As a long term resident of Singapore I’ve been a champion of western companies, mainly Canadian, making the strategic choice to capitalize on trade and investment opportunities in the ASEAN region.

The combination of U.S.-China trade frictions, and the recent outbreak of the Coronavirus and subsequent disruption to the Chinese economy and global supply chain give cause to more deeply evaluate Asia market entry and development strategies.

At the time of the first severe infectious disease to emerge in the 21st century, the SARS outbreak in 2003, the Chinese economy looked like this:

• Economy $1,670b
• Trade $851b
• Exports $438b
• Imports $413b
• Balance + $70b
• Inward FDI $53b

Nearly two decades later the numbers had grown to:

• Economy $13,608b
• Trade $5,084b
• Exports $2,494b
• Imports $2,135b
• Balance + $179b
• Inward FDI was $203b

Over the past 17 years, China has soared as Asia’s primary investment, trade and development target. It has rapidly evolved from the low cost, low value global factory floor to a value-added manufacturing nation and primary supply partner of intermediary, consumer and capital goods to many companies across a wide range of global vertical markets.

The COVID-19 outbreak of 2020 should be a red flag of vulnerability to companies that may have an over-concentration and over-dependence on China as a market to sell goods and services and as a single source supply partner.

Regional and global disruption

The COVID-19 virus will adversely affect small to midsize businesses to fortune 200 multinationals alike without prejudice and discretion. SMEs make up more than 90% of the registered companies in China, and most expect to face a cash crisis in three months should the virus continue to choke the Chinese economy.

Apple recently reported it would fail to meet first quarter earning guidance due to “supply constraints” and the dramatic drop in Chinese shoppers during the virus crises. Analysts have estimated Chinese demand for smartphones may drop by half during the first quarter of 2020.

The domestic and global car and equipment industry is another sector that has been affected by disruption to its supply chain. Last week, the heavy equipment manufacturer JCB said it was cutting production in the UK because of a shortage of components from China.

Luxury brands which have previously shown great immunity against financial and economic shocks are also affected.  Forty-five percent of Burberry revenue comes from Chinese consumers and 40% of its retail outlets are closed due to the virus.

Retail big box and modern trade companies are particularly vulnerable to a prolonged supply disruption. Walmart, for example, sources 70% of its merchandise from China. Global stock exchanges are tumbling, countries are adjusting their economic forecasts, and publicly traded companies are revising their first quarter earnings guidance.

The domestic, regional and global impact of the COVID-19 remains uncertain. However, the head of the International Monetary Fund, Kristalina Georgieva, has said

“there could be a cut of about 0.1-0.2 percentage points to global growth”, but stressed there was “much uncertainty about the virus’s economic impact”.

The call to diversify risk, ASEAN trade, development and investment opportunity

Considering U.S.-China trade tensions, the directional uncertainty of tariffs, and the compounding effect of the COVID-19 virus – is it time to pivot to the ASEAN region to diversify manufacturing and develop as an export market.

Although South East Asia accounts for only 10% of global trade, the ASEAN region is emerging as the global growth engine of the next decade and gateway into new intraregional and interregional markets. Trade agreements will more deeply interconnect the ASEAN region with global markets such as:

• ASEAN Member States (AFTA)
• ASEAN Economic Community (AEC)
• ASEAN-Australia-New Zealand FTA (AANZFTA)
• ASEAN-China FTA (ACFTA)
• ASEAN-India FTA (AIFTA)
• ASEAN-Korea FTA (AKFTA)
• ASEAN-Japan Comprehensive Economic Partnership (AJCEP)
• Vietnam-EU (EVFTA)
• Upcoming Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP)
• Proposed Regional Comprehensive Economic Partnership (RCEP)

As geopolitical shifting continues to transform global markets, the ASEAN region is emerging as the main recipient for Asia inward Foreign Direct Investment (FDI), attracting a record ~$151b in 2018 and exceeding China’s ~$139b.

The COVID-19 has accelerated the shifting of manufacturing, and Vietnam and Thailand are the most likely beneficiary countries. Samsung shifted production from China to Vietnam in 2019 and now employs 200k Vietnamese workers and production is at full capacity. Samsung moved their production to Vietnam well before the COVID-19 outbreak for two key reasons, the U.S.-China trade war and declining Chinese market share.

Western companies entering the Asia region need to be cognizant to the fact that social and consumer behaviors are shifting in China.

China’s mass urbanized middle-class consumers and 400 million millennials have become less attracted to western brands in favor of local or Asian brands.

