks, tobacco, as well as non-food products such as household care items, disposable paper products, cosmetics and pet food. Food products account for approximately 45% of the FMCG market. Despite its global brands, the FMCG market is highly fragmented. For many products, it is largely locally driven. Indeed, the ten largest producers of FMCG products – which include giants such as Nestlé, Philip Morris and Procter & Gamble – only make up just over 10% of the global market. Market structure and size Retail in the Asia Pacific region differs fundamentally from the West in terms of its structure. Traditional retail forms such as wet markets and mom-and-pop stores play an important role in the day-to-day purchasing behavior of the region's more than 2.2 billion consumers. Modern retail forms such as supermarkets, hypermarkets and convenience stores are slowly gaining ground, but in most countries the more traditional retail forms continue to dominate. Regional differences are also apparent: In Hong Kong and Singapore, modern retail forms are well established, while in China and most other Southeast Asian markets, traditional retail retains its strong hold on the market. Consumer goods manufacturers have to be able to simultaneously address the requirements of both traditional and modern retail channels. They must cater to modern retailers demanding distribution networks close to Western standards, while still supplying traditional outlets through store-by-store procurement, with specialized marketing and point-of-sale (POS) support.

This two-fold market approach increases the need for intermediaries in the distribution of consumer goods. Local adaptation is required for the entire marketing, sales, distribution, logistics and customer service value chain. Distribution structures must be able to cater to both modern and traditional retail outlets, while achieving the necessary economies of scale. Market expansion services providers in Asia must therefore offer a top-notch local sales and distribution network.


According to our estimates, the current market for market expansion services in the FMCG industry in Asia is around USD 255 billion, representing 22% of the total consumption market. In FMCG, the outsourcing market – and thus the market for market expansion services – is limited by the large share of locally produced and consumed products, such as in the area of bakery foods. It is also restricted by the fact that some products are subject to explicit governmental control in their distribution, such as tobacco and alcohol. Overall, the demand for market expansion services is lower for food products than for non-food products, such as cosmetics and toiletries, the latter tending to be produced and distributed on an international scale (see Figure 6).

The market expansion services landscape in the Asian FMCG segment remains fragmented. There are only very few international players who offer a broad service portfolio across almost the entire geographic region, such as DKSH and Li & Fung Distribution. Most providers still selectively focus on a limited range of standardized services while covering only a smaller sub-region or a single country. As such limited scopes reduce potential efficiency gains for manufacturers, a tendency toward regional, full-service market expansion services providers can be expected. Market outlook and trends The outlook for market expansion services in the FMCG industry over the next five years remains very positive, driven by the continuing rise of the Asian middle class. We therefore reconfirm the prediction made in our previous report that growth will continue. Indeed, growth is likely to outperform our initial expectations, at 7.5% across all regions.

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The strongest growth market is still Greater China, with projected growth rates of 11.4% per annum. We expect Southeast Asia to grow at almost 10%. Northeast Asia is projected to grow at a more stable 1.2%, as Japan shows signs of economic recovery from the 2011 natural disasters. These growth rates are largely driven by the rise in overall consumption. However, they are also driven by the fact that market expansion services are growing faster than the market itself. This is due to the increasing number of manufacturers seeking growth outside the currently sluggish Western economies – not only Western players, but also Asian companies looking to grow in other Asian regions and markets. Companies entering new markets or developing existing ones in Asia face the same problems, whatever their origins. They turn to market expansion services providers to ramp up their market potential while maintaining an efficient cost base.

Forecast changes in the penetration rate of market expansion services range from 0.4% to 1.1% (see Figure 7).

The growth prospects for Greater China and Southeast Asia are particularly good. Key factors here include the rise of the middle class leading to a higher average disposable income, population growth, the trend toward urbanization, and current political developments. For example, the Chinese government's most recent five-year plan foresees stimulus packages with a stronger emphasis on the development of the domestic consumer market. Similarly, the opening up of the Myanmar economy for trade is expected to spur further investment and growth in Southeast Asia.


Spotlight: Luxury timepieces The market for luxury goods in Asia continues to prosper, particularly the

market for luxury timepieces. We estimate the total size of the relevant market for market expansion services to be USD 1.9 billion: USD 1.4 billion in Greater China, USD 0.4 billion in Northeast Asia, and over USD 0.1 billion in the three major markets of Southeast Asia – Malaysia, Singapore and Thailand (see Figure 8).

