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The rise of Asia and what it means for business

Kerr Neilson
Thursday, December 21, 2017

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Asia has changed immeasurably over the last two decades. It's now less susceptible to shocks, far more self-sustaining, and has managed to side-step some developmental hurdles by leapfrogging with technology. It's time to look at Asia from a new perspective. Without doing so, you may well miss one of the great paths of wealth creation over the coming 10 to 20 years.

To start with some context, China and India together have a population of 2.7 billion and a land mass of nearly 13 million square kilometres. This means that these two countries alone have a land mass slightly smaller than the European Union (EU) and the US combined, but a population three times larger. Importantly, when measuring economic output on purchasing power parity, their combined GDP of US$33 trillion is 50% larger than either the US or the EU!

When official data claims that China is the world’s second largest economy and that its GDP is about 60% that of the US, some tend to struggle with these statistics because of the physical presence of these economies. For example, how can these figures be meaningful when one considers that China produces eight times more steel than the US and 50% more automobiles, consumes nearly half the world’s copper supply and similarly in stainless steel, aluminium and cement, and originates nearly 120 million high-spending overseas travellers each year?

Source: UN, IMF

INCOME DISPARITY

This is indeed a major issue for Asia. While household income in mega cities like Shanghai and Beijing can be US$50,000–100,000 a year, rural income is only a fraction of that. The relevance of this lies in social harmony, but as with other economies that have gone through the traumas of industrialisation, this has proven less of a challenge during that period of helter skelter growth than in its aftermath.

Either way, Asia’s economies have been growing at a remarkable pace, as shown in the per capita GDP chart below.  From an investment point of view, thinking about the rate of growth of these countries alongside that of the West adds important perspective.

Source: World Bank (World Development Indicators 2017)

 

TOUGH BUSINESS

One common complaint we hear about Asia is the difficulty of dealing with local regulatory and bureaucratic systems when it comes to matters such as the registration of a new business or the enforcement of contracts. There is no denying that most parts of Asia still lag the developed countries in the “ease of doing business”, but there are clear signs of improvement.  

One measure of this is the Global Competitive Index (2017-18) compiled by the World Economic Forum. This index measures and compares the competitiveness of 137 economies based on 12 factors ranging from social institutions to physical infrastructure, labour market efficiency and technological readiness. Switzerland and the US take out the top two spots, followed by Singapore, while Hong Kong ranked 6th, Taiwan 15th, China 27th, Thailand 32nd, Indonesia 36th, and India 40th, ahead of Portugal (42nd) and Italy (43rd). Australia ranked 21st. Is it not interesting that there are apparently 101 countries more difficult to do business in than say, Indonesia?

EDUCATION

The importance attached to education among Asian families and the improving quality of these countries’ education systems are also promising signs of tomorrow’s prosperity. The following table lists the average maths, science, and reading comprehension scores from the OECD’s Program for International Student Assessment (PISA). Seven of the top 10 positions were filled by Asian contenders, while Australia has sunk from no. 9 in 2006 to no. 21 in 2015.

While one may not identify any strong correlation between a country’s economic or industrial might and its students’ academic achievements, the changes in ranking nevertheless indicate an encouraging trend for the Asian region. It is worth observing that while public education spending in Asia (around 2-4% of GDP) lags that of Western countries (about 5%), around 80-90% of Asian families are willing to complement the school system with private tuition, compared to just 20-30% of households in the West.

While the percentage of the population achieving a university degree remains low in Asia by comparison to Western standards, the number of graduates from the so-called STEM disciplines (Science, Technology, Engineering and Mathematics) as a proportion of the total number of graduates is much higher. Today, China produces some 4.7 million STEM graduates each year and India about 2.6 million, versus around 560,000 STEM graduates from each of Russia and the US.

The amount of talent coming through suggests that China and India are far from being ill-placed in this technologically-driven age.  As an aside, it is also encouraging that they can’t all rush off to join high-paying jobs in Wall Street and, indeed, look how the Asian nations have scored in terms of patent registrations.

Note that China is now levelling with Japan, and that Korea, with its relatively small population of 51 million, ranks well ahead of several European countries which led the first industrial revolution.

There is little denying that there has been a great deal of purloining of Western technology by Asian companies, but that too is changing.  A good indicator of the growing amount of original research being carried out in institutions in Asia is the number of cited publications in scientific journals.  China and India have respectively moved up from the 9th and 13th positions in 1996 to the 2nd and 5th in 2016, a strong testament of the quality and quantity of their research efforts.  These countries are now in the same league as the industrial powers of the US (1st), Britain (3rd), Germany (4th) and Japan (6th). 

All this data accords with what we have witnessed on the ground. Take the Pearl River Delta region in southern China for example.  This used to be the manufacturing capital of the world for apparel, toys and plastic flowers, built on the back of cheap labour and imitation of others.  Today, the region is motivated by technological innovation and higher value-added products – how to become more competitive with less labour. The number of patent applications by companies such as Huawei and ZTE is double those by Sony and Intel, which is just one of the many manifestations of this powerful trend.

China’s share of the world’s high value-added exports has risen dramatically during the past two decades.  As its state-owned enterprises (SOEs) shrunk relative to the economy in the late 1990s and early 2000s, a wave of foreign companies relocated parts of their production from Japan, Taiwan and many Western countries to set up base in China, bringing with them capital as well as technological know-how.  This was later reflected in a rising trend of elaborate manufactured goods such as laptops and smartphones.  Incidentally, as the following chart shows, Korea has also been a winner of high value-added exports, while the share of these products from the US, Japan and Germany has been in slow decline.  In the coming decade it would not be surprising to see yet another shift with exports from China being led by companies winning orders on the basis of home-grown intellectual property.

Not only is Asia becoming less dependent on Western technology, it is also becoming less dependent on trade with the West. In the early 1990s, exports to North America and the EU together accounted for around 44% of Asia’s total exports. This has now dropped to 29%, while the share of intra-regional trade amongst Asian countries has increased from 44% to 57%.

All of these facts point to an Asia that has changed beyond recognition.  This is a group of countries that are surging ahead, growing quickly, and doing so mostly with internal funding.  They have the wherewithal to continue to grow and prosper.  Yet, they barely feature in many international portfolios.  The MSCI AC World Index has a weighting of just 8.4% for Asia ex-Japan, an unjustifiable under-representation given that the region accounts for close to 40% of global economic activity.  In our view, Asia is the world’s growth driver, and investors cannot afford to miss it.

[1] These structural adjustment packages (SAPs) required the recipients to reduce government spending, to allow insolvent financial institutions to fail and to raise interest rates sharply.

[2] As at 30 September 2017.

 

Published: Thursday, December 21, 2017


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