Right Approach to the Massive ASEAN Opportunity Peter McKenna Eleanor Mak Australia-ASEAN Business Council www.australia-aseanbc.org Businesses across all sectors, of all sizes, from all parts of the world are flocking to Southeast Asia to be part of the huge growth story there. The 10 countries, collectively known as the Association of Southeast Asian Nations (ASEAN), is a global hotspot for growth and diversity, driven by the fast growing consumer class and rapid urbanisation.! Australia and ASEAN are close neighbours, with free trade and other agreements driving an expanding and deepening regional integration. This integration is powering up 2-way trade and investment between Australian and ASEAN businesses, but the potential for further business is massive. To make this business happen, Australian and ASEAN businesses need a broader perspective and business approach that takes in all the Australia-ASEAN region. This is the focus of the Australia-ASEAN Business Council. The Council is revitalising as a powerful B2B platform where Australian and ASEAN member businesses work together in doing trade and investment both ways across this wider region. Attractiveness of ASEAN Businesses are attracted to ASEAN s growth and diversity story. Numbers prove the growth. Over the last 10 years, GDP has tripled to US $2.5 trillion with an annual growth rate of 5%, and now ASEAN is the 7 th largest economy in the world. Its growth rate is only surpassed by China and India, and ASEAN is expected to be the world s 4 th largest economy by 2050. Diversity is the back-story to ASEAN s growth. The 10 countries differ in culture, language, resources and business environment, and are a mix of mature, emerging and frontier markets. Traditionally, this diversity is seen as a barrier, but businesses, both local and international, are now finding complementarity across these markets, with regional production networks often linked to global value chains as an example. Together with China and India, ASEAN is expected to fuel the Asian Century as the centre of growth. Attributes of ASEAN particularly attractive to business are: World s 3 rd largest population of 620 million, which is extremely young with more than half under 30 years of age GDP growth expected to continue around 5% annually Fast growing consumer class, which is expected to double to 160 million households by 2030 Over 45% of the population live in urban areas, with another 90 million people expected to move to cities by 2030 Page 1 of 8
3 rd largest work force in the world High and growing use of networking technologies like Facebook (world s 2 nd largest) and mobile subscriptions (3 rd largest) Infrastructure needs to support growing industrialisation, urbanisation and middle class are expected to approach $100 billion annually Vision and agenda to integrate the 10 countries of ASEAN and position as a high growth, globally connected economic powerhouse, strategically located at the centre of Asian growth engine between China and India. Moving to a Single Market Economic integration started back in 1993 with the ASEAN Free Trade Agreement that was primarily internally focused at removing tariffs between countries. Though this was a start, it is the significant bottom-up efforts of individual companies that drove the deepening integration, tripling intra-asean trade and multiplying intra- ASEAN foreign direct investment. More recently, regional integration has had a top-down, policy driven approach. The latest stage is the launch of the ASEAN Economic Community (AEC) in late 2015. The objective is a single market and production base across the 10 countries to boost the region s competiveness and link trade and investment to the global economy. This is a difficult, long-term task given the need to open-up, simplify and connect all business environments across the region. Despite the difficulties, internal progress is being made particularly in removing tariffs and commencing some trade and investment liberalisation and facilitation. But non-trade barriers are growing due to national and protectionist sentiments, and must be addressed for the AEC to achieve its full potential as internal integration in the AEC directly benefits ASEAN based businesses only. External progress includes the establishment of ASEAN s 5 regional free trade agreements with China, Japan, Korea, India, and Australia and New ASEAN is a huge regional business opportunity, and potentially a better fit than in some other regions, for Australian companies. Many foreign companies are engaging and positioning themselves within ASEAN. It is a region of great promise where some early bird companies are already reaping benefits. Tan Sri Dr Munir Majid President, ASEAN Business Club ASEAN Patron, Australia-ASEAN Business Council Zealand, linking ASEAN with the global economy. In the wings for finalisation in 2017/18 is the Regional Comprehensive Economic Partnership that would cover ASEAN and its 6 FTA partners, accounting for over 50% of the world s population, 30% of global GDP and 25% of global exports. Is regional integration working? Numbers again tell the story. Intra- ASEAN trade has tripled to 25% of total ASEAN trade, extra-asean trade now accounts for 8% of global exports and ASEAN has become a foreign direct investment magnet attracting around 5% of global FDI. This is backed up by annual surveys of US and EU companies operating in ASEAN with the large majority Page 2 of 8
