investing in an accelerating asia?ftp01.economist.com.hk/ecn_papers/abos2013.pdf · • vietnam’s...

INVESTING IN AN ACCELERATING ASIA?Insights from Asia’s business leaders on their outlook for 2013

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Investing in an accelerating Asia? Insights from Asia’s business leaders on their outlook for 2013

1© Economist Corporate Network 2013

Contents

Highlights 2

I Introduction 4

II Asia gathers speed 5

III But is it enough? 7

IV Asia’s productivity challenge 9

V On the money? 11

VI Investment priorities in 2013 12

VII Frontier, or fringe? 14

VIII Unprecedented gravitational shift 15

IX Communication failure? 17

X Asia gets too big to manage 19

XI Overheating hubs 21

XII Operational insight: Footloose and fancy-free 25

XIII Operational insight: Human capital 26

XIV Appendix:Surveyfirmographics 28


2 -- Follow us on Twitter @ecn_asia © Economist Corporate Network 2013

HighlightsAsia’s productivity challengeCompanies are expecting their sales to grow twice as fast as the size of their workforce• Withsalesgrowthoutstrippingworkforcegrowth,

companies are expecting their revenue per worker to rise

• Someofthiswillcomethroughpricesincreases• Butsomewillalsocomethroughadrivetoincrease

labour productivity• Businessmodelsarebecomingmorecapital-

intensive,butimprovingproductivitywillbeanongoing challenge

Investment priorities in 2013Where are companies raising their investments in 2013?• Chinaremainsthebiggestdestinationfornew

investment in Asia by a long distance• InvestmentintentionsforIndiahavefallen• InSouth-eastAsia,Indonesiacontinuestodraw

foreigninvestment,despiteanincreasinglyprotectionist stance from the government

• Vietnam’smacro-economictroubleshavetakenthe shine off the country’s once strong appeal

Is it enough?In much of Asia, company sales are lagging underlying economic growth• ThisisespeciallytrueinChinaandIndia• Onereasonmightbestiffeningcompetitionfrom

local players• ButoursurveyalsosuggeststhatWesternfirms

areunder-investingrelativetothesizeoftheopportunity in Asia

Asia gathers speedAfter a slowdown in 2012, executives expect better things in 2013• Companiesareexpectingtheirsalestogrow

faster in 2013 than in 2012 in every market in Asia,exceptJapan

• However,theimprovementwillbeonlymodest• Chinacontinuestocarrythehighest

expectationsforsalesgrowth,butSouth-eastAsia is only just behind



Communication failure?Oursurveyshowsthat44%ofexecutivesatWesternfirmsfeeltheyare under-investing in Asia relative to the region’s opportunity• Externalconstraintshaveaparttoplayinexplainingthispicture,but

more important are internal constraints within these companies• WesternmanagementteamsbackinEuropeanorAmericanheadquarters

oftenviewtheworldthroughthelensoftheirlow-growthhomemarkets,and fail to recognise the brighter prospects elsewhere

• Tocombatthisbias,moreandmorefirmsaremovingseniormanagementintoAsia.Backin2008,just19%ofWesternfirmshadamemberoftheirmainboardofdirectorslivingandworkinginAsia.In2012,thatnumberhadrisento38%

• Equally,though,executivesinAsianeedtogetbetteratcommunicatingthesizeoftheopportunityintheregion

Unprecedented gravitational shiftForWesternfirms,theshareofglobalrevenuescomingfrom Asia continues to rise at staggering speed• In2011,WesternfirmssaidthatAsiacontributed19%of

theirglobalrevenues.In2012,thatfigureroseto22%• By2017,WesternfirmsexpectAsiatocontribute32%• However,thiswillstillbebelowAsia’sestimated35%share

of the global economy in 2017

Frontier or fringe?How exciting are Myanmar, Mongolia, Cambodia and Laos?• Oursurveysuggeststhatfewcompaniesareinvesting

heavily in any of these markets• Butinterestishigh,andmanycompaniesremainpoised

to enter when the time is right

Overheating hubsAre Singapore and Hong Kong burning up?• Oursurveyshowsthatcompanies

arestrugglinginSingaporeandHongKongwithsoaringpropertyprices,risingcostoflivingconcerns,shortagesofstaffandscarce school places

• Suchissuesarestartingtocausesomefirmstothinkaboutmovingtheir regional management teams out of these traditional hubs or else to look at new organisational structures

Asia gets too big to manage Westernfirmsarechangingthewaytheyorganizethemselves in Asia • Inthepast,manyWesternfirmsranAsiaPacific

asonemanagementunit,witharegionalHQ• Today,theregionhasbecometoobigandfirms

arecarvingupAsiaPacificintomoremanageableblocks.Thecountriesmostlikelytobecarvedoutof the Asia region to stand alone are China and Japan



Introduction Asia’s business leaders share their perspectives on the region

Everyyear,theEconomistCorporateNetwork—theemergingmarketsadvisorybusinessofTheEconomistGroup—conductsasurveyofits500clientsinAsiaPacific.These500firmsaresomeoftheworld’slargestmultinationals,andtheircollectiveviewsprovidecritical insights into the world’s fastest growing region.

