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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
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