The outlook for market expansion services in the luxury timepieces segments

is excellent. Growth in this market, which still offers great development potential in volume terms, will be spurred on by the rise of the Asian middle class and the increasing number of small and medium-sized luxury goods manufacturers eager to gain market share in Asia.

Growth rates are particularly high in China; indeed, Chinese demand reaches beyond the country's borders, with Chinese luxury shopping tourism boosting growth across the entire region. Increased demand for value-added services will lead to additional growth in market expansion services above the level of expected growth in consumption (see Figure 9).

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B. Healthcare The healthcare industry includes prescription drugs, over-the-counter (OTC) products and medical devices. Prescription drugs include all licensed pharmaceutical products that are only available with a physician prescription, including both patent-protected and generic drugs. OTC products, by contrast, are available without prescription, and include analgesics, digestive remedies, eye-care products, nutritional products, vitamins, dietary supplements, allergy care products and traditional healthcare products. Prescription drugs and OTC products are typically sold via the same channels in Asia: mostly pharmacies and hospitals. However, the market characteristics of these two segments differ in terms of the regulatory requirements affecting them and their status with regard to government reimbursement, which varies from country to country. Medical devices include consumables (e.g. wound care products and catheters), diagnostic devices (diagnostic instruments and X-ray apparatus), dental products (drills and supplies) and orthopedic, implantable and other devices.


Market structure and size The core competencies of pharmaceutical companies are research and development (R&D), manufacturing, and global marketing and regional market access. Sales competencies vary based on the portfolio size in a country. The level of channel concentration (e.g. sales to a limited number of hospitals) may allow some companies to achieve scale with a smaller turnover. Distribution offers little or no potential for competitive advantage, so pharmaceutical companies – especially Western multinationals – are generally reluctant to invest in this business process. As well, due to the scale issue mentioned above, age of products in the overall portfolio, general lack of company expertise or risk appetite, more pharmaceutical companies are outsourcing parts or all of their sales and marketing activities in addition to their distribution. The distribution of pharmaceutical and OTC products is complex, with challenging standards in terms of lead times, strict requirements in terms of corporate governance, pharmacovigilance (drug safety), the need for deep capillary distribution for some widely used products, and product quality (e.g. good manufacturing practices such as cold chains). Furthermore, Asian markets vary with regard to their regulatory environment, healthcare system, integrity of the healthcare value chain and attitudes toward the protection of intellectual property. Healthcare companies usually lack the capabilities and economies of scale to run an efficient and comprehensive distribution network under such market conditions. Consequently, they look to market expansion services providers who interface with the purchasing customers and achieve economies of scale by bundling product distribution for multiple manufacturers locally for Asia's highly fragmented markets.

Market expansion services providers offer an integrated range of services, typically encompassing regulatory services, customized marketing, sales, and a closed capillary distribution and logistics network with invoicing and customer support. They thus represent a viable means for healthcare companies to access and further grow in Asian markets.

Market expansion services are commonly used by multinational companies, both small and medium-sized enterprises and large firms. Local manufacturers of generic drugs currently make less use of them in terms of sales volume. While local generics play a very important role in overall patient care, accounting for a sizeable share of the total market, premium and transparent capillary services that ensure the integrity of the value chain, offered by market expansion services providers rather suit the high product quality and legal compliance standards required of manufacturers of branded medicines.

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We estimate the overall market for market expansion services in the prescription drugs and OTC products segment to be around USD 138 billion. The dominant region in the Asia Pacific market is Northeast Asia, at USD 74 billion, with Greater China gradually catching up at around USD 52 billion. The market in Southeast Asia is roughly USD 11 billion (see Figure 10).

The penetration rate for market expansion services is lower for medical devices than for prescription drugs and OTC products. Medical devices are technically complex, and manufacturers are less willing to outsource vital steps in the value chain unless they can find a capable partner who can provide these services at the high quality level required. In particular, sales, after sales services and customer support provide valuable feedback from customers, helping manufacturers with their product development. Additionally, economies of scale in sales can be achieved with lower personnel resources due to the channel concentration in the segment – namely larger, more developed hospitals. As a result, they prefer to keep these activities in-house. This being said, as competition grows with the market size, manufacturers are required to differentiate on service, such as better product availability. This demand increasingly leads to manufacturers evaluating aspects of the customer service process being better served by a dedicated market expansion services provider. We estimate that the overall market for market expansion services in the medical device segment in Asia is around USD 12 billion. Northeast Asia dominates the market by far, at USD 7 billion, followed by Greater China at around USD 3 billion, and finally Southeast Asia at USD 1 billion (see Figure 11).