ThelatestAsiaBusinessOutlookSurvey(ABOS)wascarriedoutinDecember2012,andassuchpresentsanup-to-the-minuteviewofAsia’smostseniorbusinessleadersanddecision-makers.HowarecompaniesperforminginAsiaPacific?WhatareCEOsexpectingin2013?Whichmarketsarebecomingmoreattractiveandwhicharelosingtheirlustre?Howarefirmsre-shapingtheirstrategiesandtacklingtheirbigoperationalchallenges?

Some207respondentscompletedthesurvey,withanevenspreadfromIndiainthewesttoJapanintheeast,andfromChinainthenorthtoAustraliainthesouth.Respondentswereallseniorexecutives,manyofthemwithoverallresponsibilityfortheAsiaPacificregion.ThemajoritycamefromWesternmultinationalcompanies.(SeeAppendixonpage28formoredetailsaboutthesurveyrespondents.)

I.



Asia gathers speedAfter a slowdown in 2012, executives expect better things in 2013—but only modestly so

Fewpeoplewoulddeclaretheyear2012adisaster.Equally,though,fewwoulddeclareitagreatsuccesseither.Theglobaleconomyslowedduringtheyear,andmanycompaniessawtheirrateofgrowthinAsiaslow too.

Butstandingonthecuspof2013,themoodappearstobeimproving.RespondentstoourlatestABOSsurveyarecertainlyfeelingbrighteraboutthefuture.Atahighlevel,47%ofexecutivessay their expectations for Asia have improved today compared to a yearago.Only15%saytheirexpectationshavefallen.(Seechart1.)

What’smore,oursurveyshowsthatcompaniesareexpectingtheirsalestogrowfasterin2013thantheydidin2012.Indeed,foreveryterritory—withtheexceptionofJapan—executivesareexpectinggrowthratestopickup,albeitrelativelymodestly.(Seechart2.)

II.

Chart 1Have your business expectations for Asia Pacific changed over the past year?(%)

Source: Economist Corporate Network ABOS 2013

47

38

15

Our expectations havedeclined

Our expectationsare unchanged

Our expectations have improved

Chart 2How did your revenues grow (or decline) in 2012 and what do you expect in 2013?(%, simple average of all respondents)

China

South-east Asia

Indian subcontinent

Japan

South Korea

Australia/New Zealand

9.78.9

9.28.8

7.76.3

5.05.2

4.74.5

4.84.3


2013 2012



ExpectationsamongsurveyrespondentsarehighestforChina.Indeed,oneofthebroadthemesofthisreportishowimportantChinaistocompanyplans,inspiteofthemany challenges that respondents say they increasingly face. Not only is it the biggest marketinAsia,andthefastestgrowing,itisalsothenumberoneinvestmentdestinationforcompanies(seesection6,“Investmentprioritiesfor2013”,onpage12).Formanyfirms,ChinaisreachingapointwhereitisbeingmanagedseparatelyfromtherestofAsiaPacific(seesection10,“Asiagetstoobigtomanage”,onpage19).

ThesecondfastestgrowingmarketforcompanysalesisnotIndia,butSouth-eastAsia.WhileIndia’seconomycontinuestodisappoint,South-eastAsiaisshowingsurprising resilience in the face of a relatively soft global economy.

ThelowestexpectationsforsalesgrowtharereservedforAustralia.Thecountry’scommodity export story has weakened a little as prices for iron ore and coal have fallen. And the domestic economy remains relatively subdued. Investment into the miningsector—abigcontributortorecentdomesticgrowth—isfalling.AndthestrongAustraliandollar—drivenupbycommodityexports—ishurtingdomesticindustry,making it cheaper to import goods than to make them locally.



But is it enough?Are companies growing too slowly?

Interestingly,thegrowthratesthatcompaniesareexperiencinginmanymarketsinAsiaarelessthantheunderlyingratesofeconomicgrowth.ThisisespeciallytrueforIndiaandChina.Chart3showsnominalcompanysalesgrowth(ie,acombinationofpricerisesandincreasingvolumes)in2012plottedagainstnominalGDPgrowth(whichincludesinflation).InIndia,forexample,nominalGDPgrewby12.6%in2012,whereasnominalsalesonlygrewby6.3%forthecompaniesinoursurvey.

Oneimportantthoughtfollowsfromthisobservation.Whilethegrowthratesthatmajor multinationals are achieving in their emerging markets might look impressive by globalstandards(especiallyrelativetoamarketlikeEurope),theyarenotasgoodasthey could or should be.

Whymightthisbethecase?ItcouldbethatthestrengthandqualityofcompetitioninthemarketsofAsiaPacificisheatingup.LocalAsianfirmsarerisingrapidly,andmayenjoydomesticadvantages,possiblythroughbetterculturalunderstanding,moreappropriatebusinessmodels,betterrelationshipswithgovernment,entrenchedprotectionism,orperhapslessrestrictionsaroundhowtheywinnewbusiness.

III.

Chart 3Nominal GDP growth and nominal sales growth in 2012(%)

India

China

ASEAN

Australia

South Korea

Japan

12.66.3

10.38.9

7.28.8

4.94.3

2.54.5

0.15.2


Nominal GDP growth Nominal sales growth



Equally,itcouldbethatforeignfirmsareunder-investingintheirbusinessinordertocapturethebenefitsofAsia’srapideconomicgrowth.Oursurveycertainlypresentssomeevidenceofthisunder-investment(seesection9,“Communicationfailure?”,onpage17).

