Episode 19: Stuart Witchell - Strategic Business Intelligence in Asia
BRG Managing Director Stuart Witchell talks about his work in the Asia-Pacific (APAC) region. Discussion includes how investments in Asia have changed over the years, the markets where foreign investment is having the largest impact, and the potential ways corruption may affect how companies do business in the region.
Stuart, thanks so much for joining us here today on the Thinkset Podcast. How are you?
Very well, thank you. Good morning.
Yeah. Good morning for you, and good evening for me. This might be our first recording where somebody's, quite literally, one day ahead of the other. And the reason for that is you're actually in Asia. You've been working in Asia for more than 20 years now and recently helped establish BRG's Asia-Pacific offices. I wanted to start by talking a little bit about the work that you've done over there and how it's changed over the years.
Yeah. Sure. So as you mentioned, I've been working in this region actually for nearly 25 years. I started my career as a diplomat with the British government, so I was sent over to Asia-Pacific with the government. And the remainder of my time, the last 18 years or so, has been working in the business intelligence investigative sector. And I think over the last 18 years or so, I think a major impact on our work has predominantly been increased regulation for our clients. And that's, obviously, resulted in a somewhat increased level of work based on the strengthening of regulation, not only in the US but in other jurisdictions including within Asia-Pacific. How does that particularly impact our work? We're increasingly being asked to do a higher level of due diligence as it relates to investments into businesses or looking at business partners or third parties, particularly in the supply chain, being undertaken much more seriously. It has also resulted in a significant uptick in internal investigations, particularly bribery and corruption related. Some clients have, obviously, particularly over the last decade or so developed quite sophisticated whistle-blower programs. And clearly, as a result of those, more allegations are coming to light. Additionally, I think I've seen a shift of some clients from dependence on China, particularly manufacturing firms, to more investments into Southeast Asia and India in recent years. And I think with the recent US-China trade war, some clients have accelerated their plans are asking BRG to conduct more market entry, stakeholder mapping type exercises around the region and beyond the region, actually. And I think, lastly, sort of improvements in technology. Obviously, that has an impact on every business, but I think for BRG, it's allowed us to more systematically and effectively analyze data whether that be for due diligence exercise or for a large-scale internal investigation for a client. The Asia-Pacific market is extremely important for BRG. And we've expanded in the region, opening offices in Hong Kong, Beijing, Tokyo, Mumbai, Singapore, and Sydney in Australia.
Wow, so there's definitely a lot to unpack there. First, I want to go back to the beginning if I could. You originally came to the region as a diplomat with the British government. What was it about the region that originally attracted you?
So I had other postings before with the British government, but I was always very keen, actually, to go to Japan. I was interested in martial arts at that time when I was a much younger man, that was my first choice and I spent five years at the British Embassy in Tokyo.
And then just enjoyed yourself enough that you decided that you wanted to get into the private sector in that area. What did that transition look like at the time?
Yeah. So obviously, I had an opportunity to stay in Japan and to support another consulting firm to establish its risk mitigation business in Japan for it, which I thought was an interesting challenge and allowed me to stay in the country which I really enjoyed working in. And I think, particularly this region, professionally is very rewarding because, inevitably, there are lots of issues that the environment that we operate in is not particularly transparent for our clients, whether that be political transparency or even, in some cases, the legal system doesn't work particularly well. That was a great challenge for me as well, actually, and hence, I decided to stay in this region.
Picking up on that, right now, there's obviously a lot going on in the news. As you mentioned the trade war between US and China, while some people concede the negative connotations of that, I know many investors look at things like that, and they see opportunity. Sitting where you are now, where are some of the spots and sectors that you believe are ripe for investment into 2019 and going forward?
Yeah, absolutely. Well, obviously, there are very, very many actually. This is obviously-- Asia at the moment is certainly a growth area compared to other parts of the world. But it's being referenced to looking somewhat like Europe at the turn of the 20th century, actually. So I think there are probably two fundamental factors that are going to drive opportunities into next year and the decade beyond next year. One is the region is awash with capital, particularly private equity capital. And secondly, with a few exceptions of jurisdictions that are highly developed such as Japan, South Korea, Hong Kong, and Singapore, most of the region are, in fact, decades behind the more mature economies such as North America and Europe. And there are large chunks of those economies that are waiting to be modernized, whether that be ports, railways, roads, to the more systematic socioeconomic aspects such as insurance, financial services, and technology. So many, many opportunities in this region.