signalling continued optimism about ASEAN including expansion of operations, growth of importance in global revenues, and adoption of a regional business strategy. This is despite the level of regional integration varying across sectors. Regional integration is also driving reform at the country level across ASEAN, particularly in the emerging and frontier markets, with improving global rankings in ease of doing business, competitiveness and innovation. This commitment to reform is a key attraction to international business and investment compared to other market opportunities around the world. Performance of Australian Business The huge ASEAN region and opportunity sits on Australia s doorstep. But despite this, the figures tell a cautionary tale of Australian business engagement with ASEAN. On the one hand, ASEAN has now become Australia s second largest trading partner after China, well exceeding trade with Japan, EU and US. On the other, 2-way foreign direct investment stock and flows, although growing, is extremely low compared to that with other countries. For example, Australian FDI stock and flows in ASEAN are at the same levels as in New Zealand. And it s thought that the number of Australian exporters to ASEAN is around the same number to New Zealand. This when ASEAN s GDP of US $2.5 trillion and population of 620 million monsters New Zealand s GDP of US $180 billion and population at 4.6 million. Why these disparities? A lot has to do with historical trade and investment partners, and the recent pivot by Australian business to growth in Asia. Australia s traditional partners like the US, UK and New Zealand spoke English with similar cultures and business environments. This supported higher levels of ease and certainty in doing business compared to other global areas, driving very tight and deep trade and investment relationships. With growth shifting to Asia, markets became highly variable in development, language, culture and business environment. To Australian business, this diversity represented significant challenges in the ease and certainty of doing business. In ASEAN, these challenges helped promote Singapore as the entry point to the region with its similar business environment, globally oriented culture, English language and ASEAN needs much more Australian know-how and innovation through Australian investment into ASEAN and ASEAN investment into Australia. In ASEAN, Singapore has been the traditional hub for international HQs, but this is changing with increasing connectivity across the region and costs. International companies are increasingly exploring other ASEAN countries as their base. Given Australia s close proximity, a possible option could be a lean presence in ASEAN run from Australia. Dr Sufian Jusoh Head of Operation, APEC Study Centre, Malaysia ASEAN Advisor, Australia-ASEAN Business Council Page 3 of 8
connectivity across ASEAN. This despite Singapore being a small population and economy, with the huge trade and investment needs and opportunities situated in the other 9 countries outside of Singapore. Until very recently, Singapore dominated Australia s trade and investment with ASEAN, with the large majority of Australian exports being final goods and services shipped directly from Australia. Both strategies, Singapore as entry point and direct exporting helped maintain Australian business preference for easier and more certain business. Today, the relationship between Australian and ASEAN business is beginning to change. Australia s recent statistics shows higher direct trade with Thailand and Malaysia than Singapore, with Indonesia close behind. Trends are in a similar direction for investment. Australian businesses are now learning to take a more direct business approach across the region, managing market diversity to successfully do business across ASEAN like their US, EU, UK and Asian colleagues. Time for Australian Companies is Now The business opportunities for trade and investment are massive across all sectors in ASEAN. The mix of markets from mature (Singapore, Brunei) to emerging (Malaysia, Thailand, Philippines, Indonesia, Vietnam) to frontier (Myanmar, Cambodia, Laos), together with regional integration efforts, are fuelling these opportunities. The window for Australian businesses into ASEAN is now. Diversity won t disappear anytime soon and regional integration is a long-term process. But there has been progress that is attracting businesses (and competition) from all over the world. Both local and foreign companies including Australian, in all sectors, of all sizes start-ups, SMEs and large multinationals - are focusing on these opportunities, doing successful business across these markets. So it can and is being done. Australian companies look a good fit with ASEAN businesses. Australian businesses are typically asset rich in innovation and resilience in competitive markets, while ASEAN businesses are often cash rich in growth and diversity including access to market scale. And ASEAN sits on Australia s doorstep. ASEAN can also be a valuable stepping-stone for testing Australian products into the wider Asian markets like China. Similarly for ASEAN products into the Australian market, Australia can be a testing ground for entry into other western markets like the US and Europe. Right Business Approach Doing business in ASEAN requires a different approach to that used by Australian businesses in their traditional markets. In those markets, Australian businesses deal with counterparts who often talk, think and behave the same way results focused, transaction oriented, short term horizons and usually within the safety of good inmarket regulatory and legal systems in case something goes wrong. Successful business in ASEAN requires a different approach. And it starts with recognition that ASEAN has been trading in and between its different markets for centuries based on custom and culture, not black letter regulation and law. This Page 4 of 8
