After the initial success back in the 1990s in moving manufacturing from the Organisation for Economic Co-operation and Development (OECD) to Asia’s Tiger economies, the shift of manufacturing to China and of back office and software development to India has created complex supply chains for resources acquisition. The countries impacted include Australia, Indonesia, Peru, Brazil, Russia, and Africa.
World Trade Organisation (WTO) initiatives, free trade agreements (FTAs) and trade cooperation have meanwhile continued to strengthen the exchange of trade and services. Highly competitive labour forces and consumerism in emerging markets, steady reductions in the cost of trade financing, risk mitigation, logistics, packaging, insurance and communications have all contributed to bolstering trade.
Consumption, wealth, foreign direct investment (FDI), technology and social mobility characterise 21st century market-led growth: In 2015 the total value of world merchandise trade is US$20.0 trillion, while the figure for services is about US$5.0 trillion. Cross trading between the emerging markets had reached more than a quarter of total global trade by 2012, with China taking the centre stage – although more recently its performance has been faltering as growth slowing.
The Middle East, including Iran, remains at the heart of South-South trade flows, with India’s trade volumes with the Middle East reaching US$135 billion in 2012.
By 2050, the population in emerging Asia is forecast to have risen to 47% of the world’s total and Asia’s gross domestic product (GDP) to 46% of the global figure, dominated by China, India and Indonesia.
Foreign direct investment (FDI) flows to developing economies reached US$759bn in 2013, which was about 52% of global FDI flows.
Opportunities galore for corporates: Opportunities for companies to reap demographic dividends and scale their operations up are growing. The trend is helped by better access to markets, improved communications, enhanced transportation and technology, political and institutional support, investments and a breakdown of cultural barriers.
Other factors creating opportunities for corporates include:
- The use of local currencies and bilateral credit is helping manage foreign exchange (FX) volatility.
- In emerging markets, the export credit agencies (ECAs) of China, Korea, Japan and the Middle East are providing risk management and financing.
- There is a surge in resource acquisition and contract farming investments, with joint ventures by sovereign wealth funds (SWFs) such as Singapore’s GIC and Temasek, China Investment Corporation, Dubai Investment Corporation, Khazana of Malaysia, and Abu Dhabi Investment Corporation, Dubai Investment Corporation, Khazana of Malaysia, and Abu Dhabi Investment Corporation.
- The Asia Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) are expected to encourage and support new infrastructure projects in emerging markets.
- Pricing for commodities has eased due to the establishment of futures exchanges in China, Malaysia, India, Singapore, and Dubai.
- Emerging market banks are leveraging their knowledge, capabilities, diaspora network and historical ties to facilitate risk management and financing.
- Singapore and Hong Kong have become bespoke global hubs and catalysts for trade due to their multiple FTAs, tax treaties, and financial and transportation infrastructure.
- Aid is being displaced by direct Chinese investments that helps develop skills, infrastructure and jobs.
The change in South-South trade is irreversible, with new corridors evolving and developed markets re-engineering to create new opportunities: Sub-Sahara Africa has emerged as the new frontier and a competitor in the agricultural and resource space. Africa has almost 60% of the world’s uncultivated and arable land, an English-speaking population of 360m, and untapped natural resources such as copper, coal, cobalt, and diamonds.
Egypt, Morocco, South Africa and Tunisia have manufacturing and service industries. Algeria, Angola, Libya, and Nigeria, which collectively earned about US$200bn from petroleum exports in 2014, are seeking opportunities to grow. Indonesia, the Mekong Delta, Africa and Papua New Guinea are probably the last frontiers for agriculture and mining.
Economic and financial restructuring is nearing completion in the OECD. The deployment of robotics, information and communications technology (ICT), 3D-printing, and nanotechnology is likely to increase the production of high technology goods and also reduce the cost of manufacturing in developed countries. The resulting prosperity in Southern countries and higher standard of living will result in increased costs of manufacturing, while the demand for high tech-skills and personalised services in proximity to their users may shift trade patterns to the North or hubs around the North.
The world is not flat: China’s woes have become world problems and most other Southern economies have not made structural changes: Open markets and trade have also created interdependence, which carries higher risks of contagion and foreign shocks. The stagnation of commodity prices, trade and investment during 2014 and 2015 as a result of China’s slowing growth has impacted South-South trade flows and economic activities. Commodity-producing regions such as Africa and Latin America have experienced excess capacities and resulting redundancies.
The gains of trade have not been enough to sustain many emerging economies, which have yet to make necessary structural changes; nor have they seen the benefits percolate through to their populations. Emerging markets have proved to be complex, opaque, lacking in financial depth and fraught with volatility. They have competition, unpredictable government policies, and a high degree of implementation risks, as their socio-economic, cultural and legal frameworks need different approaches.
Urbanisation and unplanned growth are also creating pressure on the infrastructure, environment, health, safety, usage of water, air quality and quality of human relationships as well as disparities in income and wealth. Volatility in foreign exchange and pricing of commodities has a material impact on many companies’ investments and exposures in emerging markets.
Emerging market brands and multinationals are a formidable force: Developing market companies are learning from emerging markets and also changing their business models to create powerful brands. Infosys, Samsung, Toyota, Singapore Airlines, Tata-Nano, HTC, Lenovo and Huawei are among those gaining significant market share in emerging markets. McDonald’s and Pizza Hut are increasingly adapting their product offerings to meet local preferences and demands, while Microsoft is delivering local language capability.
Multinational corporations (MNCs) in India and China have not only responded to local business demands but are exporting products, technology and talent. Developed market companies are adapting to local demand, investing their cash hoard for growth, hiring local talent and creating local structures.
Companies are playing on their strengths, building future models and execution capabilities that are orchestrated for customer focus, collaboration, employee engagement, innovation and high performance. They are also partnering to advance innovation, market share and customers, talent acquisition, resources and infrastructure, technology, or diversifying market risks.
There is increasingly a convergence of process, value systems, capabilities and corporate governance standards of emerging market companies with those of developed market companies.
The sustainability of business will require a change in mind set, attitude and corporate culture: Companies have to gear up in order to manage complex and volatile socio-economic situations, uphold governance standards, achieve balance between global and local strategies and political systems, invest in talent and ICT, and manage demanding consumers. All this within an environment made up of highly differentiated markets that operate 24×7 and are spread globally.
Sustainable brand loyalty and a thriving business will have to be built on trust, good governance, a customer-and innovation-centric culture, and execution capability.
Companies have to create a laser-focused, robust strategy calibrated to return. Risks and execution capability are necessary to ensure profitability and optimal utilisation of resources. Learning and adaptable organization coupled with strong governance systems can meet the challenge of managing global complexities, ambiguity, risks and volatility.
Management will need to invest and develop world-class talent, processes, systems and incentive programmes that are measured by performance and ethical behaviour.
China's bad debt markets are such a hot commodity that distressed assets are being sold on Alibaba’s Taobao ecommerce platform alongside household products. But the IMF warns the situation is unsustainable.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
While the pickup in global economic growth remains on track, companies in Asia continue to report difficulties in getting paid on time.