China is ASEAN’s main trading partner and the economic impact of the health crisis is cascading into the region. Malaysia, Singapore and Thailand have downgraded their 2020 economic forecasts. However, growth is still projected in several ASEAN countries due to robust intraregional demand and the continuing U.S.-China trade tensions.

New entrants need to look beyond the immediate crises and envision the region as a market opportunity to sell their products and services, investment opportunity to establish local manufacturing and a future export platform.

By the end of the decade ASEAN’s population is projected to grow from 647 to 710 million with a median age of 33. Household earnings for 125 million people in the region will reach 7,000 US$, and about 30% or 40 million will earn between 18,000 to 68,000 US$.

Over the next decade this growing middle class will spur the need for a wide range of consumer goods and services, creating the next Asia growth wave and new opportunities for multinationals.

The more open and democratic economies will compete to attract new FDI and increase the level of foreign ownership in lucrative sectors such as construction, manufacturing, real estate, finance, and retail. The trade bloc’s geographic location in the confluence of major trade routes will enable companies to utilize their ASEAN-based manufacturing as an export platform to supply new interregional and global consumers as globalization and interconnectivity progress.

This region is the new growth opportunity for many western companies wanting to expand and sell their products and services internationally. However, new entrants must take the time to complete their due diligence to make strategic choices on where and how to compete, and more importantly, how to win based on a pragmatic thought process.

The timeline of a development strategy should factor a mid to longer term three stage hierarchical approach:

• First stage: establishing an export business and distribution partners
• Second stage: investing in regional commercial resources and distribution services to scale-up the business
• Third stage: regional manufacturing investment to sustain competitiveness and scale, maximize profitability, and better serve new ASEAN customers

Pre-development and investment macro analysis has become critically important given the backdrop of the COVID-19 outbreak and disruption to regional and global economies.

Within the context of strategic marketing, companies need to look well beyond basic statistical GDP data and generalized knowledge gained from limited exposure to the region.

The Inclusive Development Index (IDI) has become a far more useful and relevant tool to measure a country’s economic progress in addition to GDP. Other sources of reliable and accurate market intelligence should be analyzed and combined to produce a market specific social, legal, economic, political, and technological analysis (SLEPT Analysis).

Social factors

In general social factors evidence an emerging ASEAN middle class, high population growth rate, favorably changing demographics, increased access to education and a more health and environmentally conscience society.

Legal factors

Country specific legal factors are establishing better regulatory mechanisms, improving intellectual property protection, and gender inclusiveness.

Economic factors

Evident in terms of growth, moreover the ASEAN region is financially integrated globally, credit is accessible, and monetary policies are growth focused.

Political factors

Economic policies influence business decisions, and most economies in the ASEAN region are highly favorable to open regionalism, globalization and FDI that creates employment and contributes to society betterment and economic development. In the context of this article governments need to have transparency and responsiveness contingencies to health crises’ such as the COVID-19, climatic disruptions such as the Australian forest fires of 2019 (arguable dependent on personal perspective), and natural disasters such as the Fukushima earthquake in 2013, and tsunami that hit the coasts of several countries of South and Southeast Asia in December 2004.

Technological factors

The ASEAN region’s rapid infrastructure development, fast-paced adaptation to AI and automation, communications and Fintech example technology and innovation that is rapidly outpacing most western economies.

I’ve applied a simplified example of SLEPT analysis fundamentals, but need to emphasize that this is a crucial analytical process that must be qualitative and rated, completed in sufficient detail, be country specific and relevant to your business.

Moreover the SLEPT analysis is only one part of the strategic marketing process, it must be integrated with country specific micro-environmental analysis, business alignment analysis, risk analysis, and other tools to establish the factual basis from which to decide go / no go / how to go / and if you go, how to succeed.

Your level of regional knowledge and commercial expertise will make a difference. My advice if you have limited knowledge of the ASEAN region, is to find an expert who can help you expedite your entry and development.

The world will survive the COVID-19 epidemic as it did SARS in 2003 and H1N1 in 2009. Chinese factories will return to capacity, supply chains will be restored and markets and economies will recover. China will continue to be an important growth market especially for new technology and a key supply source to many companies across global verticals. As we near the end of the 2020 calendar quarter – companies will assess the quarter and estimate full year impact to their businesses. The perfect storm created by the U.S.-China trade war and compounding COVID-19 virus will effect current and future trade, development and FDI decisions. Your Asia development strategy should include the ASEAN region to capitalize on immediate and emerging growth opportunities and to diversify risk.