However,thisgrowthunder-achievementisnotuniversallytrueacrossAsia.InSouth-eastAsia,thecompaniesinoursurveyreportthatsalesaregrowingmorerapidlythanGDP.ManyfirmstellusthattheASEANmarketsaremucheasierplacestodobusinessthan China and India.



Asia’s productivity challengeCompanies are expecting sales to grow much faster than the size of their workforce

AcrossAsia,mostcompaniesexpecttheirrevenuestogrowin2013.Notsurprisingly,mostcompaniesalsoexpectthesizeoftheirworkforcetogrowin2013.Thisistrueforallmarkets,butfirmswillbehiringmostaggressivelyinChina,South-eastAsia,andIndia—theplaceswheregrowthexpectationsarehighest.(Seechart4.)

Importantly,however,companiesareexpectingtheirrevenuestogrowatafasterratethanthesizeoftheirworkforce.Indeed,formostpartsofAsia,theexpectedgrowthrateforrevenuesin2013isaroundtwicetheexpectedgrowthrateforstaffnumbers.(Seechart5.)

Thisimpliesthatfirmsareexpectingtheirrevenueperworkertoincreasein2013.Twopossibleconclusionsfollowfromthisobservation.Onepossibilityisthatfirmsexpectmostoftheincreaseintheirrevenuestocomefrompricerises,whilethevolumeof underlying business increases at the same rate as the growth in their workforce. Alternatively,ifpriceincreasesareonlymodest,thenthatmeansfirmsareexpectingtheproductivity of their workers to rise.

IV.

Chart 4How did the size of your workforce grow (or decline) in 2012 and what do you expect in 2013?(%, simple average of all respondents)

China

South-east Asia

Indian subcontinent


South Korea

Japan

5.36.3

4.95.3

4.14.8

1.92.0

1.71.4

1.70.6


2013 2012



Ourinterpretationisthatthelatterstory—growththroughproductivity—ismorelikely.TakeChina.Oursurveyshowsthatcompaniesareexpectingtheirsalestogrowby9.7%in2013,butfortheirworkforcetogrowbyjust5.3%.Ourexpectationforinflation(aproxyforpricerises)in2013isaround3%.Thisimpliesthatlabourproductivitywillneed to rise in order to meet the sales target.

What’smore,anecdotallywehavehadmanyconversationswithcompaniesoverthepastyearsuggestingthatimprovinglabourproductivityisapriority.WagesinmostpartsofAsiaPacificarerisingrapidly.Companiescannolongerrelyonbusinessmodelsbuiltonbigpoolsofcheaplabour.Instead,theyareinvestingheavilyincapitalandtechnology.Manyfirms—especiallythoseinmanufacturing—areshiftingtowardsgreaterautomation,therebyreducingtheneedtohiremoreworkers.Forinstance,Foxconn,theworld’slargestmakerofelectroniccomponents,announcedin2011thatitwould deploy as many as one million robots in its Chinese factories by 2013 to do much of the work currently done by human hands.

However,raisingworkerproductivityiseasiersaidthandone.Thiswillsurelybeanever more pressing issue for companies in Asia in the years ahead.

Chart 5Expectations for sales growth and workforce growth in 2013(%, simple average of all respondents)

China

South-east Asia

Indian subcontinent


South Korea

Japan

9.75.3

9.24.9

7.74.1

4.81.9

4.71.7

5.01.7


Sales growth Workforce growth



On the money?Executives had mixed fortunes when it came to predicting how their companies would perform in 2012

Economistsareoftenencouragedtoback-testtheirforecaststochecktheaccuracyoftheirpredictions.Butwhataboutthe500companiesintheEconomistCorporateNetwork?Howgoodaretheyatpredictingthefutureoftheirbusiness?

Tofindout,welookedbackatourABOSsurveyayearago,conductedinDecember2011.Wewantedtoseewhatexecutiveswereforecastingfortheirsalesgrowthatthestartof2012,andthentocomparethoseforecastswiththeactualsalesperformanceattheendof2012.Theresultsareshowninchart6.

ForsomepartsofAsia,theresultswereextremelyaccurate,notablyinSouth-eastAsiaandSouthKorea.InJapan,executivesunder-estimatedtheirsalesperformance,perhaps because they made their forecasts when the country was still under the shadow ofthetsunamiandearthquakethatstruckin2011.Intheend,thereconstructionandrebuildingactivitiesin2012ledtoayearofstrongeconomicgrowthforJapan.

ThebiggestforecastingerrormadebyexecutiveswasinIndia.Companieswereexpectingaveragesalesgrowthof10%,buttheactualresultwasamuchpoorer6.3%.India’sweakeconomicperformancecaughtmostobserversbysurprise,soit’stobeexpectedthatcompanieswerealsooverly-optimistic.

V.

Chart 6Sales growth forecast vs actual sales growth for 2012(%, simple average of all respondents)

China

India

South-east Asia

South Korea

Japan

11.88.9

106.3

8.28.8

4.94.5

3.75.2


2012 forecast 2012 actual



Investment priorities in 2013 China and India remain the top two investment destinations. Indonesia is a close third, while Vietnam has lost its shine

GiventheeconomicgrowthratesinAsiaPacific,theregionisclearlyaplaceofgreatpromise.Butwhichmarketsandcountriesareattractingthegreatestcommitmentsfornewinvestment?

