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Asia: the best bet for
businesses
Asia remains
one of the world's most dynamic regions and offers
multiple opportunities for businesses and
investors. In addition to the considerable
enthusiasm that has been directed toward China as
a result of its rapid growth in recent years,
considerable attention is now being accorded to
India and other markets as well. Economic progress
is also fueling increasing regional integration,
which in turn is further accentuating Asia's
potential. As the largest economy in the region,
Japan plays a key role in driving economic
activity given the size, sophistication and
affluence of its population, and the operating
range of Japanese corporations.
Given the
prospects for rapid growth, greater intra-regional
trade and Asia's importance as both an industrial
and consumer market, companies and investors are
well advised to consider how the region, and Japan
in particular, might fit into their investment and
expansion plans. In addition to these regional
trends and opportunities, there are also many
exciting developments occurring within Japan's
domestic economy.
Asia grew at an
impressive 7.3% in 2004, according to the Asian
Development Bank's 2005 Outlook report. In fact,
2004 marked the region's "best growth performance
since the Asian financial crisis of 1997-98".
First-quarter 2005 data supports the view the
region remains on an upward trend. India grew at a
7% rate while Malaysia registered 5.7% growth over
the same period. For its part, Japan registered
5.3% during the first three months of 2005. This
success in part is attributable to solid growth in
traditional trading partners such as the US. At
the same time, the region is benefiting from
rising domestic consumption, business investment
and intraregional trade.
Looking forward,
some analysts are questioning whether this growth
is sustainable. In addition to stagnant growth in
Europe, Asian economies have to grapple with the
potential of lower growth in China and the US.
Robert Subbaraman, senior economist for Asia at
Lehman Brothers, noted in a Dow Jones Newswire
report that more optimistic forecasts are
"conditioned partly on the electronics cycle
turning up and oil prices not rising much from
here".
Although these concerns are not
trivial, Asia's fundamental strength was recently
emphasized by Morgan Stanley Chief Economist
Stephen Roach who noted "any hit to Asian growth
seems likely to be cyclical and temporary".
Reasons for optimism were enumerated in a recent
Far Eastern Economic Review article by
editor-in-chief of the China Economic Quarterly,
Joe Studwell, who highlighted better corporate
governance, Asia's enlarging role in global supply
chains, the strong financial positions of many
regional economies, Asia's growing role as a
center for innovation, and an expanding middle
class. Paradoxically, portfolio investors have
traditionally underweighted the region. In 2003,
Marc Faber observed Asia, including Japan,
accounted for only 11% of world equity market
capitalization. This allows substantial room for
valuation increases as this deficiency is
addressed.
India: Finally
recognized
While much of the interest
directed toward Asia in recent years can be
attributed to rapid development in China, we are
now beginning to see a similar enthusiasm emerge
in regard to India. Many analysts believe, in
fact, that India's strong devotion to democratic
rule, its emphasis on service industries,
long-term familiarity with Anglo-Saxon business
practices, knowledge of English and more favorable
demographic structure make it an even more
favorable market over the long term than China.
Over the last three years, the economy of India
has grown at an average rate of 6.5%. According to
Deputy Chairman of India's Planning Commission,
Montek Singh Ahluwalia, the country is expected to
average 7.5% over the next two years, with an
objective of seeing it rise to an 8% growth path
thereafter.
India undoubtedly still
requires numerous additional structural and other
reforms as well as substantial infrastructure
improvements to sustain its progress. The lower
baseline from which it is starting, however,
allows investors and businesses a major
opportunity for growth and entry into an extremely
promising market as it begins to open its doors
more seriously to foreign investment and
participation.
Recognizing the emerging
potential of the Indian economy, Japanese firms
have been moving to strengthen their presence on
the subcontinent. Similarly, Indian firms are
increasingly looking to Japan as an export market.
As a result, the governments of Japan and India
have moved to form a Joint Study Group, with the
goal of establishing a comprehensive economic
relationship, most likely including a Free Trade
Agreement (FTA) between the two nations. At the
first meeting of the study group this month, it
was agreed that a report would be submitted to the
two prime ministers by June 2006.
Diverting attention from a growth
story
To some extent, investors have become
more cautious toward Asia due to myriad political,
economic, and social factors. Frictions, such as
those between China and Taiwan, are longstanding,
while others - including those between China and
Japan, Muslim insurgency in Southeast Asia, and
several territorial disputes that also have
historical roots - have only recently risen in
prominence. Tensions on the Korean peninsula and
Sino-American quarrels over trade, currency
valuations, and intellectual property have also
weighed on investors as they decide how to manage
investments in the region.
These issues
are very real and warrant careful attention. Even
though most go back many decades - in the case of
territorial disputes even centuries - they do have
the potential to impact trade and investment
flows. For example, anti-Japanese protests in
China in April have made many Japanese companies
wary of expanding or starting businesses in China.
