Four factors are shaping growth opportunities in Asia Pacific and should drive business plans for the region. The results will not necessarily materialise immediately, but putting the plans together now will enable maximum growth when opportunities arise.
We explored these factors and their impact on firms at our latest Asia CEO Forum Overnight, which takes place each May in Singapore and each October in Shanghai. The event brings 30-40 Asia CEO Forum members together to debate topical market issues over an afternoon-evening, and resumes the next morning. Its two-day agenda is divided into four discussion-driven, presentation-free sessions with time for networking and socialising over dinner and breakfast.
In May 2023, our agenda focused on: Targeting Growth Opportunities in Asia; Market Transformation in India; Nurturing Talent in the Asia Team; and Refocusing Competitive Strategy in Asia. This Insight captures key points of discussion and comments by members at the first session.
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+ Interest in opportunities in Asia outside China is growing among regional and global executives.
+ China remains a priority, but investments will likely be dispersed throughout Asia in the future, particularly to the larger markets.
+ Four factors are driving growth opportunities: diversification of manufacturing; young and ageing populations; catching up on technology adoption; and investing for ESG compliance.
+ Talent shortages and skill mismatches are the greatest obstacles to growth.
+ Lack of skilled R&D specialists may slow the speed to market of the latest technologies.
+ A shift away from global towards local solutions will require new business models.
China has dominated growth opportunities in Asia over the past 20 years, with investments in the Middle Kingdom overshadowing expansion elsewhere in Asia. In the past few years, however, increased adoption of a China+ strategy and rising US and allied sanctions have shifted the interest in growth opportunities to other promising markets in Asia.
‘In the last 12 to 18 months, I see a completely different scenario of what's happening. Previously, I never stepped into India. I now go to India often because many of our customers are investing heavily there. The two countries that our customers talk about are Vietnam and India.’
China’s slow emergence from its Covid lockdown has enabled Asia CEOs to attract the attention of headquarters in investing widely across Asia.
‘With China being closed for some time, many global executives are coming more frequently to other countries in the region. It has opened a forum for our voices to be heard for investments. India is a classic example. With all the visits, they saw what was happening on the ground. India was picked for investment, which was the case we had been making for a long time.’
Even Asia’s mature markets are attracting interest among investors.
‘We acquired a majority share in our joint venture partner in Japan. This gives us both a scale and manufacturing footprint within Asia. We are investing organically in some key markets and looking at an M&A approach in others.’
China+ growth strategies gain acolytes
Despite growing interest in opportunities across Asia and the Middle East, China will remain central to corporate plans in Asia.
‘Any prudent company is probably not looking at a China exit strategy. The Chinese market is too big to move out of entirely. If we move everything out, we will probably lose the Chinese market. Rather, we are looking at resiliency with a China+ strategy.’
The largest markets across the Asian continent are still attracting the most interest.
‘We are targeting specific markets where we see growth opportunities for the next 20 to 30 years. China will always be an integral part of that strategy. Outside China, we have identified two big markets for growth – India and Saudi Arabia. Tons of investment is going into Saudi Arabia, which will be a big opportunity in our segment.’
Searching for growth opportunities
Four factors shape growth opportunities and should drive the business plans for this region. The results will not necessarily materialise immediately, but they will come. Putting the plans together now will enable maximum growth when opportunities arise.
1. Diversification of manufacturing
The desire to diversify supply sources, combined with shifting labour costs, is driving companies to explore factory sites outside of China.
‘Greater Asia is best placed to benefit from the fallout of COVID and geopolitics. The largest footprint that companies will build to diversify their manufacturing and supply chains will be built in this space.
‘Every geography has its merits, but Greater Asia is the default. And that comparison includes Mexico and Eastern Europe. Most companies will increase their footprint in Southeast Asia. When you have a manufacturing footprint, it drives demand for ancillary businesses.’
2. Young and aging populations
Continued population growth and younger populations in emerging markets, along with declining populations in more developed markets, point to future growth opportunities.
‘A lot of growth is going to come from digitally-savvy new customers in India, Bangladesh, the Philippines, Vietnam, and Indonesia. There is a lot of potential there, which we need to keep reminding our headquarters of. I am still optimistic about this part of the business.’
While the overall population in mature markets is declining, the population of seniors and retirees with money in those economies is rising rapidly. This segment offers significant growth opportunities for many firms.