TopofthelistofinvestmentprioritiesisChina.(Seechart7.)Astheworld’ssecondlargesteconomy,andwithgrowthratesthatremainimpressive,China’sgravitationalpullappearsundiminished.Nearlythree-quartersofthecompaniesinoursurveysaythey will increase their investment there in 2013.

VI.

Chart 7How will your level of investment change in the following markets during 2013?(%)

China

Indian subcontinent

Indonesia

Malaysia

Thailand

Vietnam

Singapore

South Korea

Philippines

Australia

Japan

Hong Kong

Taiwan


We will increase our level of investment We are in the market, but will not invest moreWe will reduce our investment in this market We have no plans to invest

73.8 20.6 0.7 5

54.1 32 13.9

53.5 27.1 0.8 18.6

43 38.5 2.2 16.3

38.6 33.9 2.4 25.2

37.7 32.8 3.3 26.2

34.8 53.9 0.7 10.6

28.9 46.1 3.1 21.9

28.1 45.5 0.8 25.6

27 47.6 5.6 19.8

26.2 55.4 3.1 15.4

21.4 58.8 1.5 18.3

15.2 51.2 3.2 30.4

ThisislikelydriveninpartbytheincreasinggeographicaldiversificationoftheChinaopportunity.Productioncentresaredriftinginland,andnewmarketsarerisingrapidlyinTierTwo,ThreeandFourcities,mostofwhichlieinlandfromtheestablishedmarketsofChina’seasternandsouthernprovinces.ForeignfirmshavemanygripesinChina,fromrapidlyrisingwages,toentrenchedfavouritismtowardslocalcompetitors.Butsuchgripes are not yet translating into reduced appetite for investing there.



AfterChina,investmentprioritiesinthisyear’ssurveydivergeslightlyfromlastyear.Indiahastraditionallybeenneck-and-neckwithChinaontheprioritylist,butthisyearhasfallenback:only54%ofrespondentsindicatetheywillincreasespendinglevelsthere.India’sgovernmenthasinrecentmonthsbeenapplyingpolicytourniquetstostaunchtheebbingeconomy(particularlyaroundforeigninvestmentlegislation),butthismayhavebeentoolittle,toolatetoswaydecisionmakersatmultinationalfirmsintheir2013planningcycle.

IndonesiacontinuestorankhighlyamongstEconomistCorporateNetworkcompanies,andisbarelydistinguishablefromIndiaintermsofattractiveness.However,whileIndiahas been scrambling to make itself more friendly to foreign investors in the second half of 2012,Indonesiaisseeminglywalkingintheoppositedirection.Overthecourseof2012,thegovernmentimposedtaxesontheminingsector,proposedlimitsonforeignownershipintheminingandbankingsectors,introducedaraftofminimumwageincreases,anddismantledthestateregulatorforoilandgasproduction—castingdoubtoverthestatusofforeignfirmsholdingoilexplorationconcessions.Allinall,thecharacteroftheforeigninvestmentclimateinIndonesiahasbeendeteriorating.Andyetforeignfirmscontinuetoincreasetheircommitmenttothecountry.Giveneconomicgrowththatisrunningatareliable6%to7%ayear,andahugedomesticpopulationofsome240m,manyfirmsconclude that they simply can’t afford to ignore the country.

MostotherSouth-eastAsiancountriesarealsoprovingtobeinterestinginvestmenttargets.Buttwostandoutforbeingsomewhatoutoffavour.ThefirstisthePhilippines,whichisattractingthelowestamountofnewinvestmentofanyASEANmarket.Thisseemssurprisinggiventheextenttowhichthecountryisperformingeconomically(itwasthethirdfastest-growingeconomyinAsiain2012,behindMongoliaandChina).Justasimportant,thepresident,BenignoAquino,ismakingvigorousattemptstodismantlecorruption,introduceeconomicreforms,andimprovethebusinesslandscape.Thecountryhasaworld-classbusinessprocessoutsourcing(BPO)industrythatisattractingsignificantinvestmentinbackofficesandsharedservicefacilitiesfromaroundtheworld.However,callcentresandthelikearerelativelycapital-lightoperations(beyondtherealestateandtelecomsinfrastructure).OutsidetheBPOspace,thePhilippineshasyettopersuadeinvestorsthatthe country is changing for the better.

ThesecondsurpriseinSouth-eastAsiaisVietnam.Overthepasttwoyears,thecountryrankedjustbehindthe“bigthree”ofChina,IndiaandIndonesia,andhaslongbeenafavoriteantidotetorisingmanufacturingcostsinChina.However,Vietnamfindsitselfdroppingtosixthplacethisyear,undoubtedlytheresultofthegovernment’smismanagement of the economy. Clients of the Economist Corporate Network complain ofacreditcrunchwhichmakesworkingcapitalproblematic,incompletedomesticsupplychainswhichstillrequireimportingcomponentsandmaterialsfromChina,troublesomewageinflation,andinsufficientroadandportinfrastructure.WhileVietnamdoeshavealottoofferforeigninvestors,thestoryhaslostmuchofitsshine,especiallyasanalternativelocation to China for manufacturing.



Frontier, or fringe?Do Myanmar, Mongolia, Cambodia and Laos hold any promise?

