With the U.S. Defense Department cutting its budget — and additional automatic defense cuts well on their way — defense companies large and small are looking with increasing hope at the lucrative Asia-Pacific market for new business. Shown is a Boeing 747. (AFP)
TAIPEI — With the U.S. Defense Department cutting its budget — and additional automatic defense cuts well on their way — defense companies large and small are looking with increasing hope at the lucrative Asia-Pacific market for new business.
But for all its promise, the Asian market, with its ancient traditions and complex relationships, can be baffling for U.S. executives.
And time is of the essence. As U.S. budgets are cut, opportunities abound in Asia, particularly in naval procurements as tensions ratchet up over island disputes in the East China Sea and South China Sea.
Defense News asked industry experts with decades of experience in Asia to provide insight on avoiding simple mistakes that damage business prospects.
The greatest opportunities are in Japan and South Korea, which are considered to be among the top five projected naval spenders in the next 20 years, said Bob Nugent, vice president of AMI International, a U.S.-based naval advisory group.
“So there are still more — more valuable, more realistic — opportunities in the Asia-Pacific naval market than any others,” he said.
And yet there are pitfalls. The Far East has a sophisticated culture that predates others’ by thousands of years and “because of the relatively recent ascendancy of the Western culture, too many Westerners succumb to arrogance and are dismissive of the values and practices of the customer,” said Tony Ennis, formerly based in Tokyo where, until recently, he was the regional president for a major defense company. His agreement with the company bars him from naming it for six months.
Know Cultural, Business Practices
In East Asia, guanxi (“relationships”) and diulian (“to lose face”) are critical elements of doing business in Confucian societies.
Guanxi describes the importance of personal networks of influence. This means spending less time in the boardroom and more time on the golf course, dining in restaurants, drinking in bars and hanging out in karaoke lounges.
These societies also pay higher respect to elders and are more willing to deal with an older man than a woman. This does not fit into America’s politically correct view of how the world should work, but “you are not in Kansas anymore,” one U.S. defense industry source said.
The same applies to Muslim countries such as Indonesia and Malaysia. “You just can’t send a woman to represent your company. They’ll ignore her,” he added.
Lance Gatling of Nexial Research, a defense consultancy in Tokyo, warned: “In some countries, relationships provide opportunities. In others, opportunities provide relationships. In others, it is strictly business. Don’t get them mixed up.”
Diulian — or “lose face” — describes the unforgiveable sin of hurting someone’s prestige, honor or reputation.
Refusing to eat the local delicacies insults the host. Dining is considered part of building a business relationship in Asia.
Sometimes your host will “mischievously test your mettle,” Ennis said. “Here you get to eat animals you would not normally consider part of the food chain and parts of animals that clearly indicate a determination to avoid waste. … I confess to a certain level of discomfort when asked to eat a living lobster.”
Expect to spend the first business meeting listening, drinking gallons of tea, and not promoting your product, sources said.
“There is an arrogance amongst Americans coming here with the attitude that ‘I’m an American company. America has all the answers,’” a U.S. defense industry source here said. “Do not criticize anyone. In Asia, they have a saying, ‘You point one finger at me, but four at yourself.’”
Gatling said there’s value in being quiet.
“Silence in some cultures is a time to reflect, digest what has been said. Americans hate silence and will generally say anything, appropriately or not, to ‘break the silence,’” he said.
There is no “one size fits all” strategy that works in Asia, said Bruce Lemkin, former U.S. Air Force deputy undersecretary for international affairs.
“All too often, U.S. companies think of Asia as a homogeneous entity,” he said. “Every approach must be shaped by history, culture, situation, etc., of the individual country.”
All sources warned that companies should watch the lunar calendar for holidays, such as Chinese New Year and Ghost Month, which can sabotage your chances.
“Traveling at your convenience versus the customers’ convenience,” is a mistake, Gatling said.
Another problem is language. “The more the marketing country can provide information papers and PowerPoint presentations in the country’s language the better,” said former Pentagon official Ed Ross, president of EWRoss International, a defense industry consultancy.
Providing product briefings to local defense magazines in the native language can be a cheap and helpful way to push the product. Imagine a Japanese car company giving a Japanese-language PowerPoint presentation to American auto industry journalists, and then you see the problem.
