A new world order? Asia pushes both global and regional trade

By 2030, Asia is forecast to account for two-thirds of the world’s middle class. What are the effects of near-shoring and the impact on global trade?

31August 2017

Who are your customers? That’s one of my favorite questions to ask when talking to our customers and prospects. This particular question helps us to understand how we can add value and improve their business processes with our knowledge and solutions.

The answers we receive can sometimes be very surprising. They also prove how global economies are changing. Export economies have long dominated in Asia and as a result, the traditional customer base consisted of mainly US and European companies. But rising costs of producing in Asia and changes in consumer behavior have forced manufacturers to move their production closer to their sales markets (near-shoring).

In response to this shift, Asian economies have been rebalancing themselves and trade directions have changed. With this, domestic consumption and intra-regional trade volumes have increased year on year. I’m very impressed with the changes and how these companies compensate for the decline in export volumes in order to create a new path for growth.

 

Reasons for global market shifts: cheaper, faster, safer

Manufacturing where it is cheapest. Following this strategy, entire industries have migrated from Europe, the US, and Japan to China, Southeast Asia, and Bangladesh for decades.

Recently, however, a reversed trend is taking place and the number of production facilities in Eastern Europe, Turkey, and Mexico has been increasing. It has now become cheaper to manufacture products there. Traditional cost factors such as labor, raw materials, semi-finished goods, and transportation impact the total cost of goods and support the trend to move production closer to markets where finished goods are sold.

Increasing political protectionism, cancellations of free trade agreements, and currency exchange rate developments are also contributing to this shift. Additional factors include changes in consumer behavior and consumer expectations: increasing demands for product availability and mass individualization, for example, force companies to move their plants closer to their customers to offer short lead times and keep a competitive edge.

Last but not least, risk mitigation forms an important aspect, too: supply chain risks are minimized if there is a shorter distance between production sites and end-users. Shorter supply chains involve less partners to collaborate with and generate less complexity, resulting in fewer disruptions. This is an important driver for customer-centric companies striving to improve customer service levels and maintain a good reputation.

 

Domestic consumption and intra-regional trade drive a new world order

Asia’s largest economy China has seen a decline in exports in the last 2 years due to weaker global demand. But at the same time, domestic consumption has significantly increased – reflecting the continued rise of Asia’s middle class – and so has the regional export volume. Today, 25% of China’s exports get shipped to other countries in Asia. And exports to the US and to Europe are down to 18% and 16% respectively.

Other Asia Pacific nations are seeing similar developments. Intra-regional growth in Asia and the Pacific was 57.1% in 2015 – reflecting an increase of 1.3% compared to the average growth between 2010 and 2014. In the Greater Mekong Sub region (GMS), growth was even stronger and the increase doubled to 8% ($400 billion) in the same period.

Large Japanese manufacturers have been tapping the growth potential of this region in the last decade. The automotive, electronics, and pharmaceutical industries have boomed due to Japanese investments and the majority of these companies plan to further expand their activities according to recent studies. The speed has picked up significantly: the higher-than-average amount of Japanese investment in ASEAN nations almost tripled within five years to 20.1 trillion yen (S$250.2 billion) at the end of last year, according to data from the Bank of Japan.

Globally, economic growth will also be fueled by the rise of the middle class in Asia and, of course, the Asian economies will benefit from this development as well. By 2030, Europe and North America are expected to account for only a fifth of the world’s middle class, while Asia’s share is forecast to reach a massive two-thirds of the total.

 

Status of infrastructure across Asia: growth enabler or brake on growth?

The development of infrastructure is key to strengthening economies and catering for sustainable growth. And this is exactly what differentiates the various Asian nations in their pace of development. While the Vietnam government, for example, has been investing and upgrading for over a decade now, other countries like Myanmar and Cambodia are lagging behind.

When we talk about infrastructure, this does not just refer to roads and railway tracks, of course. Power generation, mobile communication, pipelines for distribution of oil and gas, and even waste management all form a part of this as well. All of those areas are still in a premature state in some of the underdeveloped countries in Asia.

Some of the larger Asian economies like Thailand are way ahead of others: the country’s most recently announced mega infrastructure-upgrade plan for 2017 involves an investment of $25.2 billion. It includes 36 infrastructure projects, covering rail, roads, air transport, and ports throughout Thailand. The ultimate goal is an integrated local and cross-border network. Additional measures such as elimination of trade barriers and exemption of import duties on commodities like machinery and raw materials further support the plan.

Another driver behind building a stronger Asian economy is China’s ‘One Belt, One Road’ (or Belt and Road) strategy, which focuses on the development of connectivity and cooperation between Eurasian countries. It incorporates plans to fund infrastructure development projects involving 65 countries across Asia, Europe, and Africa. Many countries welcome these investments, because local funds for such projects are often insufficient and form a road-block for an advancing economy.

 

Cause for optimism: Asia is driving change with opportunities for all

It’s clear that Asia is pushing trade developments forward from all sides: while global trade remains a major driver for Asian economies, intra-regional trade is now significantly growing as well.

Embracing these changes in the world economy and seizing new domestic and regional trading opportunities seems to be the most comprehensive approach and the right path into the next decade.

Do you also experience a change in the markets your company is serving? Do you recognize the local and regional growth opportunities? Is your company already tapping that potential?

I’d be happy to exchange with you in this blog forum or you can get in touch with me via LinkedIn.

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