Thisyear,weaskedEconomistCorporateNetworkmemberstodescribetheirlevelofinterestinAsia’sfrontiermarkets.Manyhavebecomesubjecttointensescrutinyanddiscussion given their untapped potential and/or resource wealth.

Mongolia’sminingboomhasmadeitthesecond-fastestexpandingeconomyintheworldin2012(andlikelytobethefastestgrowingin2013).Laos’aspirationtouseitsmassivehydropowercapacitytobecome“thebatteryofSoutheastAsia”isalsoanexcitingnaturalresourcestory.Cambodiaisbeingseenbymanyasanextension(orreplacement)totheexportmanufacturingclustersofThailandandVietnam.

ButitisreallyMyanmarthathascapturedtheglobalbusinessimaginationthisyear.Thehugegeopoliticalcloudofisolationhangingoverthecountryhasn’tcompletelydissipated.ButsubstantialpoliticalreformcoupledwithendorsementsfromthelikesofBarackObama(followinganhistorictriptherein2012)meanthatthiscountryofnearly60mhasthepotentialtoinfuseASEANwithatremendousnewconsumermarketopportunity,andanewsourceofcompetitivemanufacturinglabour.

However,whilethesenewopportunitymarketsareoneveryone’sminds,mostmultinationalshaven’tyetcommittedresourcestothem.Only5%ofrespondentssaytheyareinvestingheavilyinMongoliaand/orMyanmar,andlittlemorethan10%saythattheyareinvestingmoderatelyinanyofthesemarkets.(Seechart8.)

Thismaysoonchange,forwhileonlybetweenaquarterandathirdofrespondentssaytheyaredoingsomesortofbusinessinthesemarkets,anotherthirdarewatchingclosely and assessing the opportunity.

VII.

Chart 8How interested is your company in the following frontier markets?(%)

Mongolia

Myanmar

Cambodia

Laos

41.633.515.55 4.3

30.716.6 34.413.54.9

36.228.21915.31.2

4132.317.49.3


We are investing heavily We are investing moderatelyWe do business there, but have not invested on the groundWe are watching and assessing, but have no business yetThis market holds no interest at present



Unprecedented gravitational shiftTheshareofglobalrevenuescomingfromAsiaPacificformultinationalfirmsisrisingat warp speed

Asinyearspast,theshareofrevenuescomingfromAsiaPacificatnon-Asiancompanieshasagainrisenyear-on-year.In2011theaverageABOSrespondentatanon-Asiancompanysaidthepercentageofglobalrevenuederivedfromtheregionwas19%.Thisyearitwas22%.

However,asChart9shows,Asia’sshareofglobalGDPissubstantiallyhigherthanAsia’sshareofglobalrevenuesfornon-Asianfirms.However,infiveyears’time,respondentssaytheyexpectthisgaptoclose.By2017,executivesexpectAsiaPacifictocontribute32%oftheirglobalrevenues(comparedtotheregion’s35%shareoftheglobaleconomy).

VIII.

Chart 9What percentage of your global revenues came from Asia Pacific in 2012 and what will it be in 2017?(%)

2017

2012

31.7

22.3

35.4

31.4

Note: Data is only for non-Asian companiesSource: Economist Corporate Network ABOS 2013

Asia’s share of global GDP Asia’s share of global revenue at non-Asian companies

Never in economic history has one part of the world gained so much share of the globaleconomicpieatsuchstaggeringspeed.Non-AsiancompaniesareclearlyexpectingnotonlytokeeppacewithAsia’srapidgrowth,buttogrowevenfaster,andsoclosethegapbetweenAsia’sshareofglobalGDPandAsia’sshareoftheirsales.

Sectorally,thefirmsthatestimatethebiggestfuturegainsarethosewhichdemonstratethefuturepotentialofamaturingAsianbusinesslandscape.(Seechart10.)Overthepastfewyears,thoseindustriesthathavebenefittedfromAsia’sblistering growth have been those that traditionally fuel big developing economies: thecommoditiessector(respondentsthereestimatethatover40%oftheirglobalrevenuealreadycomesfromAsia),telecoms,chemicalsandofcoursemanufacturing.Butinfiveyears’time,itistheprofessionalservicessector,mediaandpharmaceuticalswhich report the biggest estimated proportional jump in their Asian share of global



business.Interestingly,thefinancialservicessectorreportsthelowestshare,bothnow(understandablegiventhegloomycurrentstateofglobalfinance)andinfiveyears’time.

Chart 10What percentage of your global revenues came from Asia Pacific in 2012 and what will it be in 2017?(%)

Commodities

IT and telecoms

Chemicals

Manufacturing

Media, marketing andentertainment

Professional services

Financial services

Transport and logistics

Consumer goods and retail

Property, construction andengineering

Pharma and healthcare

47.441.2

30.825.4

33.223.9

32.322.7

31.922.5

3221.7

29.120.1

25.718.7

26.417.3

26.415.4

1811.3


2017 2012



Communication failure?ExecutivesatWesternfirmsfeeltheyareunder-investinginAsia.Whyisthat?

Oursurveyrevealsthatexecutivesatnon-Asianfirmsfeeltheyareunder-investingintheregion.Indeed,44%ofrespondentssaytheyareunder-investingandunder-hiringinordertocapturetheopportunitythatAsiaPacificpresents.(Seechart11.)

