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If there were any businesses left out there that thought they could ignore what is going on in Asia, the global financial crisis has seen to that.

Asian economies were not untouched by the credit crunch and the slump in demand from the US and Europe – still the most important markets for many Asian-based companies and multinationals. But the region’s capacity to overcome those difficulties, while western economies are still languishing, has cemented the notion that the world’s economic centre of gravity is shifting from west to east.

“We look at what the Asian companies are doing and, on the whole, they are expanding their businesses,” says Peter Elston, strategist at Aberdeen Asset Management Asia. “Whether it’s pharmaceutical companies in India increasing capacity, or banks hiring new staff in Malaysia and Indonesia, there are indications everywhere that private investment is growing across the board.”

He cites strong performances from the likes of Dairy Farm, a pan-Asian retailer that operates branded stores such as Wellcome and 7-Eleven, and Unilever in Indonesia – an economy that is far less exposed to exports than many others in Asia.

“Some companies have been negatively affected by the drop in western demand, but in the long term, an increase in Asian demand will become the dominant factor,” Mr Elston continues.

Whether that view proves to be too optimistic or not, businesses everywhere will certainly have to give even greater prominence in their strategic thinking to Asian opportunities – and threats. Companies will need to be wary of Asian competitors and alive to the possibilities of selling products and services to a rising Asian middle class.

Morgan Stanley says emerging markets, including Asia, are leading a “multispeed recovery”. Jonathan Garner, emerging market strategist, points to companies such as Procter & Gamble, whose revenues from developing countries rose from 23 per cent to 32 per cent of its total in the five years to 2009. “This company will be driven by emerging markets by the middle of the decade,” he predicts.

Neither in manufacturing nor, increasingly, in services can companies ignore the fact that Asia is now deeply embedded in the production of everything from cars to software. Edward Tse, chairman for greater China at Booz & Company, the management consultancy, says: “To flourish over the next decade and beyond, multinational companies must formulate strategies that can integrate the business implications of China’s market liberalisation into their global supply chains.” He could just as well be talking about Asia in its entirety.

To give an idea of the scale of the implications: by 2030, on current trends, Asia will account for half the world’s gross domestic product, from less than a fifth in 1950. In terms of purchasing power parity, China could become the world’s biggest economy within a matter of years; recent quarterly output numbers suggest that, even in dollar terms, it has already overtaken Japan, the world’s second-largest capitalist economy since 1968.

Asia has come through the test of the financial crisis remarkably well, but there are signs that growth may slow in 2011. This year, the region (excluding Japan, a mature economy that behaves more like the US and Europe than its fast-growing neighbours) is expected to grow by 8.6 per cent in 2010 – its fastest rate in 20 years.

But by no means did all economies escape unscathed. Some were hit hard after the 2008 Lehman Brothers collapse, when credit markets froze and export demand slumped. Taiwan, an open economy deeply entwined in the global supply chain, is a case in point. In the Hsinchu Science and Industrial Park, which supplies parts for electronic goods, a slump in orders from the fourth quarter of 2008 had a devastating impact on the hundreds of companies operating there. Revenues collapsed, and three-quarters of its 130,000 workers were put on unpaid leave.

But Taiwanese high-tech companies have since roared back to life, buoyed by a faster-than-expected recovery in the global IT sector in general, and by strong demand from China in particular. Morris Chang, the legendary chief executive of Taiwan Semiconductor Manufacturing Company, says that had he known how quickly business would recover, he would not have slowed his expansion plans. “We stopped building capacity for six months. If we knew then what we know now, we wouldn’t have done it,” he says.

Reflecting this roller-coaster ride, Taiwan’s economy – a useful bellwether of Asia’s mostly open economies – contracted by 1.9 per cent in 2009, but should expand by roughly 6.4 per cent this year, according to HSBC. Singapore, another good indicator, had an even more spectacular ride. It shrank by 2 per cent in 2009, a milder contraction than looked likely at one point, but is expected to grow by nearly 10 per cent this year.

China – fast becoming a regional, indeed global, engine of growth – was the economy that kept on giving. Even during the crisis, it expanded by roughly 9 per cent in 2008 and 10 per cent in 2009. As it put in place a massive infrastructure programme, funded by a $585bn stimulus package and a big expansion in bank credit, it drew in imports from around the region, helping to keep a number of struggling economies afloat. Australia, which supplies China with iron ore, coal and other raw materials, managed to avoid recession entirely. It is largely because of China’s dynamism that, even in 2009, the region (ex Japan) grew by 5.6 per cent.

