What are the prospects for medium-sized businesses in the Asia-Pacific region? What challenges, such as regulations or access to finance, do they face when expanding into the region, and how can these challenges be overcome?
Pamela Bracey, senior investment specialist in the private sector operations department at the Asian Development Bank, and David Pilling, the FT’s Asia editor, answered readers’ questions.
Read the full International Business Insight: Asia-Pacific report for more insight.
What are the opportunities to expand into the Asia-Pacific region? Can western companies still gain a good foothold in the area, or are rising labour costs making it more expensive?
David Pilling: Rising labour costs are only a function of a rising standard of living, so what might conceivably be lost in cheap production will be gained in a growing market on the doorstep of your factory.
Naturally, wages are not universal across the region. As wages rise in China – which they are doing right now – it will be interesting to see if some companies are tempted to locate elsewhere: in Vietnam, Bangladesh, Thailand, Malaysia, Indonesia or even India (which has hitherto lagged as a manufacturing base). In practice, supply chains may be so advanced in China and the clustering effect identified by Michael Porter so developed that companies may not be able to move very easily.
Pamela Bracey: Rising labour costs have indeed become a problem in some parts of Asia, but for the moment this seems to be limited to larger companies and particularly foreign firms. Labour costs at smaller companies right across Asia are still substantially lower than they are in big firms. In part this reflects the fact that smaller firms do not pay the same type of benefits that are paid in larger companies, and the workers in larger companies have higher skill levels.
What are the main fears that could derail both business confidence and company success in the region?
Chris Chow, Singapore
DP: The main fears are:
● a double-dip recession in the west;
● a stumble or worse in China;
● an upsurge in inflation;
● some sort of unexpected event, such as a balance-of-payments crisis in Vietnam or India; and
● least bad, but still important and quite conceivable, a slowing of growth in China – say 8 per cent or below.
PB: The main concern among companies in Asia is still largely the state of the main export economies of Europe, the US and Japan. Although some limited rebalancing towards domestic demand already appears to be occurring, the G3 economies are still the major markets for Asian finished goods. This raises concerns for major exporters, but also for the smaller companies around the region that supply materials, parts and components to those final products.
Other issues include the difficulty in accessing finance and regulatory and policy uncertainty as governments look to cope with the post-crisis economic environment.
Are you seeing a move away from emerging market companies looking to move into the developed world – that is, are they favouring other emerging markets rather than expanding into the west?
DP: The answer is both. If you take Chinese companies, they are increasingly active in all parts of the world. China has invested in the banking sectors of South Africa and the US alike. It wants resources owned by Nigerian state companies, the US’s Unocal and Anglo-Australia’s Rio Tinto alike. (Of course, it failed in the latter two cases.) Companies from Japan, of course not an emerging market but an Asian country nonetheless, have moved into markets ranging from India (Ranbaxy bought by Daiei) to the UK (Pilkington Glass acquired by Nippon Sheet Glass) and the US (Lehman Brothers’ European and Asia operations, bought by Nomura).
PB: Recent information of foreign direct investment flows indicates that many emerging market companies are looking for investment opportunities either within their domestic markets, within the region, or in the case of China, also in other emerging markets such as Africa.
With regard to small and medium-sized enterprises, output has on average been orientated towards the domestic market. In a survey of 11 Asian countries, nine of them (South Korea, Thailand, Vietnam, China, Pakistan, the Philippines, Bangladesh, India and Indonesia) had 80 per cent or more of the output of small enterprises geared towards the domestic market, while the two others (Sri Lanka and Malaysia) had 70-80 per cent. This trend is likely to intensify in the next few years as some countries rebalance economic growth toward domestic sources.
Are you seeing much interest from other emerging market companies – such as those in Brazil or Russia – looking to move into the region? Or is it still predominantly those from developed nations seeking opportunities?
DP: Resource companies such as Russia’s Rusal (which received approvial for its IPO on the Hong Kong Stock Exchange) are seeking business. Of course, many Asian countries buy a range of commodities from Brazil, although its presence in Asia itself is still not widely felt.
PB: There have been some significant changes in global FDI patterns over the past 2-3 years that are likely to gain momentum in the short and medium term. Foremost among these is the increased occurrence of emerging markets as both destinations and sources of global FDI.
FDI flows into Asia declined significantly in 2009 after several years of uninterrupted growth, However, as investment from developed countries dropped, intraregional FDI gained momentum and now accounts for as much as half of the region’s inward FDI stock.
What has enabled the region to escape the worst of the global recession? Has it been down to coordinated government action – as lessons were learned from the Asian crisis of the late 1990s – or are businesses simply more resilient (with less debt, greater cash reserves, still focused on their core business) than they were before?
DP: Asian economies were better prepared, having cleaned up their banking systems, built up big forex reserves and shored up their budgets. In most countries, companies too had improved their balance sheets. As a result, the stimulus packages that Asian governments put in place were very effective – they did not disappear into the black holes of banks’ balance sheets, but flowed out into the real economy.
China has become a genuine regional engine. It cannot replace demand in the west, but while the Chinese economy is revving, many Asian economies can avoid the worst.
Asian companies have also diversifed: South Korea exports nearly 45 per cent of its goods to the Bric countries. The Middle East (which has got rich from selling oil to Asia, among others) has become an increasingly important market too.
Finally, there is a slow but definite increase in the domestic market. We should not exaggerate; Asia has not yet decoupled. But there are more people with the money to buy the goods that Asian companies produce.
PB: The global economic crisis did have a significant effect on companies and economies in Asia. However, the worst of the impact was mitigated by swift and co-ordinated efforts by regional governments as well as central bank action. Banks and their corporate clients had learnt many lessons from the 1997-98 Asian financial crisis. Banks in Asia were better capitalised and less exposed to underlying causes of the US banking crisis, so there was less disruption to Asia’s financial sector.
That said, companies in Asia, particularly SMEs, do face a number of challenges that inhibit their growth, such as finding sufficient credit and access to technological innovation and training that would boost their productivity. Of course, clear, consistent, and supportive regulation is also key.
How can mid-sized companies gain financing? Is there a credit freeze as there is in the west, or are the banks still lending?
PB: Access to financing for SMEs has always been among the leading problems for enterprise development. This was further compounded after the global financial crisis, as bank lending to SMEs fell more sharply than to larger firms because they were perceived to be riskier. Access to trade finance has also shrunk.
Bank lending has ticked up in some countries, but is unlikely to return to the high levels seen before the crisis because of increased caution among banks about the quality of their loan books. To help meet the demand for SME financing, some governments have put in place policies that support their SMEs as part of their overall fiscal packages to support economic recovery.