Beyond Asia: strategies to support the quest for growth

Where are Asian companies expanding?

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For cash-rich Asian companies seeking access to growth, technology and resources, Europe may be the opportunity of a lifetime.

Asian companies are not restricting themselves geographically. However, some markets stand out as more attractive than others due to:

  • Proximity
  • Lower barriers to entry
  • Favorable business conditions

Our survey shows a significant difference between globally and regionally focused companies with regard to their market preferences.

Globally focused companies

Growth in Asia

Companies that already have a global footprint still expect their greatest growth to come from Asia in the next three years. India and China are the main priorities for globally focused companies, although they are also targeting second-tier rapid-growth markets in Asia like Indonesia and Vietnam.

According to our Rapid-Growth Markets Forecast (Spring edition, April 2012), these markets will be star performers in 2013: projected GDP growth is 8.6% for mainland China and Hong Kong (SAR), 8.5% for India, 7.1% for Vietnam and 6.7% for Indonesia. Globally focused companies are primarily targeting these markets.

EY

Market segments within China hold great promise.

Eastern China has attracted significant investment and interest from East Asian firms, but in the longer term, Central and Western China may offer good growth opportunities as well.

Growing affluence in China and changing consumer tastes and preferences offer significant opportunities for market expansion. Intense competition and a slowing economy, however, are leading Asian companies to look to other economies within the region.

South Asian markets offer long-term growth potential.

Despite India’s fiercely competitive business environment and bureaucratic restrictions, globally focused Asian companies view it as the second best country for expansion opportunities.

Elsewhere in the region, Indonesia, Malaysia and Vietnam have been gaining favor for their markets’ medium- to long-term growth potential as platforms from which to export to Asia and beyond, and as economies for sourcing manufactured inputs.

Regionally focused companies

Best growth opportunities come from outside Asia

India and China barely make the list for these companies, many of which may simply not have the resources and capabilities to succeed in these huge but challenging markets. Regional companies pick Western Europe as their top investment destination, followed by the Middle East and North Africa (MENA).

Western Europe offers cheap assets and open economies.

For cash-rich Asian companies seeking access to growth, technology and resources, Europe may be the opportunity of a lifetime.

Banks across Europe are selling assets at knockdown prices to meet capital requirements, governments are privatizing assets to shore up balance sheets, and struggling companies are offloading non-core subsidiaries.

“We have seen lots of Chinese companies paying careful attention to assets in Europe because of the valuation opportunities,” says Eleanor Wu of EY’s Transaction Advisory Services.

Europe is also a relatively open business environment that tends to be welcome overseas investment more than other developed economies, like the US.

“Asian companies feel few restrictions to acquire in Western Europe,” says Wu. “For companies targeting the US there may be a perception of a greater risk of protectionism preventing deals, though such a perception may not be well justified.”

MENA is a cost-effective manufacturing and resources play

Due to rising labor costs across Asia, compounded by higher oil prices and shipping costs, a growing number of Asian companies are seeking to relocate manufacturing and assembly to regions that are closer to their export markets.

The tax benefits of this move are significant. By carrying out final assembly closer to the market, rather than in the source country, Asian companies can reduce their tax liabilities. Asian companies may also be able to benefit from tax incentives in markets like Eastern Europe from hiring local people and carrying out manufacturing in these economies.

Even non-manufacturing activities could move offshore. As the domestic population in China becomes wealthier and consumes more, policy-makers will need to decide whether it makes sense to retain highly energy-intensive sectors, such as aluminum smelting, within China or move them to other parts of the world.

“Non manufacturing activities could still be Chinese-owned, but would perhaps be better located in places like the Middle East where energy is a lot cheaper,” says Mike Elliott, Global Mining and Metals Leader at EY. “When you talk about 50% of the world’s aluminum smelting capacity potentially being subject to relocation, that’s a big deal.”

The US and Australia are less attractive investment targets.

Despite being the world’s largest economy, the US is low on the list of growth opportunities for Asian companies, whether globally or regionally focused. A reason for this is simply distance.

“America is a distant market, and we think we can do a better job of managing opportunities that are closer in Asia,” says one senior executive.

Australia is also notable for its absence from the list of growth markets for Asian companies. Although a mature and stable economy, Australia has a small population compared with most countries in the Asia-Pacific region. The opportunities for market penetration are average to low.

Foreign direct investment continues to be strong in Australia. It is consistently part of the United Nations Conference on Trade and Development (UNCTAD) top 20 host economies in terms of FDI inflows, ranking eleventh in 2010.