Thursday, 23 January 2020

Five trends that will change business in 2020 and beyond

Australian corporates can look forward to greater trade opportunities, lower funding costs and faster business transactions.

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After years of trade wars and slowing global growth, the next decade look more promising for Australian companies that are keen to grow. Here are five key trends to watch.​

1. New markets for trade

Despite concerns about growing protectionism, the reality is that trade liberalisation is continuing. Australia, for example, now has trade pacts with most major Asian economies, and is further strengthening its relations with key trading partners such as the United States (US). It is also part of negotiations for the world’s largest trade deal – the proposed Regional Comprehensive Economic Partnership – which involves 14 other Asia-Pacific countries and may be agreed in 2020.

This is good news for Australian businesses looking to go offshore or expand their international trade. For example, lower barriers to trade in Asia and other parts of the world will enable companies to access the world’s fast-growing middle classes and diversify their customer bases.

According to Ciaran Scott, Head of HSBC Australia’s Middle Market Enterprises in New South Wales, more businesses are looking to take up these opportunities.

“We are seeing corporates move offshore earlier in their lifecycles, whether organically, through the establishment of offshore partnerships or direct acquisition,” he says. “This is partly driven by a growing awareness of trade agreements Australia has with other markets.”

Australian businesses can expect more trade pacts, notably with the European Union (EU) and potentially the United Kingdom. A free trade deal with the EU is currently under negotiation and would give Australian exporters better access to the union’s US$19 trillion in gross domestic product.

2. Historically low interest rates

With three rate cuts in 2019, and potentially another in early 2020, Australian companies can look forward to reduced borrowing costs. Rates are also likely to remain low in other major markets. HSBC Economists, for example, expect countries such as the US and Japan to keep rates low in 2020.

As central banks cut interest rates to counter soft economic growth, some companies are capitalising on the opportunity to make larger capital and operating investments. For example, many Australian respondents to HSBC’s 2019 Navigator survey saw interest rate fluctuations as the second biggest external influence on their growth prospects.

“The strongest corporates would likely take advantage of low interest rates to pull forward the investment needed to accelerate the growth of their business” says Scott.

3. Automation, blockchain and evolving technologies

Expect a rise in the digitisation of formerly paper-based business processes. Machines will also continue to take over mundane and repetitive tasks, freeing up employees to focus on higher-value work.

One technology that is becoming a great enabler of trade is blockchain. Blockchain can accelerate international transactions by enabling parties to process payments digitally instead of sending or receiving paper-based letters of credit. This can slash the time required to execute trade transactions from 10 days to less than 24 hours.

In 2019, HSBC executed the first blockchain trade transaction between Australia and China, involving Melbourne-based wool exporter Fox & Lillie and Chinese buyer SDIC International Trade Nanjing. Using blockchain-based trade finance platform Voltron, HSBC in China issued a digitised letter of credit on behalf of SDIC International Trade Nanjing. Fox & Lillie reviewed the letter and uploaded its own documents to the platform to complete the deal.

The arrival of high-speed 5G mobile communications will also be significant. Nearly a third of Australian businesses HSBC surveyed thought 5G would be an important technology in the next five years, with half believing it could speed up merchandise production and distribution.

Other game changers are the Internet of Things and robotics, which should both increase efficiency and productivity. And in payments, it will become even faster and more convenient to move money, helping companies optimise working capital and efficiency. HSBC Australia’s new omni-channel platform, for example, is helping businesses join the booming ecommerce market by allowing them to easily receive and send money via multiple channels across jurisdictions. The payment system also lets companies accept debit or credit card payments, supporting their mobile sales and physical retail operations.

4. Focus on sustainability

Concern about climate change and sustainability will only gain ground in 2020 and beyond, especially given the bushfire crisis in Australia experienced recently.

Today’s customers are more likely to do their research before buying – they’ll be looking for a product’s provenance and whether it has an environmental or social impact, according to Stephen O’Connor, Head of HSBC Australia’s Middle Market Enterprises in Victoria.

And companies are feeling the impact of this growing trend. HSBC’s survey revealed that almost all Australian business respondents (96 percent) are feeling pressure to become more environmentally and ethically sustainable. However, many are struggling with barriers such as their ability to finance change and free up resources to implement it. 

“Companies need to adapt and review their supply chains to make sure they’re meeting increasingly high standards of sustainability,” says O’Connor. He recommends that companies:

  • Put sustainability on their agenda, if management and the board have not already started discussing it
    Engaging independent directors with sustainability expertise can help. Management and boards must also have access to high-quality internal reporting on sustainability performance, just as they would on financial performance.
  • Understand their carbon footprint and sustainability status, and report on it
    Many businesses publish annual sustainability reports to inform customers and potential investors about the progress on initiatives to increase sustainability.
  • Identify how they can become more sustainable
    A first step might be to reduce water and/or energy use. Customers may also value knowing that a business deals with environmentally responsible suppliers, whether this involves the provision of raw materials, labour or finance.

“Building sustainable practices not only helps the environment, it also provides financial benefits such as by minimising waste in your supply chain,” adds O’Connor.

Over the next five years, a third of Australian businesses intend to prioritise investment in initiatives that reduce waste generation through prevention, reduction, recycling and reuse, with a similar figure (31%) focussing on improving energy efficiency and sourcing more clean energy.

‘Green’ financing has also become more available. HSBC, for example, provides sustainable finance options – including green loans and green bonds – which integrate environmental, social and governance criteria into business or investment decisions. For instance, it helped an agricultural client build a bio-digester that turns cow manure into clean energy. The project now produces about 3 megawatts of renewable energy a year, meeting 100 per cent of the client’s power needs. The bank aims to provide US$100 billion in sustainable finance and investment by 2025.

5. Rising consumption and growing middle classes

Increasing wealth and incomes are driving a remarkable rise in consumption, particularly in North Asia. In China, for example, the growth of its middle class has led to greater spending, and now the propensity of its young customers to spend more than save is helping diversify its economy.

Indeed, China’s rising consumption will offer a substantial opportunity for Australian trade. By 2030, 58 per cent of Chinese households are expected to become mass affluent or richer, which would give them a greater ability to spend.

Across ASEAN, economic growth has seen a rise in the number of middle-class households, many of which earn above the median income of their respective countries.

“For Australian businesses looking at these markets, especially China, it’s crucial to be aware of diverse consumer demographics, as well as behaviours and preferences,” says Scott.

Helping you achieve growth

International markets are looking more attractive for Australian businesses, but keep in mind that there are complexities in expanding offshore. You need to find a bank that can help you navigate the risks and the opportunities of doing business overseas. With unrivalled capabilities in 65 countries and territories, HSBC can be your partner for growth.

Learn more about how you can make the most of major trends affecting businesses this year.

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