This article examines a specific part of the Asian economic landscape.

The following article drills down into the details of the Asia ex-Japan business world. This commentary is from Elizabeth Soon, portfolio manager, Asia ex-Japan small cap equities, PineBridge Investments. The views are those of the author and not necessarily endorsed by this publication. The editors here invite readers to respond.

The wheel of fortune has turned and turned again for the original equipment manufacturers (OEMs) that, three decades ago, drove the spectacular growth of Southeast Asia’s “dragon” economies.

So strongly have their once-flagging prospects revived that it is no exaggeration to note that the largest, strongest and best-managed OEMs, as well as supplying the components and finished goods that underpin the world’s best-known brands, have in effect become brands in their own right.

How this has happened makes up a fascinating case study in the ebb and flow of commercial advantage in a globalised era. It also illustrates the dramatic changes wrought by the financial crisis that struck in 2008.

The story begins in the 1980s, when the manufacturing OEMs were the biggest and most significant of the foreign direct investments that transformed the economic landscape of the region and drew admiring observers from round the world, eager to learn the lessons of success.

It was the OEMs that gave Southeast Asia the capacity and expertise in sectors such as electronics, textiles and car parts that were to become hallmarks of its spectacular economic rise to prominence.

But the appearance of low-cost Chinese competition in the run-up to the millennium and beyond chilled the climate for the OEMs. With a rigorous focus on business expenses, their customers, major multinational corporations, gravitated towards their Chinese competitors. In this colder climate, it made decreasing sense for the OEMs to invest in what was progressively turning into a low-margin business.

All that changed in 2008, and within a short space of time, low cost was not the only factor weighing on the minds of those running multinational corporations. In a new, highly uncertain business climate, with much of the world mired in what would become known as the Great Recession, these companies could no longer confidently order two to three months ahead.

With volatile demand and a clouded outlook, the multinational corporations shortened their order times dramatically, to just two or three weeks. In very many cases, the smaller, low-cost manufacturers that had given the OEMs such a run for their money could not meet these new, much shorter deadlines. They did not have the cash or the versatility to turn around the orders within the new timescales.

Certain OEMs that tended to be the larger, more efficient and better capitalised could thrive in the tough, demanding business environment by giving the multinational corporations what they wanted.

Unsurprisingly, they have not only clawed back market share in the last seven years but a number have become so large that they can plausibly be described as “branded OEMs”.

Nor is their size the only measure of their importance in the post-crisis world. Far from being mere contractors, the “branded OEMs” are, increasingly, in partnership with their multinational customers, involved in strategy, planning, innovation, product quality and product development. 

Helping the process along is a new focus by Chinese companies on brand building, with heavy investment in innovation and research and development in the hope of creating premium products that will be able to command higher margins. 

Furthermore, Asian companies have led the way in a recent wave of mergers and acquisitions in which brand names have been consolidated, such as Lenovo’s takeover of IBM’s PC business five years ago and another Chinese company, TCL Corporation, emerging as the dominant partner in a joint television-manufacturing venture with France’s Thomson SA.

An additional source of impetus for “branded OEMs” is the growth of genuine brands in the emerging markets, such as Tata in India and Geely in China. Considering that it took 40 years to build trust in Japanese brands such as Nissan and Panasonic, but just 20 years for Korean names such as Samsung, LG and Hyundai to become established, it is clear that gestation periods are shortening.

Tomorrow’s top names will certainly be hoping so, and seem likely to strive for rapid brand-building by outsourcing production to reliable OEMs. One powerful example to follow is that of Fast Retailing, the Japan-listed parent of casual-wear designer Uniqlo, which has outsourced its garment manufacturing to a listed producer company and seen profits rise by more than 1.5 times over four years.

This producer firm, in turn, has prospered, helped by other outsourcing contracts from the likes of Nike and Adidas. 

Meanwhile, the region is not standing still; the proposed 12-nation Trans Pacific Partnership raises the prospect of a huge, US-led free-trade area. This, in turn, seems likely to accentuate the trend for increased domestic consumption across the region, with burgeoning middle classes eager for branded goods.

Those companies that can position themselves to work alongside the owners of the new brand names, who can deliver both cost efficiency and reliable, high-quality production, will be well placed to join the ranks of the industry elite, the “branded OEMs”.