Economies around the world are emerging from COVID-19 at differing speeds with uneven economic growth. Facing a more complex regional landscape, many organisations are increasingly considering how to diversify for a post-pandemic world. Unlocking opportunities in the Indo-Pacific will remain key to longer-term growth for Australian companies.

With the COVID-19 pandemic now in its second year, the chance for a swift, uniform economic recovery across the Indo-Pacific has faded. Some countries have recovered more quickly than others. However, the global economy overall faces slower growth and increased protectionism, while the geopolitical environment has become more complex.

Australia appears to have weathered the challenge of the global pandemic well. It has outperformed other major economies, and had its economic forecast revised upwards by the IMF.

But that should not give rise to complacency.

Our economy will remain inextricably interlinked in the Indo-Pacific in the post-pandemic world. Businesses looking to win in our complex region in the longer-term will need to diversify, embrace digital trade and deepen their capability.

The case for global growth

Landmark research by Asialink released in 2020 underscored the clear case for larger companies to continue to look offshore for growth.

Analysing the financial results of the ASX 200, Winning in Asia – a report launched by Asialink Business by business for business – observed that international cooperation was set to be more, not less important, going forward. It found:

“Australia’s largest companies now generate 34 per cent of their revenues from foreign sources. This is more than the largest listed companies in the UK (29 per cent) and the US (26 per cent). Over the past five years, the aggregate amount of foreign revenues generated by these companies has grown by 26 per cent, while domestic growth has plateaued. Exports to the Indo-Pacific have also boomed, growing at an average rate of 8.5 per cent per year, on the back of growing demand for Australian goods and services”.

The study also found that larger, internationally diversified companies created more value for shareholders than those with a domestic focus. For example, internationally diversified companies with a market capitalisation of $2-5 billion achieved on average 82 per cent greater shareholder returns than similar sized businesses that were domestically focused.

Unpacking diversification

While the argument for a continued international focus is clear, so too is the need for market diversification.

In today’s challenging international landscape, Australian business needs to diversify markets and economic relationships to enhance resilience and build a buffer against external shocks, whether a trade conflict, supply chain interruption, recession, pandemic, or other disruption.

This is not to suggest that China – Australia’s major trade partner – is going anywhere. Even against a backdrop of trade disruptions, 2020 saw a record high in total trade with China. China accounted for 39.6 per cent of our exports, representing a 9 per cent growth in total two-way trade. (By contrast, our second largest trading partner, Japan, accounted for 14.1 per cent of total exports).

The IMF projects China’s economy will grow by 8.4 per cent in 2021 (compared with 6.5 per cent growth in Vietnam and 3.3 per cent and 4.4 per cent in Japan and Indonesia respectively). China remains the largest trading partner of over 120 countries – many of them in our region. Chinese consumer demand continues to grow apace. Sectors of the Australian economy, like mining, remain deeply interlinked with China. The size of the Chinese market for Australian miners, for example, indicates that there may not be an equivalent alternative in the medium term.

‘China Plus’ – growing the pie

Given these challenges, some businesses are finding that a ‘China Plus’ approach – where the business diversifies into other emerging Asian economies, whist retaining engagement with China – can help build resilience and support longer-term growth.

The opportunities in emerging Asian consumer markets are sizeable and growing. By 2030, lower middle-income countries – including India, Indonesia, and Vietnam – will have middle-class markets that are close to AU$20 trillion bigger than they are today, representing growth 11 times the size of Australia’s current GDP.

Representing Asia’s third largest market, the countries of Southeast Asia (ASEAN) form a market of 750 million people and a largely untapped opportunity for Australian business. ASEAN’s member countries, though diverse, share a rapidly growing middle class and growing consumption.

But these opportunities are highly market, sector, and country specific and require a customised approach, that will be different to the approach business has adopted to expand into China.

As we emerge from the pandemic, they are also increasingly digital.

Southeast Asia added 40 million new internet users in 2020 alone. In Vietnam and Indonesia, growing populations, rising disposable incomes, an increasing burden of disease and the rapid uptake of digital health is giving rise to diverse opportunities for Australian medtech businesses. In Indonesia, for example, the health sector is using technology to address complex challenges associated with delivering health services to 260 million people across the country’s 17,000 islands.

But unlocking these types of opportunities requires a careful and calibrated market assessment and commercial journey. That will take time.

Deepening learning from regional partners

Building on prior Asiaink research, the Winning in Asia study found that just seven per cent of all senior executives and board members across the ASX 200 qualified as ‘Asia-capable’ – having the skills, knowledge, insights and networks needed to navigate Asian markets. The average Asia capability score for these 1700 leaders was just 13.6 (out of 100 points), and most were weakest in their ability to adapt to Asian cultural contexts.

For companies seeking to expand into new markets, deepening these capabilities, skills and insights is more important than ever. Businesses that can adapt to and learn from regional partners – for example, the increasing number of leading Asian multinationals and technology companies – will have opportunity for knowledge and technology transfer that can enhance their competitive edge.

In today’s highly competitive, uneven and disruptive global landscape, these capabilities could prove invaluable for Australian businesses wanting to win in Asia in the long term.

For more information and resources, visit asialinkbusiness.com.au