The market expansion services landscape in the Asian healthcare industry remains fragmented. The majority of providers continue to operate in their often large domestic markets with varying scopes of services. Only two market expansion services providers, DKSH and Zuellig, offer both a comprehensive geographic reach in Asia and coverage of all three product categories (prescription drugs, OTC products and medical devices). DKSH is though the only provider to offer customized solutions in a wide range of countries.

Today, the greater part of market expansion services providers in the healthcare industry offer a somewhat standardized service portfolio. However, the industry's dynamic regulatory environment and the increasing level of competition in Asian healthcare markets are leading to rising demand for customized service solutions. Market outlook and trends Overall, we expect Asia to continue to see very attractive growth rates over the next five years. Steadily increasing government health expenditure across the region (driving the whole market) and the growing middle class (driving OTC and all privately funded healthcare products) ensure that Asia's healthcare market remains the fastest-growing in the world. Additional growth expected in the prescription drugs segment in coming years will be counterbalanced by increased price pressure. In line with global trends, Asian governments are driving overall therapeutic pricing standards and generic drug usage, leading to stronger competition from generic drug manufacturers. Hence, countries with highly reimbursed healthcare will see a stronger impact on overall value growth, while volume growth will persist.

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Overall, the outlook for the next five years is positive, in line with the forecast in our 2011 report (see Figure 12).

We expect to see further growth in the OTC product segment, driven by the increase in disposable income in Asia and Chinese efforts to develop domestic consumer markets. New segments such as traditional Chinese medicine will further boost projected growth rates.


In both the prescription drug and OTC product segments, we expect the complex regulatory environment in Asia to drive demand for value-added services along the value chain (e.g. regulatory support, repacking, relabeling and customized inventory management). At the same time, the increase in intra-Asian trade means a shift of demand toward regional market expansion services providers, leading to further consolidation in the industry.

C. Specialty chemicals

The specialty chemicals industry supplies the manufacturers of consumer, industrial and healthcare products with the ingredients they need. Specialty chemicals differ from commodity chemicals: They are bought in lower volumes, at higher prices and involve a higher level of customization. As a result – and unlike commodity chemicals – they also need extra services such as product innovation and formulation. These services are provided by market expansion services providers.

A broad range of industries make use of specialty chemicals. The biggest segments are electronic chemicals, surfactants, construction chemicals, pesticides and specialty polymers, which together make up around 40% of the market. Compared to commodity chemicals, specialty chemicals require less capital expenditure and involve higher switching costs for customers. These factors generally make it more attractive than the commodity chemical segment, but at the same time they mean that manufacturers have to target a highly diverse market. The specialty chemicals industry has seen some consolidation in recent years, but it remains fairly fragmented. Price pressure has risen, the result of industry overcapacity and shifts of production to low-cost Asian countries. These factors have led to manufacturers increasingly relying on market expansion services providers for support. Market structure and size The manufacturers of specialty chemicals continue to face a challenging environment in Asia. As in other parts of the world, specialty chemicals companies make extensive use of third-party providers for sales, marketing and distribution to small and medium-sized customer companies. However, key accounts such as large multinationals are managed in-house in most cases, due to the importance of these relationships.

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Demand for market expansion services in the specialty chemicals industry is therefore largely based on the existence of a large number of small customers. Most companies lack the critical mass to efficiently serve these customers directly. This fact, together with the complex regulatory environments in Asia and the often crucial role of market expansion services providers in single sourcing on behalf of manufacturers and customers, creates a high level of demand for market expansion services.

We estimate the current size of the market for market expansion services in Asia to be almost USD 19 billion, with Greater China accounting for the largest share, at over USD 10 billion. Northeast Asia represents a market of USD 6.5 billion, and Southeast Asia a market of USD 1.8 billion (see Figure 14).

The competitive environment in market expansion services in the specialty chemicals industry is highly fragmented, with more than 1,500 distributors. The only international players that operate across the entire region are DKSH and Connell Brothers. While most providers currently focus their services on selling individual products, cross-regional market expansion services providers are increasingly centering their portfolios around solutions. Market outlook and trends The market for market expansion services is driven by two factors: a positive outlook in terms of demand for the industry's products, and growing demand for market expansion services by companies. Estimated annual growth in the penetration of market expansion services will be 0.6% in Northeast Asia and 1.3% in Greater China and Southeast Asia (see Figure 15).


