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A Two-part Guide to Understanding Investing in Asia

(This article originally appeared in the October Global Edition of Business Facilities Magazine)

Part One: The Essential Importance of an Asian Business Development Strategy

By Keith W. Rabin

If for no reason other than demographics, it is clear future growth in the world economy will be primarily driven by activity outside the U.S. and Western Europe. Japan also faces extremely serious demographic problems; however, it appears to belong in a special category when one considers the immense potential now beginning to be realized as restructuring and reform takes hold and the $3 trillion plus in savings presently invested in its Postal Savings system begins to finance retirements, pushing consumption higher.

At this point, indicators such as the recent forecast by Goldman Sachs that China will overtake the U.S. to become the world's largest economy in less than 40 years—not to mention the inherent growth in other Asian economies—is almost common knowledge. However, another important point was recently raised by Martin Spring in On Target, who noted even then China's per capita income will be only one-sixth that of the U.S. That will leave China many more decades of growth until income parity with the U.S. is achieved. Spring goes on to quote Financial Times bureau chief James Kynge as saying that "within 10 years [China's] appetite for base metals, food, and probably also luxury goods, will strain the world's ability to produce them."

These developments will have a profound impact not only on commodity prices but also on the market for all kinds of goods and services. At a minimum this will mean Asia will account for a far greater share of global consumption and financial market capitalization.

As highlighted in "The 2003 Aging Vulnerability Index" by Neil Howe and Richard Jackson, the bottom line is that the role of Asia, especially China and India, will be far more significant in the future world of our children. For forward-looking investors and corporations, that means there will be real business growth opportunities in the emerging markets and those countries that can sell to them.

This trend is further exacerbated by the growth of outsourcing. A recent Fortune article quoted Gartner data indicating that U.S. companies will spend some $17 billion on human resources outsourcing in 2004. Of that, $6.4 billion—more than one third—will be in payroll processing. This indicates major outflows of U.S. service jobs to other countries, with countries such as India as well as the Philippines and other places with strong English capabilities being the beneficiaries.

It seems fair to say in coming decades, any company seeking to maintain its growth, momentum, and market share will have to define and implement a global expansion strategy. This will be a real problem as U.S. companies, particularly those that lack the scale and resources of the Fortune 500 and other major multinationals, have enough problems initiating nationally-scaled strategies. As a result they have traditionally been reluctant to focus their attention overseas.

A recent survey undertaken by KWR International in cooperation with Business Facilities underscored the difficulties and the ambivalence of many companies seeking to initiate overseas expansion strategies. While many recognized that "international expansion is important," a notably smaller amount were ready to declare it a near-term priority. Additionally, of the respondents who noted they were already internationally active, a significant number expressed dissatisfaction with their efforts—leaving substantial room for improvement.

The reasons for this are many. A more complete analysis of the obstacles and constraints and the steps that firms of all sizes might take to overcome them must be addressed in another article. That said, they essentially revolve around the fact that most small to mid-sized and even many major firms lack the familiarity, experience, and ability needed to understand and operate in foreign markets. They are also hard pressed to apply the resources, attention, and focus needed to define and develop effective and sustainable implementation strategies, to nurture their long-term success, and to access the outside support and facilitation that could help in these efforts.

This inherent difficulty, however, is no excuse for inaction. Developing an effective international expansion strategy, particularly in Asia—where trust and relationships are absolutely essential ingredients to success—takes a lot of time and effort. It cannot be rushed. Therefore, companies that seek to sustain and expand their competitiveness in the face of the economic forces now unfolding before us are well advised to start giving these issues careful consideration so that they might begin to address them in an effective and coherent manner.




Part Two: Predicting the Economic Success of Asia

By Dr. Scott B. MacDonald

Asia is enjoying a period of solid economic growth: current account balances are generally in surplus, and foreign exchange reserves are at record high levels. In China, the region's new economic locomotive, efforts to achieve a soft landing appear to be succeeding, albeit in a gradual fashion. Elsewhere, India has achieved a change in government and many of the key elements of the country's economic reforms are intact.

Generally speaking, good news also dominates in Southeast Asia. Even in Japan, economic reforms have helped set the stage for what appears to be a sustainable recovery. The task ahead for many Asian governments and businesses is to manage success and not fall back into the pitfalls that led to the Asian financial crisis of 1997-98.

Clearly a very strong desire on the part of most Asian governments not to relive the socio-economic disequilibrium of the late 1990s has resulted in a substantial stockpiling of foreign exchange reserves (China has $483 billion), measures to improve corporate governance, and the restructuring of financial sectors. In some cases, there has been an improvement on labor market flexibility and less red tape for foreign investment.

Asia is also benefiting from relatively benign international economic conditions. In particular, the region's major trade partner, the United States, is enjoying moderate economic growth. In addition, European economic growth is set to accelerate moderately in 2005, which should help maintain export expansion in Asia.

Although there is a strong likelihood that Asia will continue to enjoy strong economic growth through 2004 and 2005, there are some clouds on the horizon. Asia's strong pattern of economic expansion can not happen without access to vast amounts of natural resources. In particular, China's spurt of industrial expansion over the past three years has fueled heavy demand for natural resources. The recent round of oil price hikes were, in part, caused by strong growth in China, which combined with renewed demand in the U.S. and geopolitical uncertainties in key oil producer nations, led to a sustained rise in international hydrocarbon prices. Some 30% of China's energy needs are imported. And behind China is India, with a population of around one billion and an increasing consumer appetite that will raise energy needs.

Asia's need to maintain strong levels of growth is renewing the old debate over securing access to key resources. While it is doubtful that any Asian countries will come to blows over coal or copper, oil is another matter altogether. For energy deficient countries such as China, South Korea, and Japan the economic lifeline extends from their home ports in the Pacific to the Middle Eastern and Central Asian oil fields. This raises issues of the security of supply lines as well as potential areas for exploration. Closer to home, it means greater attention to overlapping national claims in such areas as the Kurile Islands and the South China Sea around the Spratly Islands. In the latter, tensions have run high in the past, as reflected by a 1988 naval battle between Vietnamese and Chinese forces.

For much of Asia, economic growth was and remains export-driven. While there is a degree of complementary exports, China's long growth spurt (beginning in 1978) has elevated it into a competitor for many of the same goods produced by other Asian countries. Thailand, Malaysia, South Korea, and Japan have all felt the impact of competitive Chinese exports, based on lower labor costs. Japan and China have already locked horns on a number of trade issues and more are likely. As China climbs the industrial ladder, its competitive nature will only increase and trade frictions are likely to rise.

Other obstacles include the weakness of the Asian financial sector, where reforms have been made but more must occur, and poor corporate transparency and disclosure that hurts investors. Last, but hardly least is the threat of terrorism. There are elements throughout the region that feel marginalized by the formal political system and have opted for terrorism as a means to achieving their goals.

Yet, for all the potential points of economic derailment, Asia is more likely to stay on track. For all the tensions emerging in the region, there are critical reasons for governments to find peaceful solutions. Common economic gains are likely to outweigh the potential for conflict. Consequently, the major task confronting Asia is how to manage the challenges and avoid the pitfalls, something that it can do considering the political will and vision its leadership has demonstrated in the past. Prior to the Asian financial crisis there was considerable discussion about the Asian Century; that talk was premature, but the years ahead could be just that


Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Darrel Whitten, Sergei Blagov, Kumar Amitav Chaliha, Jonathan Hopfner, Jim Letourneau and Finn Drouet Majlergaard



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