Looking East: The Changing Face of World Business

As the world experiences a very clear move from west to east, we see ourselves in the midst of an extraordinary shift. The so-called ‘emerging markets’ in Asia and the Middle East are asserting themselves as the brightest prospects on the global landscape and, some might say, the re-emergence of Asia, following its growth through the 16th, 17th and 18th centuries, will be the most important economic driving force in the first half of this century.

According to HSBC’s data, China will be the biggest economy in the world by the end of the decade. Perhaps that won’t be a surprise to many readers, but what might be surprising is the shift in where this trade is happening. Today, many Asian goods don’t go to the west, but to other Asian countries. In India, two thirds of exports now go to markets outside the US and Europe. And last year, China became the largest importer of goods from the Latin American powerhouse, Brazil. We are seeing the emergence of south-south trade – globalisation isn’t just a process of goods circulating from developing to developed countries, but it crosses and connects with the emerging markets.

The trends of the past 20 years or so will be accelerated and consolidated in the next period. By 2030, Asia’s economy could be larger than that of the US and EU combined, with the region’s share of the world gross domestic product (GDP) swelling from a little under 30% to more than 40%. Anoop Singh, head of the International Monetary Fund’s (IMF) Asia and Pacific Department, puts it into context when he says: “Twenty years from now, Asia’s economy as a whole will be larger than that of the G-7 and half the size of the G20.”

This changing economic landscape and the impact of Asia on the rest of the world is something that HSBC is particularly interested in. The developed nations are looking to countries, such as India and China, to pull them out of recession and as this new order takes shape, it creates huge opportunities and threats for businesses domiciled in Europe.

Asia is unknown territory to many businesses and, understandably, many companies may be daunted from entering this market. But the risks of engagement must be seen in the context of the potential rewards. Markets in Asia offer a virtuous circle of investment and economic growth, and it is crucial that European businesses do not close their minds to the possibilities on offer.

The opportunities created by Asia cross all sectors. For example, there is a chain reaction between construction companies and engineers, their multiple contractors and subcontractors, and then on to exporters and providers of goods and services and their marketers. The potential rewards lie not just in large-scale projects and joint ventures, but also in technology transfer and ‘softer’ partnerships.

While we talk to many European businesses that are already creating opportunities in and with the east, we know that for many more the statistics that demonstrate fast paced growth, and therefore opportunity, remain just that – statistics.

It is for this reason that we commissioned The Futures Company to identify the most influential current and future trends in ‘the east’ – and interpret these to define implications and opportunities for companies domiciled in Europe. These findings are revealed in the report, ‘Looking East: The Changing Face of World Business’.

The report draws on eastern economies’ political, social, financial and consumer climate and identifies seven key considerations that should influence the strategic decision-making of any European business leader looking east.

Looking East

The first of these looks at the impact of new skills. Investment in education is transforming Asia’s skills base. The model where the west did the ‘value-added’ development work and the east took care of low-value production is outdated. Due to an aggressive expansion of educational opportunities in Asia, there is huge potential for European companies to recruit and capitalise on the growing level of skill now available. To prove the point, The Times Higher Education Supplement list of the world’s top 200 universities for 2009 includes six from China, four from Korea and two from India. Furthermore, in China 75,000 people graduate with higher degrees in engineering or computer sciences per year, while India educates over 60,000 to this level per year.

Being aware of this development and considering how and when to capitalise on it will be key. Companies in the relatively small countries of western and eastern Europe will have to take a much broader view of ‘human capital’ and, importantly, how it can be sourced. How can they tap into the talent of Asia and transfer knowledge and skills?

Joint venture deals and partnerships are one answer; setting up facilities near China’s e-Town or Bangalore’s Silicon Valley is another. ‘Softer’ solutions might include cultural exchange programmes and links with Asian universities and academic institutes. Non-executives with experience of Asian markets could make a vital contribution to the boardroom.

Second, new models of innovation will drive a shift from the old paradigm, where the west owned the brand, the design and the intellectual property, and then outsourced the manufacturing and production to the east. Some of the biggest names in western technology are establishing innovation centres around the world. Cisco has ‘Cisco East’, a second global headquarters in Bangalore, and Microsoft’s research and development (R&D) facility in Beijing is the biggest outside of the US.

Increasingly, innovation will originate from the east, meaning new business models and global thinking is applied to everyday challenges. Critical mass and a huge and rapidly expanding domestic market give countries such as China and India an instant competitive edge. Combine this with the investment in education and R&D and continuing low production and development costs, and you have a major force in world business.

