Monday, 11 December 2017

ASEAN builds Australian opportunity beyond the Belt and Road

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Customer Service and HSBCnet Technical Support

Vivek Ramachandran

Global Head of Growth and Innovation, HSBC

It's been 50 years since the Association of Southeast Asian Nations (ASEAN) was first established by Indonesia, Malaysia, Philippines, Singapore and Thailand. When the intra-governmental organisation's declaration was signed in Bangkok on 8th August, 1967, the average life expectancy of its combined 185 million people was just 56 years and GDP averaged USD122 per person, in 2017 terms1.

Much has changed in the five decades since. ASEAN has grown in strength and stature and now includes Brunei Darussalam, Vietnam, Laos, Myanmar and Cambodia among its 10 members. The group's population has also swelled and encompasses more than 634 million people, many of whom have helped propel the region to significant economic growth; GDP now measures USD4,021 per person and life expectancy now averages 71 years2.

Economic progress in ASEAN hasn't always been steady, but in the past decade member nations have thrived as their economies have matured and their largest neighbour, China, has rapidly expanded. China's influence looks set to continue as President Xi Jinping's signature foreign policy, the Belt and Road Initiative (BRI), aims to pave a new path of growth in ASEAN, which HSBC predicts will be the third largest economy globally by 2030.

HSBC's Global Head of Growth and Innovation, Vivek Ramachandran, says China will undoubtedly play a significant role in the region's next decade, with ASEAN and China sharing a goal to double their bilateral trade from USD500 billion in 2016 to USD1 trillion in 2020.

However, with more than 57 million new middle class households expected in ASEAN in the next ten years, he believes expansion at home will be equally important for Australian business.

"There's the obvious China theme, and then there's the economic growth being driven by the emergence of increasing affluent domestic consumers," Mr Ramachandran says of ASEAN's economic future. "People shouldn't discount the growth expected from ASEAN itself."

Embracing ASEAN

Although this fast-growing region lies in close proximity to Australia's northern border, fostering economic ties between Australia and ASEAN countries has been a slow embrace, according to Megan Mulia, the Director of Research and Information at AsiaLink Business, an Asian capability consultancy funded by Melbourne University and Australia's federal government.

"Australian business has primarily focused on the China story and the ASEAN region has not garnered a lot of interest, but this is changing," she says.

Ms Mulia says Australian businesses have had some success in the infrastructure, resources, education and tourism sectors, but believes there is scope for future growth, especially in professional services, where Australia is acknowledged as having world-class expertise.

"The challenge for Australia is we have to start shifting how we export services to ASEAN. We have to commit to larger investments and open offices in these countries and enter into more joint ventures," Ms Mulia says.

At present, Ms Mulia says many Australian companies operate a "hub and spoke" model out of Singapore to service the region but she says "when Australian companies take the time in individual countries, they are generally finding success."

For those businesses, Ms Mulia nominates a range of opportunities beyond infrastructure. She says the growing middle classes in ASEAN hold particular promise for education providers, with people willing to spend significant amounts to improve the education provided to its youth, as well as the financial sector to grow their new-found wealth.

"In Indonesia, only two per cent of the population have a banking relationship which presents an opening for Australian financial services expertise, especially in fintech," Ms Mulia explains.

"There are opportunities in aged care, especially in more mature markets like Singapore, and even legal services across the region, where we're already seeing Australian firms partnering with Asian and European firms," she adds.

However, Ms Mulia warns that while Australia has unique skills and knowledge in these services, companies can't expect to be all things to everyone, and should embrace ASEAN opportunities with an eye to their unique strengths compared to their regional competitors.

"Intra-ASEAN trade is already strong across many sectors, to be successful Australia just needs to focus on our niche expertise."

China calling

Looking to the future, intra-ASEAN trade – and middle class growth – is likely to get a significant boost from China's Belt and Road Initiative (BRI), according to Ramachandran.

"President Xi Jinping's BRI is already increasing trade and providing economic benefits around the region," he says, noting the huge amounts of capital starting to flow into the region.

This is evident in the USD5.5 billion rail link Thailand and China recently agreed to build3, as well as the Malaysian government's USD13 billion East Coast Rail Link4 deal with a Chinese construction firm. Both projects will forge stronger supply chain links within the region, as well as widen China's logistical links and influence across ASEAN.

This investment allows China to connect these economies by exploiting its own industrial overcapacity, according to Mr Ramachandran, but he says "the infrastructure is just the beginning of a wider evolution", which is spreading to Australia.

"All of the infrastructure investment connects to a larger economic ecosystem," Mr Ramachandran explains.

"The BRI is creating momentum as it connects to the ASEAN economies and we're seeing HSBC's clients getting involved in the Asia-Pacific region. They're tapping into this larger ecosystem surrounding infrastructure projects, as first-, second-, or third-tier suppliers, and in supporting the economic growth that these infrastructure projects unlock."

Mr Ramachandran believes the savvier companies operating in the region are already taking advantage of the wider opportunities the BRI offers, and notes that the present projects are just scratching the surface of what's likely to follow.

He cites infrastructure opportunities in the region that Australian businesses can already be looking towards, from the large railway corridor projects to public utilities and agricultural development. Other downstream opportunities lie in providing technology services to ASEAN nations who still trail China on their digital transformation journey, and – as new consumer classes emerge – the provision of education, financial, healthcare and tourism services.

"Inputs into infrastructure projects provide opportunities in the short term but these flow-on into larger opportunities especially in the provision of professional services." Mr Ramachandran says. "Digital technologies also provide a huge potential upside in the region especially in the payments space and in financial services more generally."

"Many ASEAN markets have economic and political nuances that can make them particularly complex," he adds. "Working with partners on the ground like HSBC, who know both ASEAN and the Australian business environment, can help companies who do want to target these opportunities but may not be sure where to start."

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