Doing business in Asia Pacific 2017-18

Perspectives from CEOs

A world in transition

Over the next three years, Asia Pacific CEOs expect their businesses will become more global and more automated. Watch PwC Global Chairman Bob Moritz’s video for an overview of our 2017 APEC CEO Survey findings launched at the APEC CEO Summit in Da Nang, Viet Nam on 8-10 November 2017.

Bob Moritz

Global Chairman, PwC

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APEC leaders discuss the business trends shaping the region’s future  

Globalisation under the test

Results of PwC’s 2017 APEC CEO Survey

Over the next three years, Asia Pacific CEOs expect their businesses will become more global, more automated and more tied to a region that they believe is slowly and steadily becoming more economically cohesive.

After victories of nationalist parties and rhetoric against free trade, we looked for evidence of a pullback from the global economy but found little. APEC CEOs are more optimistic today than during the previous two years — 37% say they are “very confident” of their prospects for revenue growth during the next 12 months. Stronger prospects for GDP growth in some APEC economies and export markets in Europe are bolstering sentiment.  International trade flows are picking up, projected to outpace global economic growth in 2017 for the first time in five years, according to the World Trade Organization.

In fact, 63% of regional business leaders surveyed by PwC expect their global footprint to expand over the next three years. A net 50% plan to increase investments globally, up from 43% at the same time last year. Executives are forging ahead despite tremendous uncertainty over trade policy directions.

Yet these business leaders are also prepared to make adjustments in how they operate internationally to adapt to changing views on trade openness. They expect to make greater use of strategic alliances (71%) to secure footholds in foreign markets; some will move to some extent to a ‘build where they sell’ (51%) model, amongst other adaptations.

 

They will balance an array of incentives — both economic and market-driven — to do more internationally against threats of rising barriers to foreign trade and investment. With governments seeking to protect jobs, and to attract or retain a greater share of business activity, especially R&D, trade relations and tax policies are in flux. Amongst the APEC economies, on average, perceptions are that the conditions for paying business taxes have improved since 2010 while they are volatile for trading across borders, according to the World Bank’s annual Ease of Doing Business ranking of economies against the highest-scoring global economy, or the distance to frontier.

Global strategies will be driven by wider adoptions of technologies, like robotics and 3D printing in manufacturing, as much as any sharp reversal in trade openness. Automation in the workplace is moving at a pace few CEOs could have imagined. With over half of business leaders (58%) currently automating certain functions in their organisations, APEC businesses are laying the groundwork for a future workforce that is more analytical, more intelligence-consuming, and less focused on commoditised tasks.


For the past eight years, in its role as Knowledge Partner to the APEC CEO Summit, PwC has delivered the business perspective on doing business in in the region through its annual APEC CEO Survey. Respondents represent businesses that are investing, on average, in six APEC economies other than in their own principal economy.

This year’s survey shows how business leaders are taking stock of a more fluid trade policy and technology environment. PwC surveyed 1,412 APEC business leaders from May through July 2017. Responses are scored from each of the 21 APEC economies. Over half of respondents are in organisations with over US$1 billion in annual revenue. Please find the full details on PwC’s APEC Survey research methodology.


Results from last year’s survey

CEO views on business conditions in Asia Pacific

APEC CEOs see the Asia Pacific region becoming more economically linked, despite rising trade frictions

A majority (75%) see progress, though slow, toward deepening regional economic integration. Their views have not significantly changed since 2014 — even as this year, the US signalled a hardening stance in its key trade relations, and a survey by AmCham in China found that its members feel less welcome today than before.

The perception is that moves by economies big and small to jostle for preferential access are outpacing other efforts that would rein in cross-border activity. A quarter of CEOs (27%) expect an increase in revenue opportunities over the next year due to a new trade agreement. Fewer (21%) expect a decrease in business growth opportunity due to stalled or collapsed agreement. The US withdrawal from the Trans-Pacific Partnership (TPP) was perhaps the most noteworthy disruption in an eventful year for regional trade. Yet trade deals continue to march on. Negotiations amongst remaining 11 economies in the TPP continue. Of the 37 trade agreements notified to the WTO since 2015, either because they are newly announced or advanced enough to take effect, seven are intra-APEC and an additional 14 involve at least one APEC economy.

There are notable geographic variations that signal new directions are afoot: a larger minority of CEOs in economies with a long history of an outwardly pro-free trade orientation, such as the US and Singapore, believe the momentum toward regional integration has stalled or reversed, 31% US CEOs vs. 18% at this time last year. Amongst Singapore CEOs, 27% share that view, compared with only 11% last year.

At the same time, some CEOs based in economies that are more recent beneficiaries of globalisation are more likely to remain optimistic on regional integration. Just 15% of business leaders with oversight in Mexico say progress is stalling or reversing compared with 20% a year ago. Even with the re-negotiation of NAFTA, Mexico has nine Free Trade Agreements in effect, giving Mexican exporters preferential access in three continents.

"We are seeing global capital flows increase over the last few years, particularly from Asia. In the first half of this year, Asian entities invested over US$45 billion in real estate assets around the world, US$25 billion of that was from China and that represented a 100% increase over last year. We see this trend continuing."