‘Across Greater Asia, the “Silver Surfer” economies are emerging – Japan, Korea, and Singapore. Almost everyone is trying to use technology to live better lives. Developed economies with low birth rates are going to build infrastructure to serve their ageing population because they will not have youth to support their seniors.’
3. Catching up technology adoption
Lagging adoption of the latest technology has long been a complaint heard in markets throughout Asia. However, viewed from a different perspective, this lag offers an opportunity.
‘Opportunities exist in Japan because the entire country is going to migrate from a legacy OS system to the latest in Windows over the next two years. Somehow, Japan does it almost always late ... and then when they do it, it goes bang!
‘That’s just one example of digitisation lagging in Asia versus the rest of the world. Whether it is education, business, or government, these kinds of needs will drive the adoption of technology.’
4. Investing for ESG compliance
The growing importance of ESG reporting is also presenting a competitive opportunity for some global companies.
‘Whenever there is a significant change, there's the potential to disrupt the competitive landscape. ESG reporting filters into strategy. If big customers demand ESG compliance, it's going to drive out the smaller competitors that can’t do it. ESG is a competitive variable, and even a competitive weapon..’
Western and particularly European multinationals have an advantage since ESG compliance has been a requirement for many years.
‘When ESG requirements are in play, we have a competitive advantage because our Chinese and Indian competitors can't properly offer a solution. And this gap has increased.’
Not everything is rosy – ‘What keeps you up at night?’
While the growth opportunities are there, companies also must be cognisant of the risks involved. Many of these risks appear to be increasing so caution rules the day.
‘There is no lack of opportunity, but there are more risks today. Clearly, China is still the big elephant in the room. The consensus seems to be, “We are expanding facilities and operations, but we are not often buying into new ventures.”’
Talent is the number one challenge
Talent shortages and skill mismatches are perhaps the greatest obstacles to expansion across Asia.
‘Talent will be the biggest barrier. In a hybrid world where there will be massive disruptions, the world will go through a series of rolling crises. The biggest shortage is going to be good talent; there is simply not enough in the pipeline to build a good team.’
Executives also are concerned that skill sets needed in rapidly evolving markets are different from the skills they have hired for in the past.
‘We need to move away from hiring engineers, geologists, science-based people, and accountants, and hire people who are more attuned to working with a non-traditional customer base and policymakers. Our new recruits must understand free trade agreements and comprehensive partnership agreements, for example, and know how to maximise them.’
At the senior management level, board members worry that even well-performing executives at the country level do not have the capabilities to move into regional roles.
‘As board members, we see a dearth of talent who understand more than one country, let alone the whole complexity of Asia. There are great leaders who can run a country or market, yet they may not be able to take it to a strategic regional or global level. From a board perspective, the middle level of talent in Asia is a real challenge.’
Research & Development at risk
Talent shortages extend into research and development, threatening the ‘speed to market’ that companies can achieve.
‘We need to convert our existing solutions into ESG-compliant capabilities, which involves ramping up R&D. Today, we have one R&D team in Asia and another in Europe. Now, we are trying to find the skill sets elsewhere, including in Singapore.’
‘Getting developers with the required skill sets is challenging. After we increase our R&D capabilities and produce ESG- compliant solutions, we still must roll them out to channel partners and suppliers. This slows down our speed to market.’
Shifting from a global R&D strategy to a dispersed R&D model also adds to the demands for R&D personnel, who are in short supply.
‘Traditionally, global R&D teams develop products for an application and then they roll that product out globally. You might manufacture that product locally, but it would not be a perfect fit. We must have the capability to make and develop products locally. That's where we will win.’
The competitive landscape is local
Shifting R&D to a locally distributed model is an element of a broader trend away from globalisation. In many markets, local companies and Asian multinationals are threatening to displace well-established global firms. Competing in this new environment will require new business models and ways of doing business.
‘Historically, our customers have been multinational companies. Now they’re mainly local companies that are funded by the banks. The challenge is servicing local, Chinese and some multinational customers. Our corporation, being a wholly listed company, must maintain high standards for corporate governance, quality and the like, which sometimes inhibits us from growing a market.'
‘There's an opportunity for us to change our business model and how we do things in the long term. We must find a way to operate as a local company without losing the attributes that we have in technology, product quality, and human capital.’
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