The focus of the world has shifted east in recent years – the 21st century has been hailed as the ‘Asian Century’ and the center of trade for the world has moved from the Atlantic to the Pacific.
This is certainly not a new trend; however recent events have highlighted increasing strategic options for Australian SMEs to explore.
For instance the internationalisation of the Chinese Yuan is an example of the new economic strength that is found in the Asian region, with foreign companies now experiencing unprecedented access to Asian markets, and vice versa.
With the recent signing of the China-Australia Free Trade Agreement, after a 10 year negotiation period, it is expected that trade will double from the existing levels as the local tariff barriers have been lifted between Australian exports and the Chinese Markets.
For Australian and New Zealand SMEs, this presents exciting new opportunities being the best-positioned, geographically and in business to make the most of this shift in the world economy.
Of course, with these opportunities comes a new set of challenges. Small businesses will need to start thinking internationally if they want to capitalise on the opportunities presented in coming decades. By being agile and taking the time to truly engage with the new powerhouse economies of the Asia Pacific, businesses will be well-placed to grow throughout the Asian Century.
In recent article released by ANZ, Mark Whelan Managing Director of Global Commercial Banking stated “all too often there is a difficulty in translating such a huge opportunity into success for individual firms or even industries. Today, only a small fraction of our small and medium-sized businesses in Australia export and a recent report by the Economist Intelligence Unit tells us only 19 per cent of businesses have taken advantage of recent FTAs”.
Without a doubt, Asia is the most dynamic and rapidly changing part of the world. Backed by almost half the world’s population, economies in the region are responsible for some of the highest expansion rates globally and will continue to be a major source of global growth into the future.
China is Australia’s largest export market of goods and services, accounting for approximately a third of total exports.
According to a recent report by PricewaterhouseCoopers (PwC), Asian countries will continue to see dramatic growth in coming decades; by 2028 the report suggests that China, which has already become the largest country in the world by purchasing power parity, will be overtaking the US in market exchange rate.
An Expert’s Insight
David Thomas, TEC Speaker and BRIC expert on global hotspots, suggested “the Australia-China relationship is about to enter a ‘Golden Phase’ with the signing of the China-Australia Free Trade Agreement, the visit to Australia by President Xi Jinping, and the increasing awareness of Australia’s agricultural resources and services capabilities in particular sectors”.
David regularly works with many wealthy Chinese entrepreneurs, investors and business leaders who are building links into Australia for a combination of business, investment and migration purposes. He highlighted that this is creating opportunities for local financial services providers (wealth managers, insurance brokers, accountants, banks, lawyers etc.) to provide support and services for them on the ground in all of our major cities and regional centres.
“Many arrive with limited or no knowledge of Australia’s complex tax, superannuation, insurance and business environment. Many of them are looking to set up local businesses, local companies, superannuation funds, bank accounts and to insure themselves against a combination of personal and business risks,”
“They also have to decide where to live, whether to buy or rent, where to send their kids to school and how to develop a local network of personal and professional contacts. This is creating enormous opportunities for local SMEs to provide the relevant services, support and advice, and to upgrade their capabilities, language and cross-cultural skills to service this lucrative and rapidly growing market,” said David.
“China’s ‘Going Out’ strategy is in full swing. Nearly half of China’s wealthiest people are planning to move to another country within the next five years and there is already evidence of a sharp increase in numbers, interest and motivation amongst those who have Australia in their sights,” Concluded David.
Clearly East Asia’s importance is only going to increase in the future. For SMEs, though, the question still remains: How can this expansion drive business growth locally?
Why SMEs need to get involved
The rise of new economic superpowers in Asia is going to create radical changes for SMEs in Australia and New Zealand. While the biggest changes will be for exporters that are looking to earn a share of new consumer demand for the Asian region, this change will affect businesses at every level.
Free trade agreements are just one example. The recent deals signed with Japan, South Korea and China – three of the largest economies in East Asia – means the door has already opened for enhanced trade and market access.
Of course these agreements and engagement is a two-way street. SMEs have greater access than ever before to these economies, businesses can now compete directly with local businesses.
This means that competitors are no longer confined to the same town or state. Now, competition is on a global scale, with many innovative Asian enterprises looking to unlock new opportunities throughout Australia and New Zealand.
Hitting the export trail
China is the world’s largest food and beverage consumer in the world with a population of 1.3 billion, capitalising on the ‘dining boom’ across Asia is an increasing trend for Australian businesses.
Recent events in the F&B sector are providing more opportunities for Australian exporters than ever before. China’s strong economy and wealthy cities are in demand of sanitary high quality meat, dairy, fruit and other products from Australian exporters.