We can also observe a trend away from local single-service contractors (e.g. pure-play logistics providers and traditional distribution providers) and toward regional market expansion services providers. This development is triggered by a desire for increased professionalization in the distribution process on the part of specialty chemical manufacturers. Greater competition and the resulting price and cost pressure mean that manufacturers have to become more efficient. In response, they are turning more and more to market expansion services providers who provide integrated services rather than single-service contractors for each step along the value chain.

D. Engineered products We define engineered products as long-lifecycle items used in the industrial development and production of goods. These items include industrial apparatus and equipment (e.g. photovoltaic equipment, analytical instruments, life science instruments and environmental technology), power generation machinery (engines, motors, small generators) and industrial machinery (food processing machines, handling equipment, textile machines, machine tools). We exclude plant engineering from our investigation, as these products are highly customized and generally developed on a project-by-project basis, leaving little scope for market expansion services.

The market for market expansion services in the engineered products industry is highly granular. Most of the industry is highly specialized and the technological requirements depend strongly on the client's industry and the specific application. What all engineered products have in common, however, is their long lifecycle, coupled with a very high level of product customization and the need for after sales service support.

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The industry landscape is highly fragmented. Multinationals such as General Electric, Siemens and ABB dominate certain segments. Even here, however, they compete with many smaller companies specializing in specific technologies or applications. The core competencies of manufacturers lie in R&D and production. However, with increasing competition and dwindling margins, companies are increasingly looking to after sales services as a solution. These services have gained considerably in importance over the last decade. Market structure and size As the world's manufacturing powerhouse, Asia enjoys great demand for engineered products. This is reflected in its total market size: almost USD 1,122 billion in imports in 2012. Nevertheless, the overall penetration rate for market expansion services remains low, at just 9%. Most manufacturers facing the challenge of gaining access to local customers still rely on single-service contractors, such as exclusive sales agents. At the same time, the increased importance of after sales services and the ongoing professionalization of distribution – favoring integrated service solutions – imply a shift toward market expansion services providers in the industry. We expect the size of the market for market expansion services in 2012 to be USD 22 billion in Southeast Asia, approaching USD 65 billion in Greater China and USD 18.5 billion in Northeast Asia. The total forecast market size is based on import quotas for the individual countries, assuming that only foreign companies make use of market expansion services providers. We assume that local players generally use their own resources or local companies to supply their domestic markets (see Figure 16).


Engineered products show the lowest penetration rate for market expansion services of the four industries examined in this study. Large companies do not tend to use third parties for market-related functions (with the exception of logistics), while highly specialized small and medium-sized manufacturers tend to rely on an integrated market approach. Few market expansion services providers actually offer specialized expertise in the industry. Added to this is the fact that some companies prefer to carry out after sales support in-house, as this is where much of the added value lies. Still, with companies increasingly focusing on their core competences rather than market-based activities for which they lack the necessary local knowledge, resources and internal skills, we see major potential for market expansion services providers in this industry. The competitive landscape of market expansion services in the engineered products industry in Asia remains very fragmented. Most local players compete in selected niche markets, operating in only one or two countries. Additionally, Japanese trading houses (keiretsu) provide market expansion services to domestic manufacturers, while some providers focus on Chinese products only. Finally, there are only few market expansion services providers that operate in the entire region or at least in large sub-regions, with DKSH playing the leading role in this peer group.

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Market outlook and trends In the next five years, we expect to see an ongoing shift from single-service contractors toward market expansion services providers. This will be accompanied by further market consolidation among both single-service contractors and market expansion services providers. In terms of import growth, we expect to see a partial shift from Greater China to Southeast Asia. This will be due to the slightly weaker increase in industrial growth in China and the continued above-average economic growth of many Southeast Asian countries. Thus, we expect imports to grow at an annual rate of over 11% in Southeast Asia and Greater China, and around 8% in Northeast Asia. The improved growth rate in Northeast Asia is due to two main factors. On the one hand, we have the expected recovery from the catastrophe that struck the Japanese manufacturing industry and the high level of demand from rebuilding activities. On the other, we will see a strong increase in demand due to the high personnel costs for sales and services staff, making outsourcing a more lucrative and effective solution for both Western and Asian manufacturers keen to boost efficiency.

The penetration rate for market expansion services is set to grow by an estimated 1.5%. This growth rate reflects the trends discussed above and is well above the growth rates expected in the other three industries analyzed in this study (see Figure 17).