WhyisitthatWesternfirmsarenotinvestingenoughinAsia?Therearecertainlyexternalconstraints: investment climates remain murky inmanymarkets,andmercurialregulationshave a tendency to swing wildly from inviting to protectionist.Humancapitalisalsohardtofindandretain,particularlyinkey“hub”marketswhereregional strategy and direction is forged.

Butrespondentsmayalsofaceconstraintsfromwithintheirfirms.AcommonissuespokenofbyEconomist Corporate Network members is that weakeconomicconditionsinthe“home”marketmaydampentheappetitefromHQforexpenditureandexpansioneverywhereelsetoo.Manyfeelthatglobal leadership teams have a tendency to regard theworldthroughthelensoftheirhomemarket,

and thus fail to recognise that many parts of the world offer considerably brighter prospects.

Toovercometheover-cautionthatresultsfromanchoringglobalbusinessdecisionsinslowmarkets,manyWesternfirmshavedecidedtouprootseniordecisionmakingstructuresandbasethemwherethegrowthis.Forexample,SchneiderElectricandKPMGbothhavetheirglobalheadsbasedinHongKong.TheCEOsof“growthmarkets”globallyforGEandIBMsitinHongKongandShanghairespectively.

Oursurveysuggeststhatsuchtrendsarehappeningatanacceleratingpace.Forexample,thenumberofnon-AsiancompanieswithamemberoftheirmainboardofdirectorslivingandworkinginAsiacontinuestoincreaseyear-on-year.Backin2008,just19%ofnon-AsiancompanieshadaboardmemberbasedinAsia.Butthisyear’s

IX.

Chart 11Is your company investing and hiring at the right rate tocapture the opportunity in Asia Pacific?(%)


5244

4

Don’t know

We are not investing and hiring at the right rate

We are investing and hiring at the right rate



ABOSsurveyshowsthatfigurehasrisento38%.By2017,executivespredictthenumberwillincreasestillfurther,with52%ofcompaniesexpectingtohaveaboardmemberintheregion.(Seechart12.)

Chart 12Are any members of your firm’s main board of directors based in Asia?(% of respondents answering yes)

0

10

20

30

40

50

60

Will have at least one board member in Asia

by 2017

20122011201020092008


19.125.7 27.9 28.6

38.3

52.6

Chart 13Are any of your firm’s global business unit heads based in Asia?(% of respondents answering yes)

0

10

20

30

40

50

60

70

80

Will have at least one global business unit head in Asia by 2017

20122011


45.651.9

68.4

Asimilarpatternisclearinothertypesofseniorrole.Forexample,more and more companies are moving the global heads of individual businessunitsouttoAsia.In2011,46%ofnon-Asiancompaniessaid they had a global business unit head living and working in Asia. By2012,thatpercentagehadrisento52%.Andby2017,companiesexpectittobe68%.(Seechart13.)

Yetnotallissuescanbeaddressedbyproximity,anditisimpossibleforaCEOtobeontopofeverygrowthmarketatonce.Partofthe solution lies with being better at communicating the Asian opportunityupthedecisionchain.ManymembersoftheEconomistCorporateNetworkdothisthroughfocusingonspecificprojects—anewcountrymarket,oralocally-developedproductinnovation—andfindingchampionswhocancommunicatespecificAsia-basedsuccessstories more broadly across the organisation. Asia’s wide and diverse opportunitylandscaperequireslocalleaderstobringspecifictangiblesuccess stories to light so global leadership can grasp the broader opportunity.



Asia gets too big to manageWesternfirmschangethewaytheyorganisethemselvesinAsia

Foralargemultinationalcompany,itmakessensetodivideuptheworldintosmallerchunksforthepurposesofmanagementandreporting.Oftenthatmeansgroupingtogether countries that are geographically close to each other into a distinct managementunit.Somecompaniesprefertogrouptheirmarketsbyothercriteria,suchas the level of economic development.

InAsiaPacific,thechallengeofdecidinghowtocarveuptheregionintomeaningfulunitsisespeciallyhard.Forone,theregionishuge.TheareafromPakistaninthewesttoAustralia in the east represents more than a third of the global economy and more than halfofitspopulation.Foranother,Asiaisincrediblydiverse.WhatworksinChinadoesn’twork in India.

Intherecentpast,manyfirmsrantheregionasonesinglemanagementunit.Buttodaythisischanging.AstheAsiaPacificregiongrows,andbecomesaneverbiggerpartoftheglobaleconomy,socompaniesarestartingtobreakuptheirAsiaPacificmanagement units into smaller more manageable blocks.

Oursurveysuggeststhat55%ofWesternfirmsstillruntheAsiaPacificregionasoneterritory,withallcountriesreportingtoaregionalhubthatinturnreportstoaglobal

X.

Chart 14Organisational structures for Western firms operating in Asia Pacific(% of respondents)

Note: Data includes only respondents at companies with a global HQ outside Asia PacificSource: Economist Corporate Network ABOS 2013

55

34

11All countries reportdirect to HQ outside Asia

South Korea

Australia

India

Japan

China

Some countries report toAsia Pacific HQ, some

report to HQ outside Asia

All countries report intoa single Asia Pacific HQ

For companies with more than 1 reporting line out of Asia Pacific, which countries report direct to an HQ outside the region (and not to the regional Asia Pacific HQ)?

