Beyond Asia: strategies to support the quest for growth
Challenge 1: Moving up the value chain could erode a critical advantage — low cost
Over the next decade, China will account for half of the growth in IT trade.
Climbing the value chain is an aspiration that all our respondents share. They highlight leading technology and the quality of their products, services and workforce as their advantages. Having a low-cost business model (Asian companies' competitive advantage a decade ago) comes toward the bottom of the list.
China's status as the low-cost manufacturer of choice is facing stiff opposition from other rapidly growing Asian countries, including Vietnam and Bangladesh. Wage inflation is eroding the labor cost advantage. In addition, the gradual appreciation of the renminbi is stoking export prices.
Tan Kian Seng, President of Venture Corporation Ltd, a Singapore-based provider of technology services, products and solutions, says that rising costs in China have affected the company's growth plans.
“China is an important market for us, but we have to be very cautious when expanding there because of the significant cost escalation.”
The erosion of the cost advantage is encouraging a rethink in policy circles about the region's comparative advantages. In China, the 12th five-year plan has a strong emphasis on innovation.
It includes a pledge to increase R&D funding for emerging technologies by 159%, to US$18 billion. Over the next decade, China will account for half of the growth in IT trade.
Companies must balance their aspiration to climb the value chain (essential for Asian economies to compete on a level footing with Europe and North America) with a continuing focus on cost competitiveness.
“Chinese companies are among the best in the world at cost control,” says Eleanor Wu of EY's Transaction Advisory Services. “Their scale, speed and ability to move from prototype to finished product at low cost are in some cases second to none.”