A key one is actually healthcare. Healthcare, particularly in India and China where both countries are at a very, very early stage of healthcare reforms, which most analysts expect those reforms to transform the industry. So infrastructure will inevitably be modernized. Insurance coverage will be broadened. And the private sector will be including major opportunities for foreign multinationals, and both China and India will have a significant role to play in the post-modernized sector. And I think if you look at the analysts' estimates of the healthcare market-- for India, analysts are estimating a market of around 370 billion US dollars by 2022. And China's healthcare market is likely to exceed 1 trillion US dollars by 2020. The healthcare reforms have only relatively recently started, actually. And you have to remember those two countries, alone, is a third of the entire global population. So the investment opportunities are really, truly phenomenal, I think. One other sector that we've been focusing quite a lot on recently is the automobile sector. And automobile, particularly electric vehicles, autonomous vehicles, and the surrounding infrastructure that's needed to support those vehicles and the AI that goes with that. And I think with China being the largest current consumer of EV, that's likely to continue, particularly with improved reforms by the Chinese government and their encouragement of foreign companies to come to that sector, actually. So just two examples of some of the sectors that I see are sort of hotspots at the moment.
If you drill down a little bit further into healthcare, you used a couple of big numbers when talking about China and India. As they look to modernize their healthcare services, what part of the healthcare market do you believe presents the best investment opportunities? Is it operations? Is it hardware? What are you seeing in the market?
So at the moment, we see some activity in foreign hospital operators looking to acquire Chinese hospitals. And I'd say there's some encouragement by the Chinese government to allow that to happen. But obviously, there are lots of challenges with that particular sector because A, they need to be extremely more modernized, and B, they need so many improvements in every aspect of running a hospital that need to be undertaken. And one of the biggest areas of concern for many foreign players, particularly the US players, are the corruption-related risks associated with the healthcare sector because most of the hospitals at the moment are state-owned. And particularly in the pharmaceutical sector, there is, unfortunately, prevalent corruption. So that's something that perhaps deters some clients from investments.
You mention risk a lot. And I know that a lot of the work that you and BRG do in the region is to really dive into that and analyze it for our clients. What are some of the spots, whether it be industries or particular countries-- you mentioned pharmaceuticals is one that might be a little bit more ripe with corruption than others, but what are ones that you're keeping an eye on that, so far, jump out to you right now and then going forward?
Everywhere on the globe there is corruption. There's fraud. It's not just an Asia problem. I want to make that very clear. But obviously, in China there has been, the last few decades, significant investments into China. And I think some clients that perhaps haven't done their due diligence properly, and they haven't perhaps understood the market dynamics properly, and they've focused too heavily on the top line of growth of their business in that jurisdiction. And that has inevitably caused problems because it's caused issues of fraud being uncovered, conflicts of interest, fictitious accounts of business partners. And this really comes from accelerated growth of those organizations in emerging markets and the, perhaps, weak or lack of proper internal controls in place. Also see-- and I think we'll see more of this, actually, theft of trade secrets. I think some emerging market companies want to accelerate their businesses and to do that, unfortunately, they're involved in illegal practices. We've already seen that. It's not a new problem. But I think we'll start to see more of that. Some clients, obviously, are very, very concerned about corruption risk which, as I say, it's not just an Asia problem. Sanctions risks, also is something that we're looking at and our clients are concerned about. And I think, particularly in some markets, clients are very worried about increased local government involvement in their business. So maybe some behind the scenes changes in policy that may affect their operations and that, obviously, has a major impact on not only their financials but on the future of their business actually.
You've been actually quoted in the international press about some pretty unique cases of corruption in the region. You’ve mentioned some countries are doing more than others to try and combat this problem, across the board though, in your experience, when looking at Asia from a global perspective, how do you think Asian countries stack up, not only against other regions, but against one another?