16

42

43

49

52



HQinEuropeorNorthAmerica.However,45%ofcompanieshavedecidedtosubdividetheregion,andnowhavemorethanonereportinglineoutofAsia.(Seechart14.)

Incaseswherecompanieshavecarvedcertainmarketsoutoftheirpan-Asiamanagementhub,whichonesarenowstandingaloneandreportingdirecttoanHQoutsidetheregion?ThemostpopularchoiceisChina.Formanyfirms,Chinahasreacheda critical mass where it needs an independent management team that is separate from managingtherestofAsia.InsecondplaceisJapan.



XI. Overheating hubsAre Singapore and Hong Kong burning up?

AscompaniesfocusevermoreheavilyonAsiaforgrowth,theyarecommittingmoreandmoreresourcestotheregion.AlotofthatinvestmentfindsitswayintoSingaporeandHongKongasthetraditionalcentresforrunningregionalmanagementhubs.Yet,bothplacesarenowstrugglingwithseriousinflation,costoflivingissues,soaringpropertyprices,scarceschoolplaces,andshortagesofstaff.Inthisyear’ssurvey,weaskedEconomist Corporate Network members to assess whether these issues where material constraintsontheirabilitytooperate—andwhethertheywereseriousenoughtocausemanagerstoconsiderdecampingtootherlocations.(Seecharts15and16.)

Chart 15For companies with a regional HQ in Singapore, are any of these issues impacting the businessoperations, or the location, of your Asia HQ?(% of respondents)

Cost of living/inflation

Property prices

Shortage of staff

Domestic business volume

Safety/security concerns

Business regulations

Availability of schools

Unfavourable tax

Distance from other hubs

Transport/logistics

Pollution


Not issue/minor irritant Major issue/cause for relocation

5248

3862

3466

2080

1486

1387

1288

1090

1090

793

595

Inthemain,issuessuchasexpensivepropertyandthesoaringlivingcostssuggeststrongdemandbycompaniestobeinthesecentres—meaningthatbothSingaporeandHongKongremainattractiveplacestocreateplatformsformanagingregionalbusiness.And,asdiscussedabove,enoughglobalfirmsarepostingleaderswithglobal



Chart 16For companies with a regional HQ in Hong Kong, are any of these issues impacting the businessoperations, or the location, of your Asia HQ?(% of respondents)

Property prices


Shortage of staff





Unfavourable tax


Transport/logistics

Pollution



4258

4159

3763

3070

1783

1486

1387

1189

991

991

694

roles to Asia to conclude that hubs will continue to retain important roles in company organisational charts for some time to come.

ButinSingaporespecifically,morethanhalfofrespondentsbasedthereconsiderrisingcoststobeeitheramajorconstraintorareasontorelocate—andnearly40%considerpropertypricesashavingthesameimpact.TheproblemisalmostasacuteinHongKong,perhapsonlymitigatedbythefactthatcostshavelongbeensohightherethatfirmshavealreadyrecalibratedtheirexpectations,whileSingapore’srisingcostsare a more recent shock.

Willthiscausecompaniestolookatotherplacestoputtheirregionalmanagementhubs?Inalllikelihoodnot.Itisstillvitallyimportanttohaveacriticalmassofmanagementinplaceswheretravelisconvenientandthefinancialsystemworkswell.However,thatdoesn’tmeanthatfirmsaredoingnothing.Anecdotally,somefirmsare moving parts of their operations that don’t need to be in their regional hubs into lessexpensivecitiesinothercountries.Otherfirmsareexploringmoredistributedmanagementmodels,spreadingtheirseniorteamacrossseveralmarkets,ratherthanputting them all in one place.

OnefactorthatmightbecriticalinlocatingkeytalentistheissueofschoolplacementsinHongKong.Singaporeisalsoatightmarketforinternationalschools,butwithtypicallyadroitplanning,thecity-statehasworkedatreducingthisbottleneck.InHongKong,whereinternationalschoolwaitinglistsrunintothethousandsofplaces,



some30%ofrespondentsindicatethatitisamajorimpediment,perhapsworthyofarelocationdecision.Interestingly,onetraditionalcomplaintinHongKongisthatpollutionisaseriousissueformultinationalcompanies,andyet94%ofHongKong-based managers in our survey said it was at worst a minor irritant.

Forcompaniesthatareconsideringanewlocationfortheirmanagementteam,howdoothercentresstackup?Inoursurvey,wealsoaskedaboutShanghai,TokyoandKualaLumpur.Nocityisperfect,buttheseotherplacesdoofferalternatives.(Seecharts17,18and19.)

