China – Asia growth gap widens but multinationals’ failure to decentralize risks underperformance in PRC

2013 Asia Business Outlook Survey sends important message to global HQs

Despite Western MNCs’ enduring enthusiasm for China, global firms run the risk of under-performing, with forecasts for sales in 2013 far below China’s presumed economic performance, a new survey suggests.

The Asia Business Outlook Survey (ABOS), released today, is produced every year by The Economist Corporate Network, and reveals how regional business leaders are investing in and managing their operations in the Asia Pacific (APAC) region.

The 2013 survey shows that China continues to be Asia’s top investment destination for Western MNCs, by a large and increasing margin. International business is predicting considerably higher sales growth in emerging Tier 2, 3 and 4 cities than in established Tier One markets.

At a regional level, the survey suggests that executives are buoyant, with almost half of respondents (47%) saying expectations for their business in Asia have risen over the past 12 months (as against 15% for whom they have fallen). Companies are predicting that sales will grow at a faster rate in 2013 than in 2012 for every APAC market (excluding Japan).

Given higher growth rates in Asia than other parts of the world, the region is rapidly gaining importance in the portfolio of operations at most global multinationals. For the 170 non-Asian companies in the survey (those with headquarters outside the region), Asia’s share of global revenues rose from 19% in 2011 to 22% in 2012. Companies expect this figure to reach 32% by 2017.

But despite this optimism, 44% of respondents say their firms are not hiring and investing at the right rate to capture the potential of Asia’s growth. Indeed, while the growth rates that companies are recording in Asia might look impressive by Western standards, the ABOS survey suggests a more measured interpretation. For many global multinationals, their rate of sales growth in many Asian markets is lagging behind the underlying rates of economic growth.

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Ross O’Brien, Chief Economist at the Economist Corporate Network, said:

“As China’s growth continues, companies are looking inland to tier 2, 3 and 4 cities for sales. However, many are not decentralizing operations fast enough. Just as global business is too often seen through a Western lens, China business remains over dominated by the view from Beijing and Shanghai.

“From a regional perspective – for the past couple of years, we have been picking up a gentle warning from Asia’s international business leaders to their global headquarters. This year it has risen to a clarion call.  International business is simply not investing enough to keep pace with Asia’s expansion.

“The message just isn’t getting through to London, New York and other global HQs. Too many Western boardrooms see impressive rates of sales growth coming out of Asia, and feel they are doing enough in the region. But when viewed correctly, growth rates in Asia are often lower than they should be, and suggest widespread under-investment. While many Western businesses are in the race, they are off the pace.”

Other key points highlighted by the ABOS survey are:

  • Although non-Asian companies may be under-investing in Asia, they are gradually shifting management focus towards Asia. Thirty-eight per cent now have a board member in the region, double the percentage in 2008. More than half now have at least one global business unit head in Asia.
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  • While China dominates thinking, the Association of Southeast Asian Nations (ASEAN) bloc is being taken more seriously: 45% of respondents now have an ASEAN strategy.
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  • The role of Hong Kong and Singapore as the region’s traditional management hubs is under threat of overheating. Executives have serious concerns about inflation, cost of living, property prices, and shortages of staff.
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  • The way that global multinational companies run their Asia pacific operations is changing. One important trend is a realisation that Asia is becoming too big to manage as one region. Increasingly, China is being seen as a standalone territory, and managed separately to the rest of the region.
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  • The shortage of international school places in Hong Kong is affecting the city’s ability to attract and retain both business and talent. This raises questions about Hong Kong’s international competitiveness and its position as a regional hub in the future.
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  • The rate of increase in staffing lags the rate of increase in sales. This implies a significant productivity challenge – generating more revenue per worker.
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  • Indonesia continues to attract investment – coming a close third behind China and India – but corruption is a major concern for most businesses operating in the country.
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  • Despite much talk of the importance of frontier markets, the business community remains cautious.  Between 30% and 40% of companies say they have no interest in Myanmar, Laos, Cambodia and Mongolia.
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  • Vietnam’s fall from grace is reflected in a drop from fourth to sixth in the list of favoured investment destinations in Asia.
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-Ends-

To access the report, click here or download from here.

 

About Asia Business Outlook Survey (ABOS)

 

Economist Corporate Network—the Economist Group’s advisory service for senior executives of global businesses—surveyed 207 clients representing a wide cross section of business across Asia including professional services, financial services, manufacturing, technology, consumer goods, energy, and the chemical sector.

 

This year’s annual Asia Business Outlook Survey—the seventh in a series—focuses on issues such as the sustainability of Asia’s growth, strategic investment priorities, board representation in Asia, and the biggest challenges to business in each Asian market. The responses allow the Economist Corporate Network to benchmark the views of senior decision makers across a cross-section of industries, and gauge business sentiment in the world’s fastest-growing region.

 

About Economist Corporate Network

 

Economist Corporate Network is The Economist Group’s advisory service for senior executives seeking insight into economic and business trends across markets and regions.  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 both regional and global business issues, with business groups based in Asia-Pacific, Central and Eastern Europe, the Middle East and Africa.  Through our tailored blend of high-calibre research, interactive meetings and briefings, Economist Corporate Network delivers country-by-country, regional, global and industry-focused analysis on both current and forecast conditions.  Learn more about us at www.corporatenetwork.com.

 

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