Leading the Way: Businesses strive for higher level of regional integration

Leading the Way is a column written by PwC's professional staff. It appears in the Business section of the Bangkok Post twice monthly. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.

This article appeared in the May 15, 2012 issue of the Bangkok Post.


Asia-Pacific economies are crossing into a new era of interconnectedness, leaving mercantilism behind and embracing consumption-based growth. Companies located in developed nations are setting up regional hubs and distribution networks, building brands, tapping local innovation and forming private-public sector partnerships.

China's private consumption alone is forecast to be worth US$9 trillion by 2020, up from $2 trillion in 2010. As the region matures _ amid economic turmoil in the EU and sluggish growth in the US _ global companies are casting their eyes eastward to become integral, long-term players.

PwC analysis and findings from Oxford Economics show that the top business priorities are more sustainable energy and redoubled efforts to improve health care, transport and labour forces into the 21st century. The message from ministries and boardrooms is clear: these advancements will occur only through private and public-sector cooperation.

A fresh look at Asia-Pacific: Businesses are expanding locally, reflecting Asia-Pacific's intraregional growth. Asia-Pacific economies are growing and becoming more integrated and exports among Apec economies are forecast to make up 71% of all exports by the Asia Pacific Economic Cooperation economies in 2020, up from 67% in 2010, based on PwC's 15th Global CEO Survey in November 2011.

Higher regional trade volumes are creating larger and more complex trading channels. And it's not just China. Vietnam _ fast becoming a destination for retail and technology manufacturing _ is adding its threads to the web. Its exports to Apec countries are forecast to rise more than twelvefold from 2000 to 2020 to $120 billion, with the biggest flows to Korea, China, the Philippines and the United States.

Multinationals are deeply integrating in the region, setting up regional hubs and laying down intraregional distribution and service networks. Greater trade, more numerous and efficient supply chains, low labour costs and higher GDP growth help enable this. With regional economic activity growing, many stakeholders are calling for an improved region wide trade climate, less corruption and clearer regulations.

The world's innovation hubs: As Asia-Pacific economies build next-generation infrastructure _ from smart grids to cloud computing _ opportunities are opening up for companies to commercialise innovations on a bigger scale and more swiftly than in their home markets.

A more integrated and diverse Asia-Pacific is allowing companies already in the region to increase scale and penetration. Businesses have the opportunity to select mature, stable bases from which to expand into larger, less-developed, but fast-growing markets. Choosing the right entry point or path to expand is crucial _ both in reaching new regional consumer markets and in developing more efficient and resilient regional supply chains.

Global businesses are setting up regional hubs to serve as headquarters to save unit costs and produce tax advantages. The regional headquarters centralises high-value functions, taking on trading, procurement and Intellectual Property protection for all the parent company's regional businesses.

Automakers have already embraced this approach. Consider Toyota's strategy in Southeast Asia. It has developed selected locations as specialised centres for producing and exporting vehicles throughout the region. Thailand is the base for its medium-size passenger cars, while family vehicle models are produced and exported out of Indonesia. The Ford and Mazda network has set up similar specialised centres in Thailand and the Philippines.

Gone are the days when companies set up assembly facilities in individual countries to sell in their small, highly protected domestic markets. The current strategy provides scale and cost-competitiveness while encompassing specialised functions such as product development and engineering.

The current environment is forcing business and political leaders to rethink the way we are innovating and the way we develop talent in the region. From an innovation standpoint, we're going to have to think more in terms of collaboration and co-creation, whereby people will join together with different areas of expertise in order to solve the very complex problems that we're facing.

Hold a stake in the region: Companies are taking stakes in government-funded initiatives through public-private partnerships _ from advancing health care to modernising transport systems by incorporating high-end, Western technology. Private equity firms are investing directly in local firms in growth hot spots.

Companies are also having to contend with obstacles in Asia-Pacific such as red tape and murky government procurement policies. Partnering with the region's stakeholders in a local economy helps a business navigate difficult new terrain and establish a presence.

Successful companies integrate more deeply by investing in talent, forging relationships with governments, building regional distribution and service networks and, critically, pursuing aims that twin with regional priorities.

This article is extracted from PwC's '10Minutes', a series that provides PwC's perspectives on critical business issues of interest to senior executives in crisp, to-the-point language and a simple format that requires about 10 minutes of an executive reader's time. To learn more, visit www.pwc.com/10minutes. We welcome your comments at leadingtheway@th.pwc.com