Chart 17For companies with a regional HQ in Shanghai, are any of these issues impacting the businessoperations, or the location, of your Asia HQ?(% of respondents)

Shortage of staff



Unfavourable tax



Pollution

Property prices

Transport/logistics





4357

3961

3169

2575

2377

2179

1981

1783

1288

892

793



Chart 18For companies with a regional HQ in Tokyo, are any of these issues impacting the businessoperations, or the location, of your Asia HQ?(% of respondents)


Unfavourable tax

Shortage of staff


Property prices

Pollution

Transport/logistics







4456

3367

3169

2476

2278

2080

1981

1783

1189

1090

595

Chart 19For companies with a regional HQ in Kuala Lumpur, are any of these issues impacting the business operations, or the location, of your Asia HQ?(% of respondents)

Shortage of staff


Property prices


Unfavourable tax




Pollution

Transport/logistics




4852

3070

2278

2080

1882

1585

1585

1387

1387

1189

991



Operational insight: Footloose and fancy-freeCompanies are relocating their operations more frequently today than in the past

Inhigh-growthmarketssuchasthoseinAsia,businessconditionsandtheinvestmentlandscapeoftenchangeatbreakneckspeed.Labourcostscanriserapidly.Governmentpolicies and rules around foreign investment can swiftly reverse course or suddenly improve.Newmarketsopenup,currenciesriseandfall,tradedealsproliferate,andtrade routes change course.

Giventhisdynamicbackdrop,it’snosurprisethatoursurveyshowscompaniesarechangingthelocationoftheiroperationsinAsiaPacificmorefrequentlytodaythaninthepast.Indeed,31%ofrespondentssaytheychangethelocationoftheiroperationsmorefrequentlytodaythaninthepast,whileonly4.6%saytheychangethemlessfrequently.(Seechart20.)

Ofcourse,theabilitytopackup and relocate operations quicklydependsonthesector that a business is in. Commoditiesandreal-estatecompanies,forexample,oftenincurheavystart-upcosts,soare much more tied down. Firms intheservicessector,however,investmuchlessontheground,and so relocating to a new market is much less of a hassle.

XII.

Chart 20Do you move the location of operations more or less frequently today compared to the past?(%)


31.1

4.6

64.2

No change

We change the locationof operations lessfrequently todaythan in the past

We change the location of our operations more

frequently today thanin the past



Operational insight: Human capital Staff turnover rates improved in 2012. But for how long?

FindingandretainingstaffremainsaperennialheadacheformanagersinAsia.Theshortage of workers with the right skills and experience has resulted in stiff competition fortalent.Themanpowerchallengeisgreatestinthehighest-growthmarketssuchasChina,IndiaandSouth-eastAsia,wherepoachingamongrivalfirmsiscommonplace.

Inthepastyear,however,itseemsthatthejobsmarkethasn’tbeenquitesovolatile.ComparingtheresultsfromourABOSsurveysin2011and2012,executivesreportthatstaffturnoverhascomedowninallmarketsacrossAsia.(Seechart21.)InChina,forexample,staffturnoverin2012averaged10.8%,farbelowthe14.3%reportedin2011.InIndiaandSouth-eastAsia,firmsalsoexperiencedsignificantlylowerstaffturnoverrates in 2012 compared to the previous year.

Onereasonforthelowerchurnin2012mightbetheweakereconomy.Giventheuncertaintysurroundingthehealthoftheglobaleconomy,firmshavebeenlesswillingtoofferhigh-paypackagestoluretalentfromrivalcompanies,andworkershave

XIII.

Chart 21What is your staff turnover in these territories?(%)

China

Indian subcontinent

South-east Asia

Australia/New Zealand*

Japan

South Korea

10.814.3

9.912.6

8.310.8

6.6

4.74.8

4.45.1

* No data for Australia and New Zealand for 2011Source: Economist Corporate Network ABOS 2013

2012 2011



prioritised the security of their existing jobs rather than seeking out new opportunities.Ofcourse,anotherreasonmightbethatcompanieshavegenerallygotbetterat

engagingtheirworkforcesandimprovingtheirloyalty.Butwearen’tholdingourbreath.Astheeconomyimprovesin2013,weexpecttoseestaffturnoverratesedgebackupagain.



Appendix:Surveyfirmographics

The2013AsiaBusinessOutlookSurveywascompletedbysome207seniorexecutiveswithmanagementresponsibilityforbusinessesacrossAsia.Theyoperateinawidespreadofindustries,reflectingtheEconomistCorporateNetwork’sdiverseclientbase,fromfinancialservicestomanufacturingtoretailtohealthcare.

Asinpreviousyears,therespondentsmainlyrepresentlargecompanies;threequartershadmorethanUS$1bninglobalrevenue,and35%ofrespondentsoversawoperationsinfirmswithrevenuesofUS$10bnormore.ThesurveyrespondentslargelyreflecttheviewsoftheWesternmultinationalinAsia,asthevastmajorityhaveheadquarterseitherinNorthAmerica(35%)orinEurope(41%).Oftheremaining24%ofrespondents,mostworkedatAsiancompanies,withasmatteringcomingfromAustraliaandSouthAmerica.

XIV.

About Economist Corporate Network

Economist Corporate Network is The Economist Group’s advisory service for senior executives seeking insight into economic and business trends in their key growth markets.

Independent and thought-provoking, Economist Corporate Network provides clients with the information, insight and interaction they need to succeed. It is led by experts who share a profound knowledge and understanding of business issues. It has regional business groups across Asia Pacific, Central and Eastern Europe, the Middle East and Africa.

Through its tailored blend of interactive meetings, high-calibre research, and private client briefings, Economist Corporate Network delivers country-by-country, regional, global and industry-focused analysis on both current and forecast conditions.

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Economist Corporate Network Asia Beijing, Hong Kong, Kuala Lumpur, Shanghai, Singapore, Tokyo Follow us on Twitter @ecn_asiaFor enqueries please contact at us at [email protected] F

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