Appendix – Detailed tables at country level

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Methodology

For the purposes of this study, Roland Berger Strategy Consultants developed a market model that covers four main industries (including over 70 sub-industries and segments) in 14 Asian countries. The model provides a market outlook through 2017. 1) Market sizing The market model is based on industry-specific data and reports from leading institutes in the industries covered. For each industry, we talked to experts about which data source best fits our purposes. Wherever possible, Roland Berger Strategy Consultants based its analysis on one source only per industry. This was done to make the results across different countries as reliably comparable as possible. For some industries (such as specialty chemicals) and some countries (especially peripheral countries such as Cambodia, Laos and Myanmar), however, the chosen data source did not provide all the information required. In these cases, the missing data was either retrieved from additional leading data sources or modeled from the best available proxies, using regression analysis based on the available data set (e.g. GDP for consumer goods, national health expenditure for medical devices, etc.). Macroeconomic data such as GDP figures and national health expenditure were retrieved from sources in the public domain (e.g. UNCTAD, Worldbank, IMF, WHO and national offices of statistics). Figure 18 provides a detailed overview of the most important sources:

2) Market breakdown After calculating the size of each market based on the total consumption/investment market, Roland Berger Strategy Consultants estimated the size of the market for relevant market expansion services in a multi-stage approach (see Figure 18). The input for this step-by-step market breakdown conducted in the course of the preparation of the initial report in 2011 was a combination of (quantitative) market data and (qualitative and quantitative) expert opinions.


3) Market projection Our market projections distinguish between forecasts of market demand per se and forecasts of how the penetration rate for market expansion services will develop. All our market projections are reported in current prices and based on fixed exchange rates (base: 2012). Where available, future projections (for the demand side) were taken directly from market databases published by the relevant research institutes (e.g. Euromonitor).

Where these leading sources did not provide the data needed for specific segments or industries, future data was modeled based on the best available macroeconomic proxies. 4) Validation To validate the assumptions underpinning the market model and the company-specific data, Roland Berger Strategy Consultants originally conducted more than 100 interviews with industry leaders, experts and representatives of the academic community.

Further validation of the current update occurred by means of additional interviews with various general experts on market expansion services and the Asia Pacific markets.

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5) Restrictions As with any model, forecasting methodology or competitive analysis, our analysis tool is subject to certain limitations. For the methodology described above, the most important restrictions are as follows: > Market size: The market sizes are based on market data from leading institutes. As explained above, incomplete data was modeled on the basis of the best available proxies. However, the market sizes modeled are only approximations and may differ from actual market sizes. > Market breakdown: The market breakdown is the result of our analysis of quantitative and qualitative information consolidated from market reports and interviews with experts. Qualitative information is necessary for a realistic market breakdown. By consequence, however, estimates are inherent in the methodology, resulting in best approximations that may again differ from actual market sizes.

> Market forecasts: The market forecasts are projections of the future and can never fully take account of all eventualities. They remain predictions – nothing more, nothing less. It follows that any unpredictable events that impact economic developments cannot be mirrored in such forecasts. The forecasts made in this report incorporate expected future market trends based on the information available at the time of quantification. Certain deviations are to be expected. Despite these significant restrictions, we are convinced that our analysis presents a true and fair picture of the markets analyzed.


Authors

Beatrix Morath Managing Partner Roland Berger Strategy Consultants in Switzerland

Alex Stöckl Senior Consultant at Roland Berger Strategy Consultants

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Disclaimer

To create transparency in an industry not yet researched by any independent analysis, this report, commissioned by DKSH, has been prepared by Roland Berger AG on a neutral, objective, and independent basis. This present report is provided by Roland Berger AG for information purposes only. Each recipient should conduct its own analysis of the information contained in this report. No recipient is entitled to rely on the work of Roland Berger AG in this report for any purpose. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report. To the extent permitted by law, Roland Berger AG, its members, employees and agents accept no liability, and disclaim all responsibility for the consequences of the recipient or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it.

Any estimates or projections of future economic performance are influenced by numerous factors that may impact the various components of the estimates or projections. Although Roland Berger AG exercises reasonable care when making forecasts or predictions, factors in the process, such as market behavior, are inherently uncertain. As such, future events may not unfold as expected and actual results achieved for the forecast periods covered may vary from the information presented. Any estimates or projections will only take into account information available to Roland Berger AG up to the date of delivery of this report, hence, findings may be affected by new developments. Accordingly, we do not guarantee that any outcome presented in this report will be achieved. Further, events may have occurred since we prepared this report which may affect it and its findings.

Roland Berger AG has indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within this report.

Roland Berger AG is under no obligation in any circumstances to update this report, in either oral or written form, for events occurring after the report has been issued in final form.

The recipient must not reproduce, disclose or distribute the information herein without the express prior written consent of Roland Berger AG.


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