Interconnectedness amongst APEC-based companies will grow tighter

A net 50% are increasing global investments, up from 43% at this time last year. Most of APEC CEOs’ planned increases in investment for 2018 (71%) will be channelled into APEC economies, which is little changed on the year.

A collective confidence in the growing economic power of APEC itself is an important factor. Future economic growth in the region is projected to continue to outpace global GDP, expanding to 3.8% in 2017-18, according to an analysis by APEC’s Policy Support Unit.

Not only do APEC countries attract over half of all foreign direct investment (FDI) inflows (thanks to the outsized influence of the United States, China, Hong Kong, Singapore and Australia), intra-APEC trade has been a source of strength. Imports and exports within the region grew at an average of around 7% a year from 1992 to 2015. Investment stimulus like China’s Belt and Road infrastructure project is a potentially significant future engine of integration. To date, PwC has tracked the equivalent of US$250 billion in projects that have either been built already, recently started construction or have been agreed on and signed in relation to Belt and Road.

CEOs with investments in China, Indonesia, the US and Vietnam are most likely to increase inbound investment in these economies over the next 12 months. Vietnam experienced record level of foreign direct investment in 2016 as it shapes an economic strategy that replicates the investment- and export-led growth model that led to the rise of successful Asian Tigers like South Korea and more recently China, as an analysis from PwC shows.


“There is huge potential for Russia in Asia. We are their neighbour. We have an excellent climate and resources, so we are going to try to feed Asia. We have a two-tier strategy. We will develop production in the Russian Far East and ship our products to Asian countries. Secondly, we will be to bring production to these countries, especially to China.”

CEOs see signs of a more restrictive international trade environment rising

A fifth of APEC CEOs say they’ve experienced an increase in barriers over the past 12 months across a range of measures of trade openness. CEOs see this trend increasing in 2018, with barriers to employing foreign labour and providing or receiving services across borders being of particular concern for more CEOs. Changing policies around immigration are a growing issue for business leaders. More CEOs want to see the APEC organisation take a lead role on labour mobility matters in the region: 30% say this should be a priority for APEC, up from 20% in 2011.

Stepped-up investigations and threats of punitive tariffs targeting specific goods; for example, in the US regarding Canadian softwood lumber, likely also play a role on sentiment. As another example, as of May 2017, 11 APEC economies, including China, Indonesia and the US, have implemented or proposed data localisation rules that serve to impede transmitting data, according to a global list compiled by the Information Technology & Innovation Foundation.

These varying signals point to rising complexities ahead for international business. This can impact in ways that may be unexpected. As a recent study by PwC’s Strategy& of corporate R&D spending shows, multinational companies are carefully watching the situation unfold. At many companies, what is now a nimble, interdependent R&D network could become a group of autonomous hubs if the movement of technical talent and innovation investment across borders are impeded through protectionist policies. Unfortunately, in this scenario, companies are likely to lose efficiency, create redundancies and take on higher costs.

“If protectionism continues to be on the rise factories could be forced to move to the developed markets in Europe and the US. For that reason Lite-On has been putting emphasis on developing smart manufacturing in recent years in order to respond to future changes. That will involve cultivating talents for smart manufacturing; making use of IT and technology to strengthen operations and supply chain capability; driving changes in organisational culture and focusing on automation and smart manufacturing to decrease the use of labour.”

“The companies of the future will be those that are focused on technology-driven solutions to make the world a more efficient and better place. That’s where our strategic focus is in terms of getting some of these companies to market and getting them succeed, dominate Singapore and the region and even the world.”

APEC CEOs are likely to adapt to changing trade policy climate by relying more on foreign partnerships and increasing activity in markets with established bilateral ties

A majority (71%) expect to rely more on business partnerships/joint ventures, of which 22% are planning to do so to a ‘great extent’, in response to perceptions of changing trade environment. CEOs also plan to turn to acquisitions and to increase business activity in economies with established bilateral ties.

While doing business in economies that are closely tied or through joint ventures and acquisitions are not new strategies for overseas expansion, these findings suggest a new intensity of interest in these methods. Much of the recent activity around alliances is being driven by the rapid pace of technological advances and an increasing difficulty in achieving a rapid and meaningful presence in high-growth and emerging markets. It is also noteworthy that cross-border M&A has grown faster than trade globally since 2013. Companies continue to seek avenues for international growth that are independent of trade trends. Given the pace of technological advances, amongst other factors, PwC believes global M&A to remain robust even in the face of the new nationalism.

At the same time, APEC CEOs are actively reconsidering what can be done more productively at home, as digital technologies such as advanced robotics and 3D printing as well as policy incentives influence off-shoring calculations. For example, half of respondents in the industrial sector expect to move to a ‘build where you sell’ global model to an extent as manufacturers compete to efficiently create and produce products where their customers are. Manufacturers in all industries will find themselves in a race to efficiently produce products at the point of demand, as this Strategy& analysis shows. In China alone, 87,000 robots were installed in 2016, 27% more than in 2015, spurred by government goals to increase advanced manufacturing capacity.