Hiromi Oki, Director of International Economic
Research at JETRO, told Bloomberg News that
"because of anti-Japanese protests earlier this
year, we have seen some companies taking a more
cautious view on expanding further inland" in
China. The result, however, at least for now, has
not been to diminish economic activity in Asia.
Japanese firms face the same structural pressures
to expand offshore regardless of dynamics between
Japan and China. As a result, they have now begun
to seek alternatives, with India and ASEAN
representing two very real and attractive options.
The intractability and conflict potential
of these frictions in any case may be exaggerated.
To some extent, these tensions might be seen as
the normal outcome of a region in the midst of
ongoing and rapid economic, political and social
change. Regional economic development has created
new trade and investment patterns, with the
necessary adjustments causing painful domestic and
external difficulties for firms and workers. At
the same time, Asian governments must justify
further movement toward reform and liberalization
in the face of domestic criticism. At the same
time, these developments are creating newfound
opportunities for nationalists, ethnic groups, an
increasingly empowered middle class and a range of
interest groups, who are now able, and more
willing, to express sentiments they could not
voice in the past.
Despite these
challenges, Japan's Ministry of Economy, Trade,
and Industry (METI) estimates that by 2020, Asia
will have a 25.5% share of world GDP (gross
domestic product) versus 19.3% in 1990.
Consumption is rising, with polling firm ACNielsen
reporting Asian consumers are far more confident
about 2005 than those in America and Europe.
Malaysia, Taiwan, and Vietnam all
experienced growth rates exceeding 5% last year.
In 2005, analysts forecast growth in India and
China will exceed 6%, while Indonesia, Taiwan, and
Thailand may register 4-5%. Air travel is also
increasing exponentially. The Singapore-based
Center for Asia Pacific Aviation concludes air
traffic growth will be so strong that Asia will
become "a key target for major investment in
service expansion and new operations". The
region's service sector is also developing
rapidly. The May 2005 issue of the Japan
Entrepreneur Report predicts the privatization of
up to 400,000 government-owned operations in Japan
ranging from youth hostels to tourist attractions
to senior centers may create a market of several
hundred billion dollars. Lastly, there has been
tremendous growth in Internet and
telecommunications services. Technology
publication Zdnet, for example, reports Asia added
4.3 million broadband lines during the first
quarter of 2005 alone.
While US and
European managers and investors have long
recognized Asia's ability to produce cheaply
manufactured export products, the region is now
seen as a huge market for commodities and,
increasingly, consumer goods. Less widely
appreciated is that Asia is quickly becoming a hub
for advanced R&D (research and development),
as well as design, production, and test-marketing
of higher-end products such as automobiles,
consumer electronics and a range of technological
applications and services. Asian governments are
supporting these trends by investing in education
and infrastructure, offering favorable tax and
regulatory treatment, and reducing tariffs and
other barriers. These measures, as well as Asia's
underlying attractiveness, are helping to
facilitate record numbers of cross-border
transactions as well as rising trade and
investment flows into the region.
The
newfound appeal of Asian economies, even
developing ones - as both producers and consumers
of higher-end products - can be seen in recent
comments by Intel CEO Paul Otellini, who told
Financial Times that his company was considering
building an assembly plant in Vietnam and that it
had created a $200 million venture capital fund to
invest in Chinese companies involved in mobile
phone technologies, broadband and semiconductors.
Increasing economic integration is also
creating exciting opportunities for companies in
the region. Between 1945 and 1990, many Asian
economies traded more with the US and Europe than
with each other. This is rapidly changing. In the
post-1990 period, interdependence has increased
rapidly, as shown in various Pacific Economic
Papers published by the Australian National
University. As Asia's largest economy, Japan is
playing a direct role in nurturing these linkages.
Japanese imports from East Asia surged from 31 to
43% between 1992 and 2001, while exports to East
Asia rose from 33 to 42% over the same period.
A number of factors will make it possible
for this trend to continue. First, regional
multilateral institutions continue to widen and
deepen their activities. Jane Skanderup, a
director at the Pacific Forum of CSIS, observed
last year that APEC (Asia-Pacific Economic
Cooperation) is helping to facilitate trade and to
encourage further region-wide liberalization. At
the November 2004 ASEAN+3 (the three being China,
Japan and South Korea) summit in Laos, economic
ministers decided to set up an expert group to
study an East Asian Free Trade Area. The
proliferation of new free-trade agreements (FTAs)
is also helping to eliminate trade barriers and
force domestic restructurings. Regional FDI
(foreign direct investment) is serving to link
Asian countries. Japanese firms, for example,
increased investments in China by 40% in 2004-2005
over the corresponding period in 2003-2004.
Increased integration is also relieving
Asia of its acute dependence on external demand.
While most Asian economies remain highly sensitive
to shifts in US and European consumer spending,
interest rates and currency values as well as the
rise and fall of protectionist sentiment, over
time the region is likely to become increasingly
de-linked from the US and Europe. This will
require that Asia be considered on its own merits.
