Policy reforms, economic shifts and offshoring are boosting emerging Far East economies.
Asia has enjoyed unprecedented economic growth in the decade since its financial crisis in the late 1990s. But just how it will weather the current global economic downturn in the coming months and years remains to be seen. While analysts have varying views on the possible effects, it is clear that the economic and legislative progress made by Asian countries of all sizes in recent times has made them stronger and less vulnerable to outside forces.
During the past five years, China and India led the way as the world enjoyed continuous economic growth. Asian countries experienced dramatic increases in GDP and per capita income. Their stock markets soared into 2008, with indices in China, Hong Kong, Singapore and South Korea hitting record levels. The emerging markets of South and East Asia reaped the rewards of stronger currencies, current-account surpluses, high currency reserves, strong domestic spending and increased trade with other developing nations and the European Union.
A shining example of that success has been Singapore, which over the course of a single generation rose from a vulnerable business climate to a prosperous and globally powerful economy. Singapore has led the world on the overall regulatory ease of doing business for three straight years, followed by New Zealand, the U.S. and Hong Kong, according to the International Finance Corporation’s “Doing Business 2009” report. The report also gives high marks to Thailand and Malaysia for reforms made in the past two years.
Thailand made paying taxes easier by reducing fees and facilitating online payments; and exempted companies with taxable income under $1.2 million baht from corporate income tax. It also amended its Securities and Exchange Act to strengthen minority shareholder rights. Malaysia abolished the real property gains tax and reduced the corporate income tax rate to 26 percent. A further reduction is planned for next year. Reforms there also brought a single-tier tax system in which profits are taxed only after dividend payments are exempted.
“Countries in the region [East Asia] are clearly committed to reform agendas,” says Dahlia Khalifa, co-author of the report. “Regardless of their stage of economic development, they are recognizing the role that regulatory reform can play in staying competitive while boosting entrepreneurship and job creation.”
While many countries have made reforms, their impacts depend on the type of business and a particular corporate or investment strategy, says Keith W. Rabin, president of KWR International Inc., a New York-based consulting firm focused on maximizing the success of Asia-oriented trade, investment and business development efforts for businesses and governments. Most important, Rabin says, is for businesses and investors to recognize the trend toward intra-regional growth and trade in the region.
“This differs from the past when the focus was more on discrete export growth to the U.S. and Europe, and the relationship of Asian economies to the West rather than each other,” Rabin says. “This shift toward activity in the region, combined with the general trend of opportunities shifting from ‘supply’ (i.e. making things there for here) to ‘demand’ (i.e. generating revenues within these economies themselves) has significant implications for U.S. corporations and investors.”
Two Southeast Asian nations noteworthy for economic growth are Vietnam and Indonesia. Vietnam has become an attractive destination for foreign direct investment (FDI) in light of government reforms of the past 10 years. Economic activity has remained robust with help from export growth and high commodity prices. And while declines are now being seen in its stock and property markets, along with downward pressure on the local currency, Vietnam is listed sixth among the top future destinations for FDI by the largest transnational corporations. A recent survey by the United Nations Conference on Trade and Development has Vietnam behind only China, India, the U.S., the Russian Federation and Brazil as attractive for future FDI. Indonesia is ranked eighth as an investment location, with companies looking at factors such as market size and growth, and access to international and regional markets.
Indonesia made a strong recovery from the 1997 financial crisis, and in recent years suffered a series of natural disasters including the December 2004 tsunami, but World Bank funding and far-reaching government reforms have helped to increase economic growth. Its economy hit a 10-year high with 6.3 percent growth in 2007, slowing to six percent this year. The nation has drawn strength from investment, as well as external and consumer demand. High commodity prices have helped the economy, as exports of oil, gas, coal, copper and crude palm oil continued to grow at double-digit rates. Meanwhile, investment in 2007 reached nearly 25 percent of GDP, according to the World Bank, which expected Indonesia to weather the global slowdown reasonably well.
The Riau Island/Batam special economic zone (SEZ), located in Indonesia 14 miles off the coast of Singapore, has attracted many large foreign companies in recent years. Batam, in particular, went from a fishing village of about 5,000 people in the late 1970s to a thriving industrial center home to more than 600 companies, including AT&T, McDermott International, Perkin-Elmer, Bechtel, Holiday Inn, Babcock & Wilcox, Hitachi, Hyundai and Sony. The newly expanded special economic zone, including the islands of Bintan and Karimun in addition to Batam, offer tariff and other SEZ benefits, and easy access to Southeast Asian markets.
