Can Australia afford not to be in Asia?

Yet offshore investments will be critically important for the Australian economy and to our ability to compete in the future. If we want to participate in the global economy we are going to have to be where the customers are – and increasingly that will be Asia.

" Asia is not easy and there are risks but the greatest risk may well be doing nothing at all."
Andrew Parker, PwC & Partner, Asia Practice Leader

This dilemma of the ongoing challenge for Australian business in Asia was discussed at the first of a series of roundtables convened by PwC and ANZ with senior business and public sector leaders.

ANZ chief executive Mike Smith and I hosted a lively discussion amongst the 15 participants, ranging from business to government to Austrade, just last week.

Smith – and others – made some telling points ranging from basic education about Asia in schools to structural skews in Australian investment management to taxation and culture.

The story is well known: the Australian economy continues to travel comparatively well by world standards. While the end of the resources boom has seen the economy enter a period of below trend growth, 2 to 3 per cent GDP growth is going to be a good outcome.

At the same time we have on our door step a number of economies that are growing at 5 to 8 per cent. It's true the largest of these economies, China, is going through a difficult transition but it is the world's largest economy in purchasing power parity (PPP) terms. There is little doubt over a longer time frame China remains a strong long-term contributor to Australia's economic growth prospects.

Despite this, Australian direct investment stock in China at the end of 2013 was less than $A7 billion and in the 10 ASEAN countries it is $A28 billion combined - about what Japan invested in ASEAN in 2013 alone. By comparison, we have invested $A46 billion in New Zealand.

Our relationship with Asia remains a bi-lateral relationship – we trade with Asia but we are not in Asia.

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Asia, of course, is not always or even mainly easy. On an ease of doing business scale, according to the World Bank, Asia is home to the full spectrum of rankings from Singapore at number one to Myanmar at number 177.

What I think is telling from this raw data is they make clear strategies and business models tailored to the regulations and laws of developed markets may not translate well into Asian markets, many of which are characterised by opaque regulatory climates, weak institutions and invisible influence networks that may expose companies to unacceptable legal and reputational risks.

But even here, with fraught tension between some local practices and global governance and law, there is opportunity, confirmed by several of the participants at our roundtable.

Many governments in the region see multi-national companies as an opportunity to control corruption and lift local standards. Ethical firms are successful in Asia – in fact their ethical standards are exactly why consumers trust their brands as representing safety and reliability. They may lose some business early on but compromising ethical standards is a naive and short term business practice – not to mention an illegal one in many cases.

Still though, Australian business seems reluctant. Approaching a year ago, PwC launched a landmark research paper titled “Passing us by: Why Australian businesses are missing the Asian opportunity. And what they can do about it”.

Australia's Foreign Minister, Julie Bishop, described the report as “sobering reading”. And, as shocking as the results were, they were perhaps not that surprising. The Asian Century White Paper made a powerful case for Australian business but we have been slow to respond. There is plenty of encouraging evidence business is starting to better understand “what” Asia represents but the question of “how” to deal with Asia remains a struggle.

A key insight reinforced at our recent discussion was the critical importance of not losing sight of your business and joint venture partners. They are amongst your most valuable strategic assets. Firms should invest a great deal of time and care in looking after these assets. Building local talent is also a critical success factor as is diversity – it is simply a good business decision for your employees to mirror your customers both at home and abroad.

Asia presents enormous opportunities to Australian firms who supply the goods and services - and provide support - to the supply chains that serve the demands of the billions of new consumers who will emerge in the coming decade. According to an April 2015 report by PwC, ANZ and AsiaLink titled “Australia's Jobs Future”, the services sector will become Australia's Number 1 exporter to Asia by 2030 and will support more jobs than all other exports combined.

Australia has enjoyed 24 years of uninterrupted economic growth and business has operated in a relatively sheltered, comfortable competitive environment. In the view of several at the roundtable, we have become complacent. Unlike most of the rest of the developed world, we haven't had a crisis to jolt us into action. But how much longer can we afford our complacency?

Again, the opportunity seems self-evident in the data: PwC's economic modelling predicts four of the world's five biggest economies in PPP terms will be in Asia by 2030 – just 15 years from now. The four economies in question are China, India, Japan and Indonesia. A middle class of 500 million people today, half of whom are under 30 years old, is expected to increase sixfold to a staggering 3.2 billion by 2030.

Our trade story is even better: six of Australia's top 10 trading partners are in Asia although that trade is dominated by the export of bulk commodities like iron ore, coal and wheat which does expose us in good times and bad.

The rise of Asia, fuelled by a fast growing and technology enabled middle class, is rapidly changing global supply chains. New trade agreements are both an enabler and a response to these changes.

Hopefully it won't take our platform catching fire for realisation to dawn – yet the need to respond to a burning platform was a necessary driver for reform mentioned more than once last week.

The consensus was there is plenty of room for Australia in Asia but we have to be far more ambitious in how we think about the relationship.

Asia is not easy and there are risks but the greatest risk may well be doing nothing at all.

The question boards often ask is “should we be in Asia?” The question they should be asking is “can we afford not to be in Asia?”