5 minute read 3 Nov 2020
Professional young businessman standing against financial district skyscrapers

How to reframe your Asian growth strategy

Authors
Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Harsha Basnayake

EY Asia-Pacific Deputy Area Managing Partner

Harsha is an experienced leader in deals, capital advisory and succesful transactions in Asia. He has pioneered many businesses in Asia-Pacific and is a passionate supporter of team diversity.

5 minute read 3 Nov 2020

As government interventions position the region’s economies to lead the global recovery, understanding political risk is essential.

In brief
  • Even in the COVID-19 era, Asian markets retain their distinct growth and investment advantage.
  • Government policy-driven shifts in the region are creating both opportunities and challenges for the private sector.
  • Three strategies can help your company navigate this changing landscape by managing political risk and building enterprise resilience.

It’s not only COVID-19 that has upended business models, revenue growth forecasts and strategic plans for companies worldwide: government responses to the pandemic have also shifted the competitive landscape. This is particularly true in Asia, where policymakers are taking unprecedented steps to limit the impact of the crisis and create a foundation for recovery. That’s why companies – both those headquartered in Asia and those further afield – must adapt their strategies to position themselves for continued growth in the increasingly important Asian market.

In collaboration with The Asia Group, we identified three government policy shifts creating a unique set of opportunities and challenges for companies with operations or commercial interests in Asia. Some of these shifts were under way but accelerated by COVID-19, while others are novel trends driven by the pandemic. Executives should monitor these policy changes, assess how they could impact key business functions, and manage these political risks. Here are three potential strategies to enable leaders to seize the opportunities created by each policy change.

1. “Go local” to support domestic economies 

The first policy shift is increased government intervention to boost domestic growth and national competitiveness. Several Asian governments are crafting ambitious economic development goals, intervening heavily to foster domestic industries. China, for example, is investing in digital technology such as 5G, big data, and artificial intelligence. And governments across Southeast Asia are supporting emerging FinTech industries. Yet sustained government intervention also creates greater potential regulatory risks – particularly if a slow economic recovery induces policymakers to protect domestic industries at the expense of foreign companies.

Our advice for mitigating the risks associated with such policies? “Go local” to help governments support domestic growth and national competitiveness by collaborating with local entities, often through joint ventures. It requires deep immersion and the slow-and-steady accumulation of political capital to unlock additional opportunities in the future. Companies that will be most successful in Asian markets will demonstrate to policymakers their long term commitment to the local economy.

2. Diversify supply chains

Government policy-driven incentives for supply chain reorientation are the second key shift. The COVID-19 pandemic has triggered a reassessment of supply chains globally and within Asia, where companies source everything from palm oil to cell phones and medical supplies. Established supply chains are often “sticky” due to strong manufacturing ecosystems for certain products in key markets, and Asian governments are offering tax and other economic incentives for companies to relocate production and supply chains to enhance resilience in the COVID-19 era.

Reliance on China makes the global medical supply chain vulnerable

Companies should evaluate governments’ investment attraction and production relocation policies as part of any supply chain diversification within Asia. Capitalizing on these incentives should be done in a way that balances enhancing supply chain resiliency with the added cost and reduced efficiency that diversification may entail. It’s in this way that supply chains are becoming more intricately tied to overall strategies. For many companies, maintaining the ability to serve the Chinese domestic market will be crucial. The “China Plus” model – where producers expand to other markets while retaining their footprint in China – may be an effective strategy for many companies to pursue.

3. Target the Asian consumer

Escalating geopolitical tensions are affecting the Asian business environment, with US-China tensions particularly impactful for companies around the world. Yet this creates a silver lining for companies operating in Asia: policymakers are deepening regional trade ties, which will result in larger, more integrated consumer markets. Most notably, there’s a renewed focus on finalizing the Regional Comprehensive Economic Partnership (RCEP) – a bloc of 15 Asian countries that comprise approximately 30% of global trade. And Asian governments are using direct cash payments and other stimulus measures to support consumer spending during the COVID-19 crisis.

Regional Comprehensive Economic Partnership (RCEP)

30%

of global trade comes from RCEP – a bloc of 15 Asian countries.

Companies should continue to target the Asian consumer for future commercial growth. Asia already accounts for more than half of the global middle class – a share likely to grow in coming years, driven by China, Southeast Asia and South Asia. Rising geopolitical tensions make the case for developing stronger ties to Asian consumers even more crucial. Rapid expansion of the Asian middle class will not only provide opportunities to companies in the consumer sector, but in pharmaceuticals, energy, industrial materials, and financial services.

Asia already accounts for more than half of the middle class and is set to grow further

Companies need a geostrategy for Asian markets

Winning across Asian markets is a strategic imperative for multinational companies. Even as the COVID-19 crisis continues, Asia is poised to lead the global recovery. But this recovery will largely be shaped by government policy interventions, creating political risks that can have a profound effect on enterprise resilience. Executives should develop a geostrategy for Asian markets – incorporating political risk management into their broader risk management, governance and strategies in Asia – to capitalize on opportunities while also mitigating the risks that come with more active government intervention in economies throughout the region.

Summary

Even as the COVID-19 crisis continues, Asia is poised to lead the global recovery. Government interventions are driving the economic recovery – and simultaneously reshaping the business environment. Companies should adjust their Asia strategies to incorporate political risk management in order to capitalize on the opportunities while also mitigating the risks that come with more active government intervention in economies.

About this article

Authors
Jon Shames

EY Global Geostrategic Business Group Leader

Helping businesses understand the implications of geopolitics. EY lifer (35 years!) Washington Capitals fan. Competitive tennis player and bad golfer. Arts and travel lover. Father, husband and son.

Harsha Basnayake

EY Asia-Pacific Deputy Area Managing Partner

Harsha is an experienced leader in deals, capital advisory and succesful transactions in Asia. He has pioneered many businesses in Asia-Pacific and is a passionate supporter of team diversity.