custom is forged in relationships, networks, trust and respect. Formal regulation is a recent introduction that is still in development across many ASEAN markets. Australia s young growth companies are more likely to adopt the right business approach for success in ASEAN. First, their CEOs have been exposed to Asian culture over the last 20 years through Australia s multicultural campuses, workplaces and daily life, and less intimidated by ASEAN s cultural differences. They are likely to have a deeper cultural understanding about trust, respect and relationships, and are more aware of how networks, collaboration and the longer view underpin ASEAN businesses. And if they have travelled or done business in ASEAN, they would have seen the ambition, energy and drive of young entrepreneurs in building businesses for a better life. Second, it is more likely that these young growth companies are still family or private businesses, without the pressures of short-termism and layers of decision-making bureaucracy. Being private is a more likely match in mindset, attitude and approach for ASEAN businesses including large multinationals that are typically family owned. In growing ASEAN, private companies have a natural advantage in the flexibility and agility required to explore and respond to opportunities and navigate challenges as they occur, and in collaborating and forming mutually respectful and beneficial relationships as needed. In developing an appropriate business strategy and doing business in ASEAN, there are 8 key considerations or principles to the right approach.. Importantly, this approach applies equally to doing business with ASEAN businesses and investors in attracting trade and investment into Australia. 1. Take a regional, not just a country, approach to planning for ASEAN Regional integration has a long way to go achieving a true single market, but it is progressing. Business is optimistic, with many local and foreign companies developing regional strategies and proving that at this stage of integration business can be done successfully across the region. As a region, ASEAN is increasingly connected to the global economy, centred in the Asian growth engine between China and India, and situated on Australia s doorstep. 2. Look for opportunity in the diversity across markets Our strong relationship with ASEAN through the existing Free Trade Agreement between Australia and ASEAN makes trade and investment easier, particularly for SMEs. ASEAN is ripe for Australia s growing SMEs as many of the markets suit the scale of Australian businesses and there is much trade and investment opportunity in the marketplace of over 600 million people. Bryan Clark Director, Trade and International Affairs, Australian Chamber of Commerce and Industry Secretariat, Australia-ASEAN Business Council ASEAN is a mix of mature, emerging and frontier markets with different needs and resource profiles including labour and technology. This diversity, whilst challenging, is also an opportunity with demands in every sector and options to Page 5 of 8
build supply chains across markets based on their comparative resource advantages. Regional production networks across ASEAN are an example. 3. Find similarities in the opportunities across markets All countries in ASEAN are different, but focusing initially on country differences is limiting. Lack of homogeneity requires tailored offerings for each market. But there is a growing homogeneity in opportunities across markets that can lead to more uniform offerings. Examining markets across ASEAN using a lens such as customer type or city size can be helpful. An example is the increasing similarity in consumer tastes at the premium end of markets. 4. Focus on the longer view, but make sure the short term is covered Business in ASEAN is based on relationships. Building relationships and business models, particularly in the emerging and frontier markets takes time and patience. So a longer-term view on success is essential to shaping strategy and performance requirements. This longer view is typical of ASEAN businesses where the large majority are private/family owned. But governance must also cover critical short-term requirements to this success. For our most talented youth and young entrepreneurs to achieve the full benefits of ASEAN integration, we need to start working on building global relationships that open new ideas, best practices, markets and funding for them now. Rommel Sim Gerodias Chair, ASEAN Young Entrepreneurs Council ASEAN Partner, Australia-ASEAN Business Council 5. Drive innovation into your business offerings and solutions ASEAN is hungry for innovation. Entrepreneurs, businesses and governments are acutely aware of the benefits that innovation can bring to accelerating market development including leapfrogging traditional steps. For example, moving directly to mobile internet rather than fixed line broadband in developing markets. This thirst is about the use of disruptive technologies, as well as new or improved products, processes, marketing and business models for growth. 