Understand Local Procurement Rules
“Working without understanding the least about the different national procurement systems and laws” will destroy any chance you have, said Nexial’s Gatling. A lack of understanding of how the system works “leads to fuzzy understanding of the situation back at the home office.”
The first “land mine is long timelines,” said Mark Stokes, a former Pentagon official with the Project 2049 Institute, a Washington-based think tank focusing on China. “Companies are often disappointed by how long it takes to sell something.”
It can take an Asian customer up to a year to trust you, said a defense industry source, “so patience is a virtue.”
Business in the Far East is between people, which makes trust critical, Ennis said. “Permanence, loyalty and stability engender trust, and corporations or individuals that are in constant change make the establishment of relationships challenging.”
Ennis added that the Western approach to procurement is to dehumanize the decision-making process, but the Eastern approach to business traditionally allows the “customer to look into your soul to determine if you can be trusted to deliver what you say you will and, if you fail on your commitments, how honest and honorable will you be in the resolution of the problem.”
As in most areas of the world — and increasingly so — partnering with local industry is mandatory, said Lemkin, a former U.S. Air Force official who heads his own consulting firm, Lemkin International.
One defense industry source said South Korea “demands localization of manufacturing” and in Japan “there are intricate offsets requirements that must be met.”
“Technology transfer is an increasingly important and challenging matter,” Lemkin said. “For a U.S. company, my advice is always talk with the relevant U.S. government entities before spending lots of time and effort on a program that may never be approved.”
This means contacting the Armaments Cooperation Section of the Office of Defense Cooperation within the local U.S. Embassy. One should also consult with the U.S. Defense Security Cooperation Agency and the U.S. State Department’s Directorate of Defense Trade Controls.
In individual countries you might not meet a local defense official until the middle stages of a sale.
In some countries, you are required to hire a local agency to represent your product to the military. Picking the right one can be difficult, said Ross, the defense consultant.
And conducting the proper due diligence on agents is critical. In Taiwan, some agents have been arrested for working for Chinese intelligence. It is not unusual to discover the agent is a staff member of the legislature’s defense committee, or worse, a member of a local organized crime outfit, such as the Chinese Triads or Japanese Yakuza.
One U.S. defense executive was blunter: “Don’t be afraid to fire your local agent if you feel uncomfortable.”
Providing financing for the deal is crucial in some cases.
Nexter, the French land weapons maker, in July signed a 108 million euro ($140 million) contract to supply 34 Caesar cannons to Indonesia. For the deal to go ahead, French banks must draw up a bank loan for 85 percent of the purchase amount, with the financing to be provided to the Indonesian Finance Ministry in April, a company executive said.
Know Corruption Laws
All U.S. companies doing business in Asia should be fully aware of the Foreign Corrupt Practices Act, as well as local laws governing corruption, Ross said.
But what is illegal in the U.S. could be legal in certain Asian countries. These include expensive gifts, even cash and golf memberships, and hiring relatives as ghost employees.
Another U.S. source said a deal with Taiwan’s military-run Chungshan Institute of Science and Technology (CSIST) was lost when a European competitor paid off a government official.
“Everything was going great, but the spec requirements were written for exactly what the European company offered. We lost the competition over a $35,000 bribe,” he said. A Taiwan Ministry of National Defense official denies there is corruption in the military or at CSIST.
One U.S. defense industry source said a contract was lost in Indonesia after the customer requested the company procure an expensive sport utility vehicle for his daughter studying in Boston. The company refused, but the European competitor did not dither. A photograph of the customer’s daughter in her new vehicle was included in the letter announcing the winner of the competition.
“Corruption is a significant issue in some, but not every country,” Lemkin said. “A company must go into the country with eyes wide open and fully ensure that they are not ensnared in a web from which there may be no means of extrication.”
In France, the perception is that the influence that can secure an arms order is conducted at government-to-government rather than at the company level, said a lawyer based in Paris. “The state is a gray area,” a lawyer said.
From a European point of view, there are many ways the U.S. can take care of the client country without endangering the company, he said.
Aid foundations are seen as a means to sway opinion. A typical example given by European executives is a U.S. foundation granting a three-year Harvard scholarship to a general’s daughter, the lawyer said.
European companies claim they do not have similar official state measures backing them and lack government involvement in their sales efforts, putting them at a disadvantage to U.S. competitors.
“They have to cope with that themselves,” the lawyer said.
Pierre Tran in Paris contributed to this report.