APEC CEO Survey 2018 - Full write-up
A year into rising protectionism, APEC business confidence holds up
As walls go up, companies in Asia Pacific are finding ladders
Companies on the road to a more digitally-integrated world encountered a series of diversions in 2018 shaped largely by a hardening US trade stance toward China with repercussions for foreign investment, supply chains as well as digital business models across the Asia-Pacific Economic Cooperation (APEC) region.
Against this backdrop, business leaders continue to project confidence in their growth prospects in the Asia Pacific region with a net 51% planning to raise investment levels, mainly at home as well as cross-border in other APEC economies, up from 43% two years ago, according to PwC’s annual survey for the 2018 APEC CEO Summit. However, results also show sentiment is highly sensitive to escalations in trade tensions; so the current mood could change. Companies are in the early stages of adjusting to US-China-Europe trade orientations, with notable spillover effects into data-driven futures as major economies race to put their stamp on the terms for using data.
PwC surveyed 1,189 CEOs and industry leaders from 10 May to 16 July 2018 for the 2018 APEC CEO Survey, with responses from each of the 21 APEC economies. The survey, in its ninth year, serves as a strong indicator of international business sentiment and strategies in the region; on average, respondents are investors in six other APEC economies. A second survey of US executives in companies with at least US$1 billion in yearly revenue was conducted in early October. You can find the full methodology and respondent profiles for the two surveys here.
Business confidence holds up even as companies experience new trade barriers
APEC business confidence holding up thus far
At the mid-year point, after the first US tariffs on imports of steel and aluminium from China were imposed, and as China retaliated, 35% of all APEC respondents are ‘very confident’ in revenue growth over the next year, down slightly from 37% in 2017. Yet the headline figure masks some wide variations: for example, US and Thailand business leaders are more upbeat (57% and 56% ‘very confident’, respectively), while respondents in China and Mexico, two of the largest trading partners for the US, are below the APEC CEO average. Sentiment readings over the course of June-July also make clear that the uncertainty being propelled by the succession of unilateral US trade moves are having a dampening influence on business sentiment across Asia Pacific.
A second reading of 100 US business leaders in early October, as the US imposed 10% tariffs on a further US$200 billion of imports from China in September, and China announced retaliatory tariffs on US$60 billion on US imports, shows a majority of US business leaders (69%) expect a positive impact on their revenue over the next year from these trade tariffs, with fewer (27%) anticipating higher costs (negative impact). These findings imply that US business confidence is not shaken, however with anecdotal evidence rising that the tariffs are disrupting US supply chains as well as input costs for US purchasers, it may be too early to see the full impacts. As Federal Reserve Chairman Jerome Powell commented in late September, according to a report in Fortune.com, if US trade policy “perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the U.S. economy.” [1]
Data flow restrictions stand out
APEC leaders are encountering new barriers in every area of doing cross-border business. But restrictions on the movement of data is where companies are experiencing the greatest year-on-year change. Twenty percent of respondents experienced an increase in barriers to moving data, up from 15% last year. These business leaders are contending with European data privacy rules (GDPR) taking effect, as well as new cybersecurity laws (China) and various requirements for local servers in a handful of other APEC economies. Also more data-handling rules are on the horizon: California, for example, is pressing ahead with its own law on protecting consumer information (CCPA).
A widening number of jurisdictional claims on data presents real challenges for business leaders and policymakers alike. While some new trade arrangements do address protecting cross-border information flows, this is being done piecemeal. The reality of today’s trade is that data increasingly drives both conventional trade in the form of the sale of goods and services on digital platforms, and through the workings of global supply chains. In a global economy increasingly dominated by Artificial Intelligence (AI) and automation, the terms of data trade will take on even greater importance.
[1] Kelleher, Kevin, "Fed Chair Says He's Hearing 'a Rising Chorus of Concerns' from Companies About Trump's Trade Wars", Fortune.com, September 26, 2018.
More companies experience opportunities from shifting trade arrangements than in 2017
Finding opportunities in global trade shifts
The survey showed business leaders contending with two matters: a range of scenarios being generated by the stand-off between the US and China with potentially sizable impacts to growth projections and on the other hand, a reality on the ground that belies a simple interpretation of what’s going on. For while around a fifth of respondents report experiencing new barriers to their trade in 2018, twice as many this year realised fresh revenue opportunities as a result of new trade arrangements (28%) than last year (14%). Moreover, 31% are sensing openings to benefit from new trade arrangements over the next year. Among other factors, which must include the basic fact that the surge in tit-for-tat tariffs on US and China imports creates winners and losers everywhere, these findings show businesses uncovering new paths for growth despite the trade policy flux.
