HQ Asia: China, India and Indonesia are key markets for many businesses. What trends are most underappreciated when you talk about these markets?
One of the key trends is the business focus of the region, where we are seeing a shift to an outward focus. For example, when you look at Chinese multinational corporations (MNCs) going to overseas markets, they are looking to establish regional business centres in locations that might not draw the eye of Western MNCs. They are looking for other criteria and have a different way of looking at the world. In particular, Chinese, Indian and Indonesian companies have different priorities for success, different perceptions of risk, and different assessment of talent.
There are always a number of key priorities, but these change over time. For example, the types of Chinese companies venturing overseas have changed in the last few decades. It used to be just energy companies that would explore foreign opportunities, but today many other sectors, such as real estate, food and beverage, and automotive firms, are looking at overseas openings.
There are a number of key trends one needs to examine when trying to understand why Chinese companies act the way they do. First, they are very conscious of cost, and will continue to be so. China has invested heavily in developing markets like Africa in order to achieve cost competitiveness. The Chinese are particularly good at managing costs. They have developed this discipline through legacy clients, and are continuing to build it as they grow independent.
China has recently entered a very difficult stage in its economic transformation, and the model that previously worked in China – loans and debt driving investment and growth – is quickly coming to an end. A decade ago, a loan of 1RMB would create 1RMB of GDP, but today it takes 3RMB worth of loans to create 1RMB of GDP. China’s loan-based economic underpinning has simply deteriorated.
The nation’s economy has moved on and it is now time for Chinese companies to generate their own cash and investment, and become accountable for their own development. There are pockets of developing communities and industries in China, and other pockets that are going overseas for other benefits. There are still ample opportunities for growth in China today.
How do you see the development of the ASEAN trading bloc panning out?
The ASEAN trading bloc is a very hopeful goal. There are real physical challenges for ASEAN – it is not a geographically cohesive bloc; there are oceans and cultures, histories and religions. There are different levels of development, infrastructure and currencies. Every layer of this is a risk, and developing a cohesive trading bloc is about reducing those risks. Reducing any single one of these layers is going to take significant breaking down of barriers. Traditionally, ASEAN has had more justification for division than unity, and this means the negotiators in ASEAN have to be very focused on closing the gaps.
Are there similar levels of motivation among all the ASEAN countries when it comes to developing the ASEAN trading bloc? Would Indonesia, for example, be less motivated by the potential benefits it could gain?
I actually think that Indonesia is quite enthusiastic about it. They have had some impressive diplomatic activity around the region, if you look at the Thai-Cambodian border dispute among other things. They see themselves as having the critical mass to lead, though not in a solitary manner. Indonesia is a huge country with many dierent cultures and a constant need to build consensus, and it shows when they sit in on many of these inter-country disputes and extend their diplomatic activity to resolve conflicts. I certainly think Indonesia wants to be a key player in an integrated ASEAN.
Would an integrated ASEAN enhance the developmentof talent in the region?
A larger trading bloc means more opportunity. More opportunity means more channels for development. Greater wealth and income give people more incentive to lead and grow, and for companies to invest. So a united trading bloc will definitely help, as long as it remains an economic opportunity. If it is economic, you will see rising incomes, healthier economies, less volatility for currencies, and a greater expectation of better governments and infrastructure, and for fighting corruption.
Economic development is cyclical: with more opportunities, people have more wealth. With more wealth, they pay more taxes. As they pay more taxes, they expect a better and more responsive government. A better government will fight corruption, creating a better environment, which in turn creates better opportunities, and the cycle repeats itself.
What’s your opinion on how ASEAN might improve in terms of boosting productivity?
There are a number of factors at play. Firstly, there are a lot of SMEs in ASEAN. There are impediments to those SMEs becoming larger firms, growing above US$100 million dollars in annual revenues. Some of these are cultural, others are built into tax laws, and some are logistical.
But many of these SMEs are reluctant to pay for training for their staff and to extend the capabilities of their staff. Because it is easy to get very low-cost labour throughout the region, it is actually a disincentive to invest in technology and training. That, more than anything, is one of the biggest impediments to productivity in Southeast Asia. Many ASEAN countries are still trying to figure out how best to overcome this.
Because it is easy to get very low-cost labour throughout the region, it is actually a disincentive to invest in technology and training.
What do you see as the main drivers of India’s economic growth over the next 20 years?
The biggest thing India needs at the moment is a stable regulatory and legislative environment. Foreign businesses are very concerned about their investments in the country because of the fairly erratic regulatory regime. Indians frequently bemoan their government and, in the forthcoming 2014 general election, voters have the opportunity to decide what they want, because they will not get better government until they actually make a decision to get one.
FDI regulations in India have been volatile for some time. Major global companies who have wanted to invest have pulled back. Yet, there is a lot of smart human capital in India, and a lot of smart leadership. I hope the Indian government takes a good look at its situation, and makes changes accordingly. This starts with small wins, like those achieved in building the nation’s infrastructure – India has been investing a lot in it over the last decade, and what India has now built is highly impressive, including the construction of new metros and ports. However, to have a good business environment a nation needs to build a stable regulatory regime, an area in which India could certainly do a better job.
This article was first published in 2013 in HQ Asia's print version, Issue 7.