Asia: The Early Innings of Innovation?

I think one of the better ways to invest for the long-term is to latch onto trends in a region and, in Asia, one of the long-term trends that we see is innovation. We believe focusing on innovation is a better approach to finding growth companies in this region. I'd like to explain how we think about innovation. Most people associate innovation with breakthrough products, but we’ve broadened that concept to include companies that are implementing new ideas to build great businesses in Asia. So, that includes companies that are building products and services to create new markets or gain market share within existing industries, and it also includes companies that are using innovative strategies to build entry barriers and sustainable competitive advantages.

Innovation is more than Technology

I think it's important to emphasize that we look for innovative companies across all industries and sectors, not just in one or two specific sectors. We believe that innovation comes in different shapes and forms, it could be either disruptive or sometimes incremental. For example, companies like Alibaba or Didi are very disruptive, they’ve completely changed how we shop or use transportation. On the other hand, companies like Samsung and TSMC are more incremental; every year they make incremental changes to their existing products, but they're still successful and very profitable.1 We also believe that innovation happens across all levels of corporate structure, so we look at products and services, and we also look for innovations in strategy, marketing, how they manage their customer relationships and supply chains as well.

Asia: a Favorable Environment for Innovation

The next question is why Asia? Why do we believe that focusing on innovative companies is the right way to approach Asia? I believe that structural growth drivers are changing in Asia. Over the last 20 years, the main growth drivers have been simple: labor and capital inputs. During that time, opportunities were created in industries such as commodities, steels, and chemicals, and everyday consumer products like toothpaste, shampoo, instant noodles, among other very simple things. However, as regional income reached around $8,000 to $10,000 per capita2—which I see as an inflection point—we're beginning to see a shift in the economy and opportunities developing in more sophisticated industries such as automation, entertainment, healthcare, industries that are more services oriented. Opportunities emerging from these trends tend to last anywhere between three to five years, sometimes 20 years, providing great long-term investment opportunities.

Another reason to look at innovative companies in the region is the tremendous rise in worth over the past 20 years and the size of the market. With rising income, Asia has become the biggest market today, not just by volume, but in terms of spending power as well.