Managing Director Brian Sheley discusses opportunities and risks associated with footwear sourcing in Cambodia and Indonesia with members of the Footwear Distributors and Retailers of America. (December 10, 2013)
2. Cascade Asia Advisors is a boutique research
and strategic advisory firm focused on
Southeast Asia.
KEY SERVICES
Research & Analysis | Strategic Advisory
Due diligence
Bespoke research
Supply chain reliability
analysis
Local market intelligence
Policy & regulatory
assessment
Political risk analysis
Market entry & establishment
strategy design
Corporate positioning
Government mapping &
relations
CSR strategy
Issues management
3. 92% of our analysts have
advanced degrees
We speak 10 Southeast
Asian languages
66% of our clients are from
the private sector though we
serve public sector clients as
well.
4. Why are you on this call today?
You may be in one of a few different scenarios:
1.You are new to Southeast Asia and are evaluating procurement options or the
end market potential for your brand(s);
2.You are already sourcing in the region and are looking to re-evaluate an
existing sourcing relationship;
3.Southeast Asia is an end market for you and you are evaluating how you will
get your products to market (distributor or JV).
7. zzzzIndonesia’s comparative advantage
Source: BPS, BCG Population and Household Expenditure Database 2012; BCG analysis
250million
Jakarta
201220122012
2020
74
141
million
million
2012
2020
10. zzzzIndonesia’s Macroeconomic Outlook
Source: Bloomberg, Cascade Asia
BI Scales Back FX-Market Intervention After Admitting
IDR’s New Equilibrium Closer to 11,500 ($ mil., left axis)
Growth Momentum Slows Before Future Pick-Up
as Domestic Imbalances Correct Themselves
12. Near-term political outlook
Q4 Q1 Q2 Q3 Q4
2013 2014
Q4
2013
•Negative
investment
list being
finalized
Negative
investment list
likely to be
announced
•April:
Parliamentary
election held
•Mid-July:
Presidential
election to be
held
•September:
Presidential
run-off
election (if
needed)
•October: New
president’s
term begins
13. Near-term political outlook
Joko Widodo “Jokowi”
Pros: Reformer, clean, result
focused, pro-business, non-
elite, earning trust
Cons: New to national stage
Megawati Soekarnoputri
Pros: Would likely choose
Jokowi as running mate
Cons: Traditional elite/patron,
lacks natural leadership
qualities
Prabowo Subianto
Pros: Decisive
Cons: Controversial former
general, businessman with
vested interests
Source: CSIS (Indonesia)
Cascade Asia assessment
14. 2014 wage debate summarized
Source: http://bit.ly/16bMIES
Environment
•High inflation
•Invigorated labor groups
•Nationalistic leaning policy making
•Outgoing president & looming elections
= Most dramatic wage negotiations in recent
history
Developments
•Some foreign manufacturers have threatened to
leave
•Some companies have been bypassing government
through “outsourcing”
•Regulation issued which defines outsourcing as
“supporting services or activities that are not
directly related to the main production
process” Ministry of Manpower and Transmigration Regulation 19, Section 17(2)
•Protests continue
15. Labor cost comparison
Firing costs (in weeks of salary) Monthly base salary (factory workers)
Source: World Economic Forum, Wall Street Journal
17. Indonesia’s footwear industry
Source: UBS, UN, Economic Complexity Observatory, MIT Media Lab and the Center for International Development at Harvard University, A.T. Kearney
Global Retail Development Index.
23. zzzzCurrent macroeconomic backdrop
Source: Trading Economics, Australia Department of Foreign Affairs and Trade
Cambodia’s principal export destinations, 2012
1.United States 25.9%
2.Hong Kong 21.5%
3.Singapore 8.7%
25. Source: World Bank
Cambodia: Infrastructure
• Main roads in all provinces where
garment factories are located
• Two antiquated railway lines that
run through six of the 11 provinces
with garment factories
• Two major ports (Phnom Penh &
Sihanoukville) & one minor port
(Koh Kong)
• Three international airports & five
local airports
26. Source: ADB
Infrastructure development projects
• A US$142m railway project is underway
• 93% of the southern line is complete,
and trains are operating between
Phnom Penh and Sihanoukville Port.
• Will link Cambodia to the Trans-Asian
Railway Network
27. Leader Hun Sen Sam Rainsy
Party Cambodia
People’s Party
(CPP)
Cambodian
National Rescue
Party (CNRP)
Seats 2008 90 29
Seats won 2013 68 55
Seat change - 22 + 26
• CPP’s Hun Sen re-elected as Prime
Minister
• More evenly balanced National
Assembly
• CNRP disputes election results
and boycotts National Assembly
• Possibility exists for the political
impasse to have positive impacts
• Impasse likely to be resolved by the
CPP allowing for more balance of
power in the National Assembly and
reforms
Political outlook
2013 National Assembly Election Results
28. 2014 wage debate summarized
Environment
•Political impasse
•Unprecedented labor unrest
•Labor unions pushing for US$150/mo
•Violent clashes between protestors and
police
•Recent factory accident and looming safety
concerns
Developments
•Representatives from the labor ministry,
factory owners and workers unions are
negotiating a new minimum wage for 2014
•Wage hikes in January are imminent
29. Labor cost comparison
Firing costs (in weeks of salary) Monthly base salary (factory workers)
Source: World Economic Forum, Wall Street Journal
31. Cambodia’s footwear industry
Source: UBS, UN, Economic Complexity Observatory, MIT Media Lab and the Center for International
Development at Harvard University, A.T. Kearney Global Retail Development Index.
32. Summary – Cambodia
Opportunities
•Extensive garment industry ecosystem
•World-class labor standards
•Connectedness and proximity to global port in BKK
•Strong economic growth outlook
Risks
•Wage negotiations
•Safety compliance
•Continued political impasse
33. Preventable missteps
• Being caught in a bad business relationship/missing out on a great business
relationship
• Relying too heavily on a local partner
• Being caught off-guard by: a policy that inhibits your operations, protests,
changed or new regulations, negative press, responding to a bribe, etc
• Viewing IP violations as a cost of doing business
• Failure to have include your perspective in on a draft regulation
• Being caught in a responsive cycle vs. capturing strategic opportunities
• Not clearly understanding where your brand(s) fits in
• Failure to fully appreciate the competitiveness of local players
34. 10 questions to which you need
answers for these markets
1. How will you ensure that your due diligence is sufficiently rigorous for these
markets? OR When was the last time you’ve evaluated your local partner?
2. Where does your brand fit in in Cambodia? In Indonesia?
3. What early warning systems do you have in place for (local and national level)
policies?
4. What system do you have in place today to monitor the media (local and
national)?
5. What is your strategy for responding to IP violations?
6. How are you monitoring ancillary industries?
7. What system do you have in place for teasing out opportunities?
8. Who are your key stakeholders and how are you nurturing relationships with
them?
9. What is your positioning strategy?
10. What are your greatest compliance risks and how are you measuring and
mitigating them?
35. Q & A
t/ 1.360.358.3094
e/ bsheley@cascadeasia.com
www.cascadeasia.com