Data sources

The Future is Asian, Parag Khanna / Carnegie Endowment for International Peace / WITS / Trading Economics / OECD / Enterprise Singapore / Focus Economics

The post China too risky? Do you need a new strategy for your FDI in the face of COVID-19? appeared first on Trade Ready.

The Crystal Ball Report examines the most significant economic, political and technological issues facing Canadian business in order to forecast critical opportunities and challenges in the years ahead. This report is the culmination of extensive research and input from businesses across Canada and from the global experts who helped us gaze into the crystal ball.

Recent reports state that China’s economy is showing signs of improvement, after a volatile few years for Canada’s second largest trading partner. However, China continues to face major economic challenges, contributing to what is largely considered to be an unsustainable growth rate.

The Canadian Chamber of Commerce’s Crystal Ball Report, released in January, asserts that China will remain one of the world’s biggest contributors to global growth in 2016-2017. Unfortunately, the fact that China is such a major player in the world’s economy means that a slowdown in the region will have an impact worldwide.

Naturally, Canada’s exporters will feel the hit from a downturn in demand from the world’s biggest commodity consumer.

According to Jill MacLeod, Regional Chair for Canada with Cornerstone International Group:

“Canada’s economy is also directly affected by what is happening in China, where a weaker appetite for resources is depressing prices for oil, coal, copper and many of the key commodities that dominate this country’s exports and investments.”

China’s challenges:

“The big challenge for China is that it has to reform everything at the same time,” explains Mark Zandi, Chief Economist for Moody’s Analytics.

From an export-led economy to a consumer-driven one. From state-owned enterprises dominating to the private sector taking over. From a state-controlled financial system to market-driven banks. From a pegged currency to an open capital account. This is a tall order.

The Crystal Ball Report cites three major challenges for China’s economy this year: skyrocketing debt, a slowing growth rate, and an overheated housing market.

1. China’s debt has nearly quadruples since 2007, from $7 trillion to $28 trillion in 2014

The nation’s debt has risen to 282% of the GDP as China has increasingly used credit to fuel its growth. This staggering debt is now larger than the U.S. and Germany’s total credit. What has caused this dramatic increase in the country’s debt load? Over half of it is tied up in loans associated with China’s overvalued housing market.

2. China’s property market shows signs of massive oversupply

The country’s unsold home inventory reached an all-time high of almost 70 million homes, up 17.8% from the previous year. This represents almost 700 million square metres of unsold properties; a new record for China’s housing market. After prices fell for almost 18 months straight, the government took steps to stabilize the mortgage market.

Stimulus efforts began in 2014, and have recently expanded to included reductions to minimum required down payments for first and second time home buyers. More stimulus measures are expected this year as well, including interest rate cuts and lowering banks’ reserve requirements.

3. Steadily declining growth rate

Exports out of China are not expected to maintain their current rate due to the slowing global economy and a less competitive labour market. The projected GDP growth has dropped to 6.5% in 2016, followed by 6% in 2017.

This decrease represents a slowdown, from 10.4% in 2010, but not a crash.

China’s government has the tools to intervene before a dramatic crash happens, such as a $3.5 trillion foreign exchange reserve.

The forecasted continued lowering of interest rates throughout 2016 will contribute to a modest depreciation in the RMB. It’s possible that we could see a 10% depreciation in the renminbi, bringing it back to where it was in 2011.

Growing middle class means stress on resources (but opportunities for exporters to China)

Despite China’s economic challenges, every year, 30 million people are added to China’s middle class. As this segment of the population increases, so will the need to spend on cities, roads, power grids, and other infrastructure. This is a great opportunity for exporters, as demand for commodities and services increase in the world’s biggest market.

Chinese citizens typically save a much higher percentage of their income than North Americans. Though the country’s average wage savings rate is a staggering 32%, even a small increase in spending would have a huge impact on the economy from consumption.

The bottom line for Canadian exporters is to be cautious but optimistic. Though China’s slowdown continues to have an impact on business worldwide, there is potential for an increase in demand and spending in some areas, particularly in services.

The post How 3 major challenges to China’s economy will affect Canadian businesses appeared first on Trade Ready.

Facing a global economic slump and a sharply devaluating loonie, the government of Canada has strategically turned its attention on growing international markets with the goal of tapping into the economic benefits of global trade.

Prime Minister Justin Trudeau has demonstrated his desire to strengthen international trade ties by planning a major trade mission to China and India.

He has also invited former Australian Prime Minister Kevin Rudd into discussions with senior Canadian business leaders to seek a free trade deal with China, similar to that negotiated by Australia.