6. Manage risk through trusted relationships and arrangements Doing business across borders into unfamiliar ASEAN markets is risky new cultures, business practices, business environments and regulations for example. Typically, new market entrants find this information opaque and difficult to discover, particularly in developing markets with under-developed regulatory and legal systems. Connections to trusted sources of local market knowledge and adapted business models with effective local presence are critical to managing business risk. 7. Develop relationships through networking and collaboration Networks are the foundation of business activity across ASEAN. They are typically informal with trusted contacts from ASEAN business, government and academic circles, providing support and shared value through exchange of Page 6 of 8
knowledge and opportunities for collaboration. More formal networks are often specific to clusters of customers, suppliers and other stakeholders relevant to a more targeted business purpose. Participation in ASEAN business networks is necessary for business success. 8. Use free trade agreements to improve competitiveness Free trade agreements (FTAs) are driving ASEAN s internal and external regional integration. FTAs help businesses expand international business across ASEAN by overcoming barriers to trade through preferential treatment above competitors without such an agreement. Despite proven benefit to businesses that use them, use of FTAs by businesses has been traditionally low. Use of FTAs can improve the competiveness of a business in ASEAN. We are together with the Australia-ASEAN Business Council in promoting ASEAN as a key opportunity for Australian business. ASEAN has been overshadowed by the recent FTAs with China, Korea and Japan. But awareness will grow as the RCEP agreement is finalised and business sees ASEAN s central position in the Asia growth region. ECA s ASEAN Connected Report and toolkits are useful references. Lisa McAuley CEO, Export Council of Australia Australian Partner, Australia-ASEAN Business Council Australia-ASEAN Business Council Helps B2B The Australia-ASEAN relationship is strong at both country and regional levels. The regional relationship celebrated its 40 th anniversary in 2014. This year, ASEAN celebrates its 50 th Anniversary, and the Australian Government is hosting a historic ASEAN-Australia Leaders Summit in 2018 in Australia. The Australia-ASEAN Business Council (AABC) recognises this strong relationship and the potential for a massive increase in 2- way trade and investment. To make this happen, Australian and ASEAN businesses must look beyond their home markets to the broader Australia-ASEAN region and build a regional capability for cross-border trade and investment that takes in this broader region. The AABC is revitalising as a powerful B2B platform for Australian and ASEAN businesses to work together exploring, developing and implementing trade and investment opportunities across the region. This platform, based on regional Page 7 of 8
relationships, networks and collaborations, provides information, training, and connections to make business happen. This new platform includes: Advancing 2-way trade and investment across the region through regional network, intelligence, promotion and advocacy activities Members and executive are from Australian and ASEAN businesses Strong Australian and ASEAN business, government and academia support networks Regional briefings, conferences, training and clusters of AABC member businesses targeting specific trade and investment opportunities. Recent platform achievements include the honour in appointing Tan Sri Dr Munir Majid (President, ASEAN Business Club; Chair, ASEAN Business Advisory Council Malaysia) as ASEAN Patron, signing an MOU with the ASEAN Young Entrepreneurs Council to connect Australian and ASEAN entrepreneurial ecosystems, working with the ASEAN Business Advisory Council in advising ASEAN senior officials, Economic Ministers and ASEAN Leaders on regional economic integration efforts, establishing partnerships with Australian and ASEAN industry organisations, and assisting with the review of regional FTAs between Australia and ASEAN. The time for Australian and ASEAN businesses to collaborate in making trade and investment happen is now. The support and commitment has never been higher with the AABC, formation of AustCham ASEAN, government support through the Australia ASEAN Council and the special 2018 ASEAN-Australia Leaders Summit in Australia. The AABC invites and welcomes new members from Australia and ASEAN in all industry sectors. About the Authors Australia-ASEAN Business Council www.australia-aseanbc.org Eleanor Mak, President +61 423 492 330 president@australia-aseanbc.org Peter McKenna, Vice-President, +61 487 395 510 vicepresident@australia-aseanbc.org Note: many of the statistics in this article are referenced from the report Why ASEAN and Why Now? Insights for Australian Business a joint Austrade and Department of Foreign Affairs and Trade publication, Australian Government 2015 Page 8 of 8