My conclusion is I think corruption has never been more prevalent despite what several reports and media say. But I think mainly driven in Asia-Pacific, mainly driven by the Chinese government, there are some steps being taken to really do something about systemic corruption, particularly in the government and increasingly with private institutions, actually. So the Chinese anti-graft watchdog states that over the last four or five years, 1.3 million government officials have been punished related to corruption activities. Which is a staggering number. Now obviously, some observers argue that in some cases, this is politically driven to ensure continued legitimacy of the party. Whether or not you subscribe to that view, the impact of these investigations are really real and increasingly now being felt across the commercial sector in the PRC. And then obviously, there are a large number of officials from the very, very top to the lowest grassroots level that have fallen from grace as a result of this. And unfortunately, from a reputational standpoint, some of those officials have dragged along with them a large number of private businesses, both domestic and foreign, that operate in China. And I think what I'm seeing now-- other countries are starting to take the Chinese approach to dealing with corruption. And we've seen recently the Indian government taking steps to crack down on corruption-related issues. And we're seeing some countries in Southeast Asia, Malaysia in particular, with the 1MDB scandal, and again corruption at, literally, the highest level in Malaysia. So that they are starting to follow China's example and taking real action. So unfortunately, it's still a long way to go. And I say that's why, going back to what I first said, it's never been more prevalent. It is still, unfortunately, very, very prevalent. And I think the major countries that I mentioned, China, India, Malaysia, Thailand, the Philippines, etc., are really starting to have some impact. But there are many, many other countries in Asia that haven't really started to deal with the problem actually. So it's got a long way to go.
What are some of the problems that your clients face if they're not doing their due diligence properly, if they haven't had somebody like yourself vet the investments that they're looking into? Is it so bad that they might be investing in what could be a ghost company that doesn't really exist that has that much corruption? Or is it just you're going to leak oil throughout the course of something if you don't have intelligence on the ground feeding you information?
I mean, obviously, it depends on the industry and the country that our clients are considering investment, and also their risk appetite as well, actually. But clearly, they know-- one of the main focuses of our due diligence work typically is corruption. But we do focus on other aspects, and those being political relationships or, in some countries, military relationships because it's important to understand what those relationships are. They, in some cases, can be very beneficial to our clients going forward if they want to look into grow their business so long as those relationships are aboveboard and they're completely transparent. That's really a key. But obviously, other risks that if clients don't do their due diligence properly and clearly financial exposure. They invest into the wrong company and, unfortunately, maybe unscrupulous individuals behind that company. And they don't necessarily have a very strong track record or have been involved in shenanigans in previous firms. And I've seen so many cases where money or assets have been stripped out of those companies. So obviously, our clients, if they have invested into something that isn't quite what they thought it was, they inevitably are involved in litigation, sometimes arbitration proceedings, and ultimately, negative publicity. And that's something everybody, I think, wants to avoid. So I can't stress enough the need for proper, in-depth, due diligence, not just relying on a couple of Google searches to give you some comfort before making an investment.
Yeah. We would hope that people with the right money-- and I think this is sort of the evolution some would say, of when the smart money-- and as you talked earlier about how the region is awash with capital right now. These people don't accumulate the type of wealth that they have without being smart about what they're doing with their money. So with the smarter investor comes a more intelligent investigation and more due diligence before they start making significant investments.
I think that's right.
Looking forward, what do you think will be the big story in Asia in the next five years?
Right. I see this very much as a world of VUCA. And VUCA as you probably are aware was coined by the US Army in the 1990s to describe post-cold war world. So V referring to volatility; U referring to uncertainty, C, complexity; and A, ambiguity. And I think what we're seeing, particularly in Asia, lots of rapid changes, economic and political upheaval in many of the countries in Asia-Pacific, and increased pressure on businesses and staff within this jurisdiction and beyond. And I think with all of those issues in the mix, there will inevitably be crisis and uncertainty for some clients. And my prediction for going forward is going to be more increased compliance and regulations that are going to affect businesses, particularly in this region. I think there are going to be more FCPA, Foreign Corrupt Practices Act, type investigations driven by the Department of Justice, and they're going to affect companies operating in Asia-Pacific. We've seen that already. I think that's going to only increase. We mentioned the current US-China trade war. I think the implications from that at the moment are currently unknown. So that's something to watch. I think being able to keep up with technological innovations is going to be a major challenge for companies. And some of them are going to fail, particularly in China. And then, hence, the need for proper business intelligence on what those market opportunities are and how companies can compete in such markets is going to be very, very important for them. And I think, unfortunately for our clients, there's going to be a lot more crises that are going to affect them and disputes. Whether those be disputes with sovereign states or private disputes, I think increasingly, there are going to be more of those in this region. So, unfortunately, it doesn't sound like a very pretty picture, but I think overall, I mean I'd say the investment climate here-- everyone's very, very optimistic about the opportunities. But I think to mitigate one's self from those risks that I just mentioned, it's very important to have an advisor that really understands the markets where our clients are going to.
Yeah. Well, it certainly seems like there's a lot to keep an eye on but, at the same time, plenty of opportunity to go around. If anything, it gives us an excuse to touch base certainly down the road. Stuart, thank you so much for joining us today. I really appreciate the conversation.
Thank you so much.