Asia-Pacific companies look farther afield for growth
Asia-Pacific middle-market companies step beyond domestic borders to drive their business growth.
Middle-market companies in the Asia-Pacific region continue to pursue their growth ambitions, but they are looking farther afield than in previous years to achieve them.
Asia-Pacific executives remain confident in their growth prospects
In this year’s survey, 39% of Asia-Pacific executives indicate that they are expecting double-digit growth, an almost equal percentage to last year. While this sentiment is lower than global expectations, economic fundamentals suggest that Asia-Pacific executives remain confident, with 87% expecting global and domestic prospects to improve over the next 12 months. This is a significant improvement from the 61% who felt the same way a year ago. Further, 72% express optimism that corporate earnings, short-term market stability and credit availability will improve domestically in the year ahead. This belief may, in part, reflect growing optimism in the resolution of the China-US trade negotiations.
If we drill down a little, we find that Asia-Pacific middle-market companies between US$100 and US$250m are the most buoyant in their projections, with 62% planning for growth above 10% and 42% aiming for 16% growth and above.
Geographic expansion appears to be a key focus for M&A
Asia-Pacific executives indicate that transactions are an important part of their growth strategy, with 42% expecting to pursue M&A in the next 12 months.
Intention to transact42%
expect to pursue M&A in the next 12 months.
For 67% of these, cross-border dealmaking appears to be a primary consideration, which is well above the global middle-market average of 55%. This appears to align with Asia-Pacific executives’ top strategic priorities of geographic expansion into both domestic and overseas markets.
This said, when it comes to M&A, they appear to mostly want to stick to targets in their region, with China, Australia, Japan and India appearing in the top five investment destinations.
Optimism for growth is tempered by the challenges that lie ahead
Although Asia-Pacific middle-market executives are optimistic in terms of growth, survey results suggest that certain challenges ahead are top-of-mind. Thirty-two percent say a slowdown in economic activity would be a key risk to their growth plans. Meanwhile, 44% say geopolitical uncertainty and supply chain disruption could curtail expansion plans; and 34% see threats amid disruption from technologically-advanced competitors and new market entrants.
With elections in several Asia-Pacific countries this year, middle-market executives in the region may be anticipating the risks and taking proactive measures to build resilience and prepare for the range of circumstances that may unfold.
Executives turn to technology for agility and resilience
Almost all executives in the region surveyed indicated that they would be making significant investments in technology as a means to build agility and resilience.
plan to invest in technology in the next year.
One in four intend to use technology, AI and automation to improve the effectiveness of their talent strategies. In fact, Asia-Pacific companies, more than any other region, intend to deploy AI for better and faster talent recruitment and onboarding. More than three-quarters (77%) say they will be developing these AI capabilities in-house. Asia-Pacific executives may be hoping that technology can help them to identify and hire talent, which they ranked as the second most significant challenge to their growth plans behind disruption from more technologically advanced competitors.
For almost one in five (19%), risk reduction is top-of-mind, a significant jump from 2018, when only 4% of executives in key Asia-Pacific economies registered it as an important consideration.
A look ahead suggests a dual path toward growth and resilience
As we look ahead, positive sentiment around macroeconomic fundamentals globally and domestically, and 39% of respondents expecting double digit growth, both point to continued confidence among Asia-Pacific middle-market executives.
However, as some executives from this region can be more cautious by nature, we expect them to continue building resilience to prepare for the challenges that may lie ahead. Technology will play a key role in driving talent strategies, improving operational efficiency and managing risk, while transactions will help them future-proof their portfolios.
European middle-market executives expect growth prospects to improve
Confidence is high in the European middle market with 92% of executives expecting global and domestic growth prospects to improve.
European middle-market companies are feeling bullish about their financial performance and their ability to achieve double-digit growth. More than any other region, European middle-market executives plan to use M&A to help them achieve their objectives. However, even as they pursue their growth plans, they plan to build resilience within their organizations by making better use of technology and closing the talent gaps.
Plans for double-digit growth prevail despite economic headwinds
The results of our latest Capital Confidence Barometer reveal that European middle-market executives are positive about their growth prospects. In fact, the percentage of those expecting 11% growth or higher in 2019 (57%) has more than doubled since 2018.
Confidence in near-term growth57%
expect growth of 11% or higher in 2019.
As we drill down further we find that smaller companies with revenues between US$100m and US$250m show even more confidence, with 67% reporting revenue growth targets of 11% or more.
This positive sentiment is further reflected in key market fundamentals, as 87% of European middle-market executives express confidence in corporate earnings, short-term market stability, credit availability and stock market outlook at both global and domestic levels.
While European middle-market executives are confident in their growth prospects, they continue to keep their eye on the danger of slowing economic activity in the latter part of 2019. Brexit uncertainty continues to keep the UK economy on tenterhooks. Germany is forecasting weaker growth in 2019, and Italy’s economic situation remains delicate. With this in mind, one-third of executives report a slowdown in economic growth at the greatest external threat to growth.
European executives have greater M&A appetite than other regions
With their sights set on 11% growth and above, 53% of European middle-market executives are relying on M&A to help them get there. This represents a significantly higher appetite for M&A than US (38%) and Asia-Pacific (42%) middle-market executives.
More than half of European middle-market executives say they plan to stick close to home in their pursuit of M&A targets, with the UK, Germany and France representing three of the top five investment destinations. The US and Russia round out the list.
Talent shortages pose greatest risk to future growth
Although an economic slowdown is of concern, a looming talent crisis appears to be a bigger challenge for European middle-market executives than among their global peers. In fact, our results support another EY survey, Building a Better Working Europe, where European companies admitted their struggle to recruit and retain talent with digital skills.