Despite the fact that there are currently no free trade negotiations between China and Canada, both countries have demonstrated a willingness to strengthen their trade relationships and promote foreign investments.

According to Sylvain Charbonneau, CITP®|FIBP®, an international trade professional with over 15 years of experience and an instructor at Ashton College in Vancouver, there are two sides to this discussion. He noted:

A Canada-China free-trade agreement should be beneficial for Canadians, but it could also bring challenges and risks of negative impacts in some areas.

This article explores the primary issues with regard to the establishment of free trade between the two countries.

Canada-China trade presents major challenges

There are several things to consider when it comes to trading with China. International trade agreements create ties of influence between the countries that can extend beyond import-export affairs. The Chinese government has different values and priorities when it comes to the issues of law, politics and human rights, amongst others.

Moreover increasing competition for Canadian companies and economic pressures have international trade experts concerned.

The most pressing challenges can be outlined as being:

China’s human rights record: It is hard to deny the fact that China has a well-known history of human rights violation and systematic repression of certain minority groups. One of the biggest concerns about opening a free trade agreement with China is whether Canadian export products might become involved in oppressive situations. Of course, we are not talking about an arms trade, but this is an important consideration nonetheless.

Intellectual property protection: Canada values the protection of intellectual property for owners, producers and creators of various products, goods and services. Reported cases of intellectual property violations in China, and the possibility of forged products circulating in the market, have been raised as another point of conflict.

Economic incompatibility: Ron Austin, an instructor in the International Trade department at Ashton College, points to the difficulty of aligning the two economic systems of both countries.

Trying to integrate two economies with such different economic conditions – which is what free trade agreements essentially accomplish – can be challenging.

“If we look at the European Union, for example, we see countries like Greece or Italy clashing with Germany and Sweden; countries which have greater capital and higher taxes. We would not want that to happen in a Canada-China trade relationship.”

Competition: Charbonneau points to concerns over competition from Chinese companies, noting that an increase here “could cause difficulties for many Canadian businesses if they can’t continue to innovate on an ongoing basis. This could also have an impact on the employment landscape in Canada”.

Trade with China could have huge positive impact

There is certainly another side to this story. A strong economic (and even political) relationship between Canada and China could bring real opportunities for Canadians. Most predictions foresee great benefits for Canadian exports as a result of a potential Canada-China free trade agreement.

Among the key advantages are the following:

Economic benefits: Even though China’s economy is slowing, its purchasing power cannot be ignored. There are several key areas in which Canada could diversify in China and increase exports.

According to Charbonneau:

Trade with China could represent great business opportunities for Canadian exporters of consumer products, equipment and machineries – especially with its growing middle class generating an increasing demand for commercial goods.

“The agriculture industry should see an increase in demand for such products as meat, canola, fish and seafood. The trade deal could also be favourable for the forestry industry, metals and minerals”.

Bringing Canadian services to China: The rapid rise of the Chinese middle class has created opportunities for Canada, from the possibility of offering pension funds and insurance in China, to the expansion of Canada’s infrastructure sector and services.

Charbonneau has pointed out engineering, financial services, information technologies and architecture as the key industries to benefit from the export of services. There is even a potential to expand Canada’s influence in the areas of green technology and natural resources.

Improving the Canada-China relationship: According to Trudeau, cooperation with China could bring benefits to both countries. Strengthening Canada-China relationships could go beyond economic ties, leading to political connections (an important tie, given China’s growing influence) and cultural exchange, including travel and education.

So what happens next?

Although concerns and hesitations about establishing free trade between Canada and China certainly exist, the general consensus is that the benefits outweigh the challenges. However, this does not mean those concerns should be disregarded.

Austin states:

I believe the key is to introduce trade agreements that would reinforce environmental protection and positive working conditions of the cooperating countries.

Indeed, careful negotiation is needed to ensure that any economic benefits are also aligned with Canada’s political and humanistic objectives.

Although concerns and hesitations about establishing free trade between Canada and China certainly exist, the general consensus is that the benefits outweigh the challenges.

However, this does not mean those concerns should be disregarded.

“I believe the key is to introduce trade agreements that would reinforce the environmental protection and positive working conditions of the cooperating countries,” states Austin.

Certainly careful agreements have to be established to ensure that economic benefits are also aligned with Canada’s political and humanistic objectives.

Do you think it’s a good idea for Canada to pursue a stronger trading relationship with China? Do the challenges in human rights and IP present too much risk to Canadian trade?

The post Do the rewards outweigh the risks when it comes to trade with China? appeared first on Trade Ready.