APEC is at the centre of this activity. Over the past year, milestones include the rebirth of the 11-economy Trans-Pacific Partnership without the US (CPTPP); the EU’s tariff-cutting pact with Canada (CETA) and free trade negotiations with Japan; revisions to the NAFTA agreement binding US production with Canada and Mexico, as well as the US with the Republic of Korea. China’s Belt and Road initiative remains one of the most sizable cross-border infrastructure and investment projects. China is also working towards concluding an Asia Pacific trade alliance (RCEP). While these trade projects are in various stages of approval-to-impacting, they set a promise of lower market access costs or risks, and potentially, stronger economic growth. For example, the World Bank estimates a 1.1% boost in Viet Nam’s economy from the CPTPP by 2030. [2]
At the same time, seizing an opportunity to attract foreign investment and move up the value chain, smaller APEC economies are actively marketing their own free trade agreements (FTAs), including Chile, host of the APEC CEO Summit next year. In this light, it is worth noting that two of the more outwardly open economies in APEC – Canada and Australia – each moved up in the survey’s rankings of APEC economies attracting planned cross-border investment over the next 12 months. Viet Nam, China, the US and Thailand remain within the top five destinations for foreign investment by APEC business leaders as in 2017, with Australia replacing Indonesia in 2018 as measured in terms of the number of respondents (44%) planning to raise cross-border investment. Canada rose to 7th.
[2] Maliszewska, Maryla; Olekseyuk, Zoryana; Osorio-Rodarte, Israel. 2018. Economic and distributional impacts of comprehensive and progressive agreement for trans-pacific partnership : the case of Vietnam (English, Vietnamese). Washington, D.C. : World Bank Group.
Drive to be digitally competitive is top of mind, some fear falling behind
As companies in APEC look to the near future they have their sights set firmly on becoming more competitive and relevant in a digitally-integrated world. This drive is reflected throughout the findings of the survey even as they must navigate both political upheaval and an unstable international trade environment.
The business areas where they are looking to invest suggest CEOs are all too aware of rising consumer demands for fast, convenient and, frankly, more friendly services. Faster growth in the internet economy underpins the urgency. This is giving rise to a new crop of rapidly-growing start-ups. Close to a fifth of all respondents believe their organisations are falling behind competitors in their digital customer interactions.
In PwC’s recent Global Consumer Insights Survey more than 40% of respondents said they would pay extra for same-day delivery while consumers also said they felt companies had lost touch with the human element of customer experience and complained that there was a serious disconnect between what consumers expect and what companies deliver. Often, these heightened expectations are being shaped by a new generation of always-connected social media savvy consumers who are making purchasing decisions based on their access to digital information and speed of response by companies through the platforms and channels where those digital natives choose to shop.
Not surprisingly then, APEC CEOs are prioritising investments over the next two years in digital customer interactions (this was the number one priority for Consumer, Technology and Financial Services CEOs), developing a digital workforce and improving their overall digital operations.
Digital trailblazers increasing investments
It’s clear that the majority of companies grasp the need to be digitally prepared. Half already believe they are keeping up with competitors when it comes to meeting core measures of digital capabilities, from managing data risks to skills development in their workforces. However, simply matching the competition won’t be enough in the future. Even as firms understand the need to dramatically improve their digital competency, many risk being left behind by a small subset of leading firms who consider themselves ‘highly competitive’ across a range of measures of digital capabilities.
These firms stand out in a few ways. In an age where automation will make or break many sectors, these firms (the majority of whom have a turnover of US$1 billion plus) already show real confidence in making use of artificial intelligence (AI) - 59% of these digital leaders assess their organisation’s performance over the last two years in building (AI) in products as ‘highly competitive’ compared to just 15% of the total respondents. Given that 33% of all respondents say they are yet to any make use of AI technology, the lead these digital trailblazers are taking could be a game changer. Smaller firms will need to find ways to compete as demand for talent to develop AI-driven product grows.
The pipeline of science-technology (STEM) skill is worrisome
How Can Companies Compete with the Digital Leaders?
For those companies lagging behind in the drive for greater digital competitiveness, support from policymakers to recruit and nurture skilled people will be crucial in helping them catch up. At present though, the pipeline of talent trained in the technologies that are shaping the region’s future is worrisome: 65% of respondents say APEC governments ‘should do more’ to train science and technology (STEM) professionals.
Improving employee skills and capabilities is particularly important because, despite many fears that automation will decimate workforces, most business leaders say that advancing technologies like automation are actually creating jobs (56%). What’s more notably impacting inside the company is that technologies are leading to the creation of new roles, and for some business leaders (34%), it’s been a struggle to fill them.
Top two ways to accelerate inclusive growth: Expand access to education and improve transport
Planning for a more digital and inclusive APEC
As Asia Pacific becomes more digitally connected and competitive its business community will need to meet the growing consumer and greater societal expectations of an inclusive future. Business leaders already believe that expanding access to high-quality education at all levels and improving transportation can enable more people to participate in and benefit from growth and trade in the APEC economies. Increasing more affordable high-speed internet access also ranks high in their list of effective policy actions.
Yet when it comes to their own corporate action on creating a more inclusive society there is room for improvement. One third of respondents say their business makes no contribution to improving core APEC infrastructure issues including ensuring more stable food prices (39%), improved access to water and sanitation (33%), more reliable access to power and electricity (33%) and more affordable high speed internet access (also 33%). In their defense, many companies may not have the ability to have a direct impact on these individual issues. While many companies may not have the ability to have a direct impact on these individual issues, the infrastructure issues cited relate to specific UN Sustainable Development Goals that every APEC economy has endorsed. Moving forward, companies operating in those countries will also want to show how they are helping to meet those goals as part of their license to operate. If not, their digitally connected consumers, customers, employees and regulators will want to know why.
