A fundamental and unprecedented shift is taking place in the global economy. As we see a very clear move from West to East, Asia and the Middle East continue to assert themselves as the brightest prospects on the global landscape. Certainly, the rise – or, some might say, the re-emergence – of Asia following its growth through the 16th, 17th and 18th centuries – will be the most important economic driving force in the first half of this century.
This changing economic landscape and the impact of Asia on the rest of the world is something at HSBC we are particularly interested in. According to our own data, China will be the biggest economy in the world by the end of the decade. Many might think this unsurprising; after all, the East has long been a force in manufacturing, particularly goods which then make their way over to the West. However, some might not be aware that today, many Asian goods don’t go to the West, but to other Asian countries. In India, two thirds of exports now go to markets outside the US and Europe. And last year, China became the largest importer of goods from Latin American powerhouse Brazil. We are seeing the emergence of South-South trade: globalisation isn’t just a process of goods circulating from developing to developed countries; it crosses and connects emerging markets.
To many businesses in the distant markets of the West, particularly perhaps those in the SME sector, Asia is unknown territory, with many businesses still having outdated perceptions of the region. But the risks of engagement must be seen in the context of the potential rewards. The developing markets of Asia offer a virtuous circle of economic growth, investment and economic growth, and it is crucial that European businesspeople to not close their minds to the possibilities offered by the rise of Asia.
While we talk to lots of businesses who are already creating opportunities in and with the East, we know that for many more, the statistics remain just that, statistics. It is for this reason that we commissioned The Futures Company to identify the most influential current and future trends in ‘the East’ – and interpret these to define practical implications and opportunities for companies domiciled in Europe. These findings were revealed in a report called: ‘Looking East: The Changing Face of World Business’.
This report draws on Eastern economies’ political, social, financial and consumer climate. It recognises that while every business and every national economy across the world is being affected by this shift from West to East, we will, in the future, see the decline of the western-centric mindset, and a new way for the world to do business; quite simply, Europe is at risk if it doesn’t keep up.
Bearing this is mind, in my view, two key questions remain:
– On a practical level, do businesses across Europe truly appreciate not only the vast scale of this change, but more critically, the considerable opportunities it presents?
– In a time when Europe is most in need of an economic and financial boost, are business leaders ‘looking East’ quickly enough?
To help answer these questions, the report identifies seven key considerations which should influence the strategic decision making of any European business leader looking east. These are:
New skills: Investment in education and R&D is transforming Asia’s skills base. The model where the West did the development work and the East took care of low value production is dead. In future, forward looking businesses will take advantage of the growing level of skill available in Asia.
New models of innovation: The old paradigm, where the West owned the brand, the design and the intellectual property then outsourced the manufacturing and production East, is shifting. Increasingly, innovation will originate from the East, meaning new business models and with global thinking applied to everyday challenges.
New consumers: The booming Eastern population and consumer wealth will create unprecedented market opportunities for European businesses. Adaptability and consumer insight sit at the heart of success.
New pressures on energy markets: Asia’s demand for oil outstrips supply, creating uncertainties for the global economy – a macro-economic consideration for European businesses.
Social unrest and political risk: The rapid economic expansion of Asia has created the conditions for social tension and political instability. The sensible business, however, will weigh the risks of investment against the potential rewards and diversify risk.
New models of capitalism: The free-market, liberal principles on which the West was built are often in direct contrast to methods of rule in the East. New economic models are emerging to challenge the old business rules and European businesses need to be aware that the competitive playing field is not necessarily level.
Geopolitical change: A series of pan-Asian alliances is re-shaping the geopolitical map. As the influence of the West declines, the importance of business relationships in Asia will grow: European companies must not find themselves sidelined in the new economic and political order.
As a result of these key considerations, we are then able to determine what will make a successful European business of the future and in our eyes, these will be those that:
– Maximise human capital – this involves looking beyond domestic borders to recruit and capitalise on Asia’s investment in training and up-skilling as it moves away from its image as a source of low cost labour. This has been due, in part, to Asian investment in education and research and development (R&D). There has been an aggressive expansion of educational opportunities in the region with investment by foreign universities which are now able to open up in India. Additionally, according to the European Commission report, China and India could account for approximately 20 percent of the world’s R&D, more than twice their current share, by 2025.
– Create an ‘innovation supply chain’ – innovative businesses will turn the traditional model of Western innovation and Eastern delivery on its head to take advantage of Asia’s increasing share of R&D spend.
European businesses need to ask themselves how they can tap into the fast-paced thinking in Asia and how they can work with the development of Asian economies. Forming partnerships that see India and China take state-of-the-art design to the mass market by recognising global strengths and expertise is a big opportunity.
– Invest in consumer insight – the booming Eastern population and consumer wealth will create unprecedented market opportunities for European businesses. Given the rapid expansion of developing economies, it’s clear the biggest potential markets for European and American exporters by far are outside Europe and the US.
Due to the diversity and complexity of the region however, market insight is not easily achieved. Doing business in Asia means respecting socio-economic, cultural and religious sensitivities. Thinking globally, but acting locally – for example – in product launches and advertising campaigns.
– Employ a global mindset – successful businesses will dedicate time to understanding how Asia has redrawn the world business ‘map’, overturning preconceptions about ‘the East’ and fostering a culture which accommodates different business models and ‘rule books’.
– Mitigate risk effectively – thriving businesses will accurately research, understand and weigh up risks versus the significant rewards of engaging with the East.
Instability in Asia, so important in the global economy, could mean economic instability for everyone; higher commodity prices, lower investment inflows and outflows. But for European businesses this shouldn’t be a reason not to interact with the East. Being aware of the tensions is sensible, but with the right partners on the ground, ‘thinking businesses’ can overcome this potential issue.
– Rethink consumption and distribution – acknowledging individual business’ role in tackling global sustainability issues, particularly the East’s energy consumption, and considering new models of manufacturing and export as a result.
As Asia suffers from energy shortages, distribution and export models may need to change. Being aware of this within future scenario planning and considering risks versus opportunities to capitalise on Asian investment in new energy sources will be key.
– Create an advisory-led business – acknowledging the role of external experts to provide local market insight into doing business globally will prove to be a great advantage for European businesses.
With new economic models emerging to challenge the old business rules, European businesses need to be aware that the competitive playing field is not necessarily level. Having on the ground partners could be a cost-effective way of understanding and mitigating this potential risk.
For many European companies, the rebalancing of economic power towards Asia presents a more challenging, more competitive, more threatening business environment. But they also suggest a huge range of opportunities; the new economic confidence of Asia means new markets, new global wealth and new business.
In summary, the findings provide us with a startling reality check and wake up call for companies; over the next decade businesses can’t afford to wait for business. They have to go where the business is. We are no longer looking at when West meets East but at how the East will redefine the West and how European businesses can respond for success.
At HSBC we are committed to using our unrivalled knowledge and global network of experts to ensure that we help our European customers identify and activate the right opportunities internationally. We will be sharing the lessons from this report with our customers to help shape the future of business across Europe and the world.