“One can also obtain the world-class infrastructure, services, quality of life and other advantages of Singapore…with the cost savings of operating in Indonesia,” Rabin says. “That is roughly equivalent to accessing resources in Manhattan from a factory, logistical hub or back office on Staten Island.”
The nations in South and East Asia have made strong economic gains, but with the financial turmoil that thickened throughout the year, growth has slowed and will continue to do so next year. Advanced economies already are moving into recessions, while emerging ones also are expected to weaken. According to the International Monetary Fund (IMF), growth for Southeast Asia’s five biggest developing economies, Malaysia, Thailand, Indonesia, the Philippines and Vietnam, will be reduced from an average 5.5 percent this year to 4.9 percent in 2009, as opposed to the previously forecasted 5.6 and 5.9 percent.
“The economic cycle started to turn in early 2008, and more weakness is expected ahead in response to slowing demand from advanced economies and growing strains in regional financial markets,” the IMF says in its latest world outlook report.
While Asian countries try to weather the global financial storm, there is one area of business that will continue to be a boon for many of them, and that is offshoring by foreign companies. In recent years, more than one million U.S. jobs have been moved overseas, and projections show millions more being outsourced to a growing number of Asian countries in the years ahead.
XMG, a Canada-based think tank and consulting service, says the offshoring industry will be one of the few remaining bright spots in the aftermath of the U.S. economic crisis. Leading offshore destinations such as India and the Philippines, along with other developing locations in East and South Asia, will continue to attract business from around the world during the next decade, according to the firm’s analysis, conducted in October.
Still, the slowing economy will take its toll on the rate of growth of offshoring. In 2007, XMG predicted offshoring to grow by 34.7 percent through 2010, but new economic conditions bring that forecast down to 24.2 percent. The decline is due mostly to expected reductions in captive, or U.S. company-owned operations offshore, as companies look to monetize assets by selling their captives to third-party vendors. Certain factors will make offshoring more appealing, according to XMG, which expects the long-term strengthening of the U.S. dollar to result in an improved quality-to-cost ratio for sending functions to Asia. Also, as the economy forces financial, insurance and manufacturing companies to slash jobs, that will increase the potential talent pool for business process third-party vendors with a healthy sales pipeline.
During the last three years, India, China, the Philippines and Malaysia have garnered a substantial share of global offshoring revenues, totaling $40.39 billion in 2006 and $54.98 billion in 2007. The leader by far is India, whose revenue from offshoring is projected to more than double, from $34.19 billion last year to $74.25 billion in 2010, according to Vikki Mapua, research manager with XMG. China will be second in the market, with revenue estimated at $42.38 billion from offshoring by 2010. The growth is due to IT and IT-related services, and non-voice BPO and KPO (business process and knowledge process outsourcing).
The Philippines’ offshoring revenue is expected to grow to $9.3 billion in 2010 as its market share increases for voice services such as sales, customer care and technical support. Malaysia, focused on IT-related and BPO offshoring, is projected to reach $5.28 billion in the next three years, according to Mapua. Malaysia, she says, has highly specialized, technical people, thus giving the industry a strong backbone for both captive and outsourced services in BPO, KPO, software development and engineering.
India is the most inexpensive place to set up a business, followed closely by Malaysia, and then the Philippines and China, and all four countries have made significant strides to reform their fiscal incentives and tax rates, Mapua says. All four nations are increasing the number of SEZs, offering greater savings through import tariff waivers, discounted utility rates and access to government incentives.
The bottom line for offshoring is that, regardless of the economic conditions, the technology service sector will continue to prosper.
“No matter what the economic situation dictates, the sought after resource will always be people and expertise,” says XMG Chief Analyst Lauro Vives. “As services become the growth segment in this industry, people will become the greatest export in several offshore countries.”
During the past decade, Asia’s more advanced economies ascended to positions of global prominence and emerging nations made strides of their own. Economic growth and more open markets reduced poverty throughout the continent. By 2012, the World Bank estimates that 95 percent of East Asia’s residents will live in middle-income countries. These nations are moving from being low-cost suppliers to middle-income consumers, further driving economic growth. Asia, including the oil-wealthy nations of the Middle East, contributed about 20 percent of the global GDP in 1980, and now contributes 40 percent, according to the World Bank.
Asian nations, particularly export-dependent ones, will feel the emerging global turmoil, but according to Rabin, they are in a much better position than they were during the crisis of a decade earlier, thanks to larger cash reserves and an understanding of necessary policies.