The main question for European businesses here must be: “How can we tap into the fast-paced thinking in Asia?” Opportunities include forming partnerships that see India and China take state-of-the-art design to the mass market and capitalising on the 24/7 opportunity that globalisation allows to deliver better end products, quickly and cost effectively.

The booming eastern population and growing consumer wealth will create unprecedented market opportunities among new consumers for European businesses. At an event I attended recently, the Chinese Ambassador revealed that if every Chinese citizen spent one more yuan a day, the purchasing power of China would increase by US$70bn a year. But crucially, the eastern consumer is not a replication of their western counterpart and a ‘one-size-fits-all’ approach will not succeed. Recognising and understanding the impact of significant regional diversity and differing behavioural and cultural norms will be key in innovating specifically for the Asian market – either by adapting existing products or by developing new ones.

New Pressures on Energy Markets

As Asia’s demand for oil outstrips supply, pressure on energy markets is a macroeconomic consideration for European businesses. The risk for the global economy is increased and more volatile energy prices. Businesses could see significant increases in production and distribution costs – and commensurate drops in profits. The Chinese have anticipated the problems by huge investment in wind and solar power over the past 15 or so years.

For European companies, consideration of energy consumption and potential investment in renewables and sustainable energy will become increasingly important. Being aware of this within future scenario planning and considering risks versus the opportunities to capitalise on Asian investment in new energy sources will be key.

The rapid economic expansion of Asia has created the conditions for social tension and political instability. But while it is critical that European businesses are aware of the potential risks of these uncertainties, they must weigh up risk versus reward when considering entry into the East. Central to this will be diversifying risk across a number of countries and regions – R&D, production and supply chains should not be concentrated in any one area.

The free market, liberal principles on which the west was built are often in direct contrast to methods of rule in the east. New models of capitalism are emerging to challenge the old business rules and European businesses need to be aware that the competitive playing field is not necessarily level. Having on-the-ground partners could be a cost-effective way of understanding and mitigating this potential risk. Equally, this ‘new’ model of operating offers great opportunities to form new collaborations and partnerships.

A series of pan-Asian alliances is seeing a re-shaping of the geopolitical map. As the influence of the west declines, the importance of business relationships in Asia will grow: European companies must not find themselves sidelined in the new economic and political order.

Taking into consideration the impacts of the above, the intelligent European business of the future will:

  1. Maximise human capital – this involves looking beyond domestic borders to recruit and capitalise on Asia’s investment in training and up-skilling as it moves away from its image as a source of low-cost labour. According to the European Commission (EC) report ‘The World in 2025’, China and India could account for approximately 20% of the world’s R&D, more than twice their current share, by 2025.
  2. Create an ‘innovation supply chain’ – innovative businesses will turn the traditional model of western innovation and eastern delivery on its head to take advantage of Asia’s increasing share of R&D spend.
  3. Invest in consumer insight – the booming eastern population and consumer wealth will create unprecedented market opportunities for European businesses. Given the rapid expansion of developing economies, it is clear the biggest potential markets for European and American exporters by far are outside Europe and the US.
  4. Employ a global mindset – successful businesses will dedicate time to understanding how Asia has redrawn the world business ‘map’, overturning preconceptions about ‘the east’ and fostering a culture which accommodates different business models and ‘rulebooks’.
  5. Mitigate risk effectively – thriving businesses will accurately research, understand and weigh up risks versus the significant rewards of engaging with the east. Being aware of the tensions is sensible, but with the right partners on the ground, ‘thinking businesses’ can overcome this potential issue.
  6. Rethink consumption and distribution – acknowledging individual business’ role in tackling global sustainability issues, particularly the east’s energy consumption, and considering new models of manufacturing and export as a result.
  7. Create an advisory-led business – acknowledging the role of external experts to provide local market insight into doing business globally will prove to be a great advantage for European businesses.

Conclusion

The rebalancing of economic power towards Asia presents a more challenging, more competitive, and more threatening business environment. But it also suggests a huge range of opportunities: the new economic confidence of Asia means new markets, new global wealth and new business.

What’s fundamentally clear from the report findings and from HSBC’s experience, is that over the next decade businesses can’t afford to wait for business. They have to go where the business is. We are no longer looking at when west meets east, but at how the east will redefine the west and how European businesses can respond for success. In a time when Europe is most in need of an economic and financial boost, are business leaders ‘looking east’ quickly enough?

To learn more about HSBC Global Transaction Banking, please visit the company’sgtnews microsite.

9 views

Related reading