Part of the reason for Asia’s resilience was the strength of its fiscal position and banks. Armed with more than 60 per cent of the world’s foreign exchange reserves and a healthy tax base, Asian economies were in a position to apply some of the most generous and effective stimulus packages.

Subroto Som, group head of small and medium-sized enterprise banking at Standard Chartered, says Asian companies were hit hard in 2009 when trade volumes fell by 30 per cent across the region. But thanks to government support, the impact was not as devastating as it might have been, he says. “The government stepped in – that is the biggest single difference from the 1997 crisis. This ensured a steady flow of credit to SMEs and helped them to weather the storm.”

Because there was less need to prop up banking systems – prudently regulated and with largely healthy capital adequacy ratios – much of the stimulus went straight into businesses, helping to support jobs, wages and consumer demand.

With the exception of Japan, that spending appears to have put in train a reasonably robust cycle across Asia in which better business conditions feed through to higher wages and more consumer spending, says Prasenjit Basu, regional economist at Daiwa Securities.

“If there is now a long period of weakness in the G3 economies,” he adds, referring to the US, Europe and Japan, “domestic demand will become more important. At the moment, there is substantial Asian momentum – largely export driven, with domestic demand playing an augmenting role.”

The role of domestic demand has sparked an academic debate about whether Asia is “decoupling” from the west, enabling it to grow even through western recessions.

Mr Elston at Aberdeen Asset Management supports this theory, saying that – with per capita income as low as $4,000 in much of the region – Asia can expect fast growth for years to come. He also points out that several economies have diversified their export base to other developing economies, including Brazil, Russia, India and the oil-exporting nations of the Middle East.

Intra-Asian trade has also exploded, partly due to a “noodle bowl” of bilateral and multi-lateral trade agreements across the region. But sceptics point out that, even now, much of this trade is in components that are double- and triple-counted as they make their way around the regional supply chain towards consumption in the west. Stephen Roach, chairman of Morgan Stanley Asia, says: “Sharply expanding intra-regional trade in Asia is still mainly driven by supply-chain links involving intermediate goods rather than newly surging end-market demand in Asia.”

China is an interesting, and crucial, example. There, retail sales have been growing in the high teens for some time. But an even faster expansion in investment means consumption has actually been falling, as a percentage of total output. Still, there have been developments that could accelerate China’s shift towards consuming – in addition to the relentless urbanisation that will see, according to McKinsey, Chinese cities swell by 350m people (equal to the population of the US) by 2025.

On the jobs front, for example, fears that migrant workers might lose work as a result of a slump in exports have quickly fallen away. Foreign companies operating in China have instead been hit by a wave of strikes as an emboldened workforce pushes for wage increases.

As the immediate crisis abates, long-term demographic trends have started to exert their influence, tightening the labour market and forcing an increase in salaries that could spill over into higher consumer demand. Some companies are also moving their manufacturing into the interior, where wages are cheaper, opening up new markets as they go. Car sales have begun to slow, although in 2009, China overtook the US as the biggest market for vehicles. Sales of mobile phones, computers, white goods and other consumer goods are soaring.

This presents opportunities for foreign multinationals that have been lured to China for several years as much by the prospect of 1.3bn consumers as by the attractions of its low-cost manufacturing base. In fact, for low value-added goods, some factories are already moving to countries such as Vietnam and Bangladesh. But China’s growing sense of confidence – and the competition from home-grown suppliers of goods and services – is making the operating environment harder.

In July, Peter Löscher, chief executive of Siemens, said foreign companies working in China were being discriminated against in terms of winning public tenders. He called on Beijing to remove trade and investment restrictions in sectors such as automobiles and financial services. Jeffrey Immelt, chief executive of General Electric, complained that China was becoming more protectionist, although he later softened his remarks.

Many countries operating in China, and in Asia generally, continue to do good business. Consumer companies such as Nestlé, Danone and Unilever have all reported brisk sales in emerging markets, of which Asia forms the largest chunk. But businesses cannot take such profits for granted, particularly as local competitors try to steal market share. If most of Asia really is convinced that its economic performance is becoming more insulated from what goes on in the west, then the business environment for foreign companies is bound to get more complicated.

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