In response to their talent shortages, nearly half (43%) of European middle-market executives in our survey report that they plan to hire more contractors, freelancers, and part-time staff. Globally, 31% expect to do the same. Conversely, only 4% of European middle-market executives plan on hiring more full-time staff.
plan to hire more contractors, freelancers and part-time staff.
Noteworthy is the relative ambivalence European middle-market executives have toward technology, automation and artificial intelligence (AI) in their talent strategy. Only 20% plan on using technology to improve their talent strategy, versus 25% globally. This may reflect a lack of digital skills in the European market. However, Europeans also seem have different priorities when it comes to technology investment, with 20% focusing on risk reduction, including cyber threats.
Technology investment is on almost everyone’s agenda
Like their Asia-Pacific counterparts, 99% of European middle-market executives report that they plan to make significant investments in technology in 2019. While priorities are evenly split across reducing risks, improving the customer experience, improving internal efficiencies, creating new services or products and improving financial data access and analysis, the priority that stands out is risk reduction, including cyber risks. With 20% reporting a sizeable investment in this area in 2019, this represents a nearly threefold increase from 2018.
Meanwhile, although fewer European middle-market executives plan on using technology for their talent strategies than other regions, almost one in five say they plan on using automation and AI to improve talent recruitment and onboarding.
European executives must build resilience through 2019
As European executives strive to achieve their growth ambitions, they will also have to find ways to build resilience within their own organizations by addressing their talent gaps.
Although European middle-market executives appear more inclined to take advantage of the gig economy to solve talent shortages in the short term, as talent and technology agendas start to converge, they may want to consider more actively deploying technology, automation and AI beyond talent recruitment and onboarding.
A robust talent strategy that leverages technology throughout all aspects of talent management could increase agility and resilience at a time when European middle-market companies need it most.
US middle-market companies lead the way in growth ambitions
US middle-market companies continue to be bullish on growth, but they are building resilience in anticipation of challenges ahead.
The winds of growth have turned around, shifting their trajectory from East back to West as the US has become the main driver of global growth among middle-market companies in 2019.
4 of 5 US middle-market executives expect double-digit growth
In our latest survey, 80% of US middle-market executives say they are expecting double-digit growth in 2019 — six times higher than the 12% who reported double-digit growth projections in 2018 and 22% higher than all of this year’s global middle-market respondents. Despite rumblings from economists and analysts of a looming downturn, US companies see little evidence of a slowdown within their respective markets. As a result, US middle-market companies seem more comfortable than their global peers to push full steam ahead.
expect double-digit growth
US companies at the lower end of the middle-market spectrum (US$100m to US$250m) are particularly bullish, with 94% expecting double-digit growth, and more than half aiming for 16% growth or higher. While these numbers may seem too good to be true, they are supported by key fundamentals, with 98% expressing increased confidence in global and domestic prospects, and 88% expecting corporate earnings, short-term market stability and credit availability to improve. Anecdotally, we are hearing the same confidence in the conversations we are having with our clients.
Bullish US executives are keeping an eye on the red flags
There’s been a wealth of speculation in the news media lately that the US is heading for a slowdown. So, while US middle-market companies are overwhelmingly confident about their growth projections, they are more acutely aware of the challenges that lie ahead than they may have been before. Concerns around the impact of slowing economic activity is up slightly from 29% in 2018 to 31% this year.
Where we’ve seen a real difference, however, is in the areas of geopolitical and trade risks. In our recent survey, 14% identified regulation and trade or tariff uncertainty to be a key strategic growth risk, up from just 5% a year ago, while 17% are focusing primarily on geopolitical uncertainty. Heightened awareness of these risks likely stems from issues such as US-China trade tensions, the yet-to-be-ratified United States-Mexico-Canada trade agreement and the associated tariffs that have resulted, as well as the ongoing Brexit situation.
Technology-driven competition, either from technologically advanced competitors or from new market entrants, is also a worry for 29%. Given our clients’ laser focus on disruptive innovation, we’re surprised this number isn’t even higher.
Agility and resilience depend on both organic and inorganic growth
While US middle-market executives are confident, they are still building agility and resilience through strategic organic and inorganic investments in technology. Operationally, 93% of US middle-market companies intend to invest heavily in technology, most notably tech that will create new products or services, improve the customer experience or advance internal efficiencies.
intend to invest heavily in technology
Given that US companies tend to drive innovation through customer-centricity, it makes sense that 44% identify creating new products and services and improving the customer experience as their top areas of investment. Specifically, one in four executives is keen to deploy artificial intelligence (AI) to improve the customer experience. Interestingly, of those looking to use AI for this purpose, 93% say they’ll be building the capability in-house, largely to gain a competitive advantage.
For 38% of US middle-market companies, mergers and acquisitions (M&A) will form a key part of their growth strategy, primarily as a means to help them boost their new product and service development efforts, as well as expand into adjacent sectors. In terms of where they expect to spend their M&A investment dollars, they’re looking local first and foremost, as well as considering investments in the UK, Germany, China and Canada.
Expect the confidence to continue throughout the rest of 2019
As we look ahead to the rest of 2019, we expect US middle-market companies will continue to lead the way in their assertive pursuit of double-digit growth.
At the same time, they are mindful of the potential challenges on the horizon. As such, we expect US middle-market executives will continue to build resilience by investing in and using more technology, AI and automation for talent management, product and service offerings, and risk reduction.
Key highlights from our global report
The EY Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.