One example of this is TEC member and Managing Director of Beerenberg Farms, Anthony Paech who has expanded his family business into a global operation, exporting an increased percentage of their products overseas. Their premium products are 100 per cent Australian, sourced directly from their farm in Adelaide. This particularly appeals to Asian customers and the five star hotels they supply.
Another shining example is award winning TEC member company Craig Mostyn Group, a leading diversified food and agribusiness with revenues in excess of A$310 million, who operate locally and throughout Asia. With close to 30 per cent of pork products exported to Singapore and the recent investment into abalone farming exporting over 95 per cent of its high value product into Japan and China.
Once you begin exporting into another country you are scaling your business to a much higher level, it is strongly advised to have a formal strategy in place. HSBC states that 73 per cent of Australia’s exports go to Asia and estimates that by 2020, it will increase to 80 per cent.
Many SMEs find it difficult to determine where the best point of entry for their products is. The best approach is to do your homework, undertake research and then approach Asian countries that have the right market conditions and infrastructure aligned to your products and services.
Risks and operational challenges
Cultural differences are also an important factor in effectively approaching business engagement in Asia. Even within a single country, markets conditions are incredibly diverse and present their unique operational challenges, having a strong cultural understanding will prove beneficial and minimise the risks.
According to TEC Chair Max Robertson, “the risks in most of Asia will be from the ‘unknown unknowns’ or the things you are oblivious to. SMEs need to get educated about the characteristics of the individual countries they are interested in. For example, within Indonesia, pork has a good market in Bali but not in Java due to the different religions in the two areas.”
“You need to be aware of the differences between countries and that most countries are not homogeneous. There are enormous cultural and linguistic differences you need to understand. You need to be sensitive and aware of the differences and how they can impact upon business opportunities.”
Cultural factors aren’t the only risks that organisations will need to overcome when approaching a foreign market either – there are also bureaucratic obstacles for companies to navigate.
Tax is just one example. Even as western taxation and accounting standards become widespread in the Asian region, these areas are still less developed than SMEs will be used to in Australia and New Zealand. The same is true for legal practices and many other structural factors that underpin a successful business.
“Get advice from accounting firms on tax and don’t make assumptions about the rule of law and payments. You can’t generalise.”
“There are terrific opportunities in Asia, but there are also major risks if you get the wrong joint venture. There can also be problems in some countries with repatriating profits, as some of the universities have found. Companies need to be acutely sensitive of how difficult it is to move money around,” explains Max.
TEC member and Managing Partner of WMS Chartered Accountants, Aaron Lavell is an example of how Australian expertise is training Malaysia’s accountants. “As Malaysia is currently rolling out the implementation of a new GST, we’ve found there is a market for Australian expertise and training on this topic,” Aaron explains. The training covers areas such as tax rules, legal requirements, cash flow and system issues that arise when a country transitions to a GST regime, as Malaysia will in April 2015.
Businesses looking to address strategic risks when entering Asian markets must remember to expect the unexpected. Often the best way around this is to build partnerships with local companies and embark on joint ventures in order to enter Asian markets.
Not only does this make financial sense for Australian companies, it is also a good strategy for reducing the risk posed by entering a new market.
Offshoring for cost reductions
The potential of Asian markets isn’t limited just to exports – SMEs can also benefit from moving their business processes to East Asian markets in order to become true multinationals.
Currently manufacturers have been the most prolific users of outsourcing to the Asian region, with mainland China firmly established as the ‘factory of the world’. However, the next step is going to involve moving services and other business processes to overseas markets in order to make the most of lower input costs.
While lower costs might be a major advantage, this shift in labour will also allow Australian companies to invest more in their local staff, keeping high-value processes in Australia, while moving low-skilled work overseas.
Many SMEs may never have considered the possibility of outsourcing their processes to another country, especially if they are still focusing on building a strong business. But, with cost pressures rising, it is now more important than ever to look for new growth opportunities.
Here are some of the core benefits:
- Lower costs
- Accessing skilled experts
- Reduced overheads
- Greater flexibility among staff
- Increased efficiency
Of course, offshoring part of a business isn’t a process that can be completed overnight. SMEs in Australia and New Zealand will need to invest time in understanding everything that’s involved and finding partner organisations that can assist with their outsourcing efforts. As with any major development, a strong plan and comprehensive risk management strategy are essential.
There are clearly obstacles that organisations will need to undertake, regardless of whether they are looking to export to Asian markets or outsource their business processes. However, companies in Australia and New Zealand are better placed than many in other countries to capitalise on the coming Asian Century.
For those who commit to this process and truly engage with these markets, the potential for future growth is virtually limitless.
About the Author
David is well known in Asia Pacific for his experience, credibility and passion for identifying, building and facilitating business and investment relationships between developed and emerging countries. David brings personal insights, anecdotes, stories and observations to every presentation to show business leaders and forward thinking organisations how to profit from a fast changing world.