Wherever APEC CEOs look to grow their business in the future they are keenly aware that decisions around automation will dominate a great deal of their strategic planning — 58% already are automating certain functions in their organisations and 41% are identifying workers who are skilled at using new automation tools. Approximately the same percentage are investing in machine learning, a form of artificial intelligence (AI) and emerging technologies. Technology CEOs being particularly proactive in this regard.

While AI is still in early development, businesses everywhere are grappling with promise of increased productivity and potential for disruption within industries and customers. Examples in use today include digital assistants and chatbots; they can learn and take action in response to customer interactions, thus augmenting the productivity of their labour force while automating some tasks.

A PwC analysis into the business implications of AI shows how big a game changer AI is likely to be, and how much value potential is up for grabs. From a macroeconomic point of view, there are opportunities for emerging markets to leapfrog more developed counterparts. Our research shows that 45% of total economic gains by 2030 will come from product enhancements, stimulating consumer demand. This is because AI will drive greater product variety, with increased personalisation, attractiveness and affordability over time.

"I think AI will certainly be the biggest trend over the next ten years, much in the same way as mobile Internet in the past decade. If today a mobile Internet company has not yet begun to embrace AI, it will surely be eliminated from the competition. Some of our invested companies have begun to implement AI models internally step by step, with very significant results."

“A lot of airlines’ working environment is still processed by paper — immigration for example and other forms. In the next few years that will be digitised and everything will be accessible by mobile. So we have invested heavily to make sure that we have evolved and continue to evolve according to people’s lifestyle, our passengers’ lifestyles.”

“We just have to be transparent. Business partners have other channels to find information about us. So we collaborate closely with them. We have an origin tracing system for our products and apply new technologies in production. We have to communicate this clearly to our clients so that they can pass it on to the end consumers.”

Businesses have signed up to lead the transformation of the workforce to grow in the digital economy

Findings reveal that business leaders think society’s best bet may be for the business itself to take the lead on worker training. Businesses have the most insight into the competencies they need as adoption of technologies makes some tasks in their organisations redundant and as others continue to emerge.

Here’s how APEC CEOs rate the effectiveness of different ways to accelerate digital workforce readiness. Greater investment by business in continuous learning leads the pack.

One thing is certain: an automated business will still need human talent. It’s notable that CEOs give little importance to post-work issues like offering a basic universal income or taxing robots to fund that income. Yet the skills required won’t be focused simply on science and technology. In a world where machines can vastly improve upon human productivity in so many logical tasks, non-binary skills like creativity, leadership and empathy will be in demand. The companies that identify the skills that can best complement machine learning and other emerging technologies will be the ones that truly benefit from the automation age, as this Workforce of Future study from PwC shows.

 

“Companies will inevitably have to invest more in training but it’s also investing more on workforce resilience, making sure that employees who potentially don’t have a future with that company have the skills and talents to go somewhere else. This isn’t just a simple task about saying, ‘we love digital’; it’s a task about saying, ‘what are the implications for digital across the totality of our workforce starting now for the long term future.”


Implications for business leaders and policymakers

The findings of this year’s APEC Survey reveal an increasingly complex environment for businesses that operate across borders. Global and regional political currents suggest companies face the uncertainty of tougher trade barriers even as they attempt to increase intra-regional investment and growth. At the same time they must plan for future growth with an operational capability that will be increasingly automated.

Both will impact the way APEC companies have done business for the past 20 years and so they should not expect simple answers to the questions the new trade landscape and automation pose.  The depth of integration and specialisations that have grown alongside today’s global supply chains means it’s unlikely there will be an obvious solution.

Here’s what we do know. Over the next five years the APEC workforce will become more automated and the region more closely integrated economically. Despite this integration the combination of trade barriers and automation could mean that worker mobility is restricted and securing talent becomes harder. 

 

Policymakers should expect that businesses will model the impact of trade and tax changes to understand potential company impacts, and continue to reassess supply chain and sourcing for potential border, exchange rate, and price impacts. They have clearly signalled that they intend to maintain or extend global footprints.

To ride out the changes automation will bring, companies need to ask the right questions now in order to plan. How will automation and forms of artificial intelligence like virtual assistants affect your business model? Will these changes open up new markets and opportunities that have seemed off-limits in the past? What type of talent will you need over the next five years and how will you secure it? And how can you build and maintain trust in your business when so much of your business strategies, growth markets and even the makeup of your workforce is in flux?

Above all, for both businesses and policymakers, the challenges can be considered theoretical no longer. It’s time to get practical about helping workers at many different skill levels adjust to working in an automated world.

 

PwC @ APEC CEO Summit

We are proud to be Knowledge Partner to the APEC CEO Summit 2017. In addition to launching PwC's 2017 APEC CEO Survey results at the Summit, we have also produced two thematic videos played at the Future of Globalisation and Future of Work plenary sessions during the Summit.

How can governments and businesses work together to make globalisation work for all?

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What will you do to prepare for the future of work?

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