As a result, Asia provides a way for
investors to diversify their portfolios. As Mark
Headley, president of Matthews International
Capital Management, pointed out in the June 2005
issue of Asia Insight, carefully done, investing
in Asia "seems a natural means of addressing the
enormous concentration one faces in having one's
job, home, portfolio, and currency all in one
place".
Japan's
contribution
Japan has been a key player in
helping to promote Asian integration. This is
being achieved through investments by private
firms, as well as government grants to develop
regional infrastructure, service operations and
production capabilities. Japanese firms are also
investing substantial sums in China to profit from
its accelerating economic growth, manufacturing
prowess and rising participation in global trade.
Sharp, Panasonic, and Toshiba are just a few of
many Japanese companies making major commitments
to develop operations on the Chinese mainland.
Japan has also committed itself to
building trade flows with Southeast Asia. It now
invests approximately 10% of its outbound FDI into
ASEAN and Asia's Newly Industrialized Economies
(NIEs). Individual firms such as Denso, Mazda and
Mitsubishi are sending billions of dollars into
countries such as Thailand, Malaysia, and the
Philippines to produce finished goods and
components for domestic, as well as external,
consumption. Japan also serves as a major customer
for Asian products. ASEAN and China are major
exporters of commodities and processed/assembled
goods to Japan. Last year, China became Japan's
largest trade partner, supplanting the US. Current
data also indicates that business with ASEAN
represented 14.7% of total Japanese trade in 2003.
Japanese trade with ASEAN
METI's
recently released 2005 White Paper emphasizes the
importance of Japanese trade with ASEAN and
encourages Japanese firms to consider basing more
production in these countries as well as India.
This is seen as a way to avoid the dangers of
overinvestment in, and over-reliance on China, and
the dearth of management staff, weak intellectual
rights protection, and power outages that afflict
Japanese companies currently operating on the
mainland. Given that this will bond a wider range
of countries into regional production networks, it
will serve as an additional force to deepen
economic integration in Asia.
Japan's
sheer size also gives it great influence. As
Fareed Zakaria, Newsweek International Editor,
observed not too long ago, "Japan is still the
second richest country in the world, bigger than
all the rest of Asia combined." It is estimated
that over 70% of the largest Asian companies on an
annual turnover basis are Japanese. These firms
play a critical role in the intertwining and
expansion of Asian economies. Moreover, Japanese
companies are internationalized and produce at the
upper end of the value chain. They are highly
advanced in terms of technological innovation,
spending, and are estimated to allocate the
world's highest proportion of funds for research
and development relative to GDP.
Exposure to Asia a must
Despite
the political, social, economic, demographic and
other challenges that exist in Asia and Japan
itself, it is clear the region represents an
increasingly attractive and important component of
global markets, which internationally focused
corporations and investors neglect at their own
risk. Those who focus solely on the risks will
surely miss out on the many opportunities for
enrichment afforded by Asia's large population,
its ongoing industrialization and urbanization,
and its increasingly affluent middle class. India
and China alone offer some of the fastest growth
rates in the world, with expanding industrial and
consumer markets, the ability to efficiently
manufacture high quality goods, and to
increasingly provide high-end professional
services. At the same time, Indonesia, South
Korea, and Thailand are taking steps to improve
corporate governance, strengthen bank regulation
and supervision and to remove bad loans from state
banks. Beyond this, Asian governments are pursuing
other initiatives to create a fertile environment
for investment, such as signing on to
international conventions concerning the
protection of intellectual property rights.
Thinking about Asia as a whole, investors
also need to keep in mind that rising regional
economic integration means that investment into
one country no longer is just a way to sell into
single discrete markets, or to obtain an export
platform, but also can serve as a springboard into
one of the most dynamic, and rapidly growing,
regions in the world.
Gateway
Japan
For many years, pundits have forecast
the emergence of the "Asian Century", an era when
the region would assume its rightful economic and
political place alongside Europe and the US. While
many came to discount this possibility with the
advent of the Asian financial crisis in the late
1990s, the pieces now seem more in place than ever
before. While other markets in Latin America,
Central and Eastern Europe, the Middle East and
even parts of Africa are also showing signs of
improved economic performance, few possess the
intrinsic scale, strength and potential of Asia as
both an emerging industrial and consumer market,
not to mention the extensive linkages which make
the region an important focal point within
increasingly interdependent global supply chains.
There are undoubtedly risks, and Asian
economies will continue to face many severe
challenges. But solid fundamentals, ongoing
restructuring and reform, as well as rising
regional integration, and economic, technological,
political and social advancement all augur well
for the future prospects of the region. As Asia's
largest economy, Japan will continue to play a
major role in the developments now taking hold.
Given its importance, companies and investors
looking to enter this dynamic region would be wise
to pay attention to what is happening there. This
is true not only in terms of the ramifications of
Japanese activities in developing Asia but also in
respect to the significant opportunities now
arising as a result of the restructuring, reform
and changing market conditions now taking place
within its domestic economy.
Compiled
by the Japan External Trade Organization (JETRO)
in New York in cooperation with KWR International
Inc. |
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