Through the storm

As the global economic storm exhibits some signs of easing, many studies show that Asia Pacific is paving the way towards recovery and getting ahead of their Western counterparts.

This may be an indicator that power is shifting from the West to the East. Some countries in the Asia Pacific region are taking advantage of the global recession and are planning on taking a revolutionary transformation in their business models over the next decade.

The KPMG International Thought Leadership article below discusses the resiliency of Asia Pacific economies and how prompt and firm action undertaken by their governments have fast tracked their economic recovery. It illustrates its influence on specific sectors such as automotive; electronics and semiconductors; financial services; and healthcare and infrastructure.

Please take time to read this article. I am optimistic that Asia Pacific will continue to lead the global economic recovery. Many opportunities are present in the environment and businessmen need to recognize these, calculate the risks involved and invest wherever they have high chances to succeed. Philippine companies need to stand firm and get ahead of their game or they will fall behind competition.

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Coming out ahead

As the world navigates the bumpy road to recovery, it appears likely that the Asia-Pacific region will emerge from the crisis not just first, but also with a clear advantage over the formerly dominant West.

After a period of economic and financial turmoil, the global economy appears to be regaining its feet. However, even as the world’s markets return to a state of “normalcy”, there is a distinct sense that something significant has changed, that the balance of power has shifted. This crisis may well be the tipping point in what was always going to be the natural transition from the US to China as the dominant economy.

The automotive and electronics and semiconductor sectors stand out as particularly strong examples of this, with potentially huge shifts to the East either underway or likely in the short to medium term. Asia-Pacific’s healthcare and infrastructure sectors will benefit from strong fundamentals and strong long-term demand as Asia ramps up development. The region’s financial services industry is also in an enviable position compared to its Western counterparts, as it is set to grow alongside the impending broad recovery in Asia-Pacific.

Indeed, it is the Asia-Pacific economies that are taking the lead in the global recovery, benefiting from the quick and decisive action taken by their governments and financial sectors that were arguably less affected by the crisis than their counterparts in the West. The October 2009 International Monetary Fund’s (IMF) World Economic Outlook: Sustaining the Recovery paper states that, “The global economy appears to be expanding again, pulled up by the strong performance of Asian economies and stabilization or modest recovery elsewhere.” The IMF predicts that gross domestic product (GDP) in developing Asia will grow at twice the pace of advanced economies in 2010.

Saved by stimulus

Governments in Asia-Pacific were quick to enter the fray with large stimulus spending packages and policy measures to minimise the impact of the downturn, with a clear focus on saving jobs and propping up key industries, such as the automotive and infrastructure sectors. Australia came up with a US$39 billion infrastructure spending plan, while Japan pushed through US$287.5 billion in spending, loan guarantees and small business support, as well as significant tax breaks to support the automotive industry.

Elsewhere, Korea, Singapore, Malaysia and others also reacted quickly to prop up their economies and stem the tide of corporate failures and resulting job losses. However, it is China that stands out with its massive US$686 billion in spending on transport, housing, infrastructure, technological innovation, energy and the environment.

The result of all this spending was a shallower and shorter recession for a number of key industries in Asia-Pacific than that experienced in the West. For example, China’s passenger vehicle sales rose by 37 percent between January and August 2009, and we believe sales of 12 million vehicles are an attainable target for China in 2010. Similarly, across the region, the electronics and semiconductor industry surprised many by being one of the first to show signs of a recovery, with improvements in demand and prices seen as early as the second quarter of 2009 — a quarter ahead of the broader economy.

Liquidity returns

A key to sustaining the recovery seen in Asia-Pacific is the continued liquidity of the credit and capital markets. This has been one of the region’s key advantages over the past six to 12 months, as banks restarted lending ahead of those in the West, while corporate bond issuance has also met with greater success. Capital markets have also seen activity increase, as initial public offerings that were shelved in late 2008 and the first quarter of 2009 are now back on companies’ agendas.

Mergers and acquisitions (M&A) activity in most sectors has also seen a marked increase in the second half of 2009 as companies position themselves for the upturn. In the electronics and semiconductor industry, KPMG notes that both M&A and cross-border collaborations have jumped in recent months, with Intel making large investments into China and Taiwan, and Taiwanese companies forming alliances with their Japanese counterparts. There is also expected to be a huge influx of Taiwanese investment into China as trade barriers are gradually removed. All this bodes well for greater competition, more innovation, and an increasing edge for the industry in the Asia-Pacific region.

The balance shifts

As the West continues to struggle with growing unemployment and a somewhat shaky recovery, Asia-Pacific has seized the advantage in a number of industries. We see this not as a total surprise, but as a continuation of what has been a gradual (and some would say inevitable) shift in the balance of power from West to East.

The automotive and electronics and semiconductor industries, in particular, are seeing this shift take place very clearly. While the West’s automotive companies struggle with huge debts, conflicts with powerful unions, and out of date product lines, those in Asia-Pacific are reaping the benefits of technological innovation, greater efficiency and growing demand from its burgeoning middle classes. In the electronics and semiconductor industry, the inexorable shift to lower-cost production bases that was already evident before the crisis continues apace, while sector-specific dominance in Korea and Taiwan, together with an ongoing focus on innovation, is also contributing to the consolidation of the region’s lead.

The healthcare and infrastructure industries in the region will see sustained high growth in the coming years in large part due to the fact that there is simply a huge demand for either new or upgraded infrastructure. At the same time, major reforms and upgrades to healthcare systems, particularly in China, will see the industry flourish as funding and policy changes spur greater investment and innovation.

The financial services industry in Asia-Pacific went into the crisis in much better shape than its Western counterparts — in large part due to reforms implemented in the wake of the 1997 Asian Financial Crisis. It can also be argued that difficulties in the banking sector in the region did not really reach crisis levels this time around, suffering only a brief halt to lending in reaction to global uncertainty and minimal damage to their balance sheets. Credit and capital markets have come unstuck, and financial institutions are well positioned to ride the wave of broad economic recovery and growth in the years to come.

The common thread across industries in Asia-Pacific is the sustained recovery expected in the coming years and the strength of individual sectors’ current positions. This is highlighted further when contrasted to the less rosy prospects in the West, indicating that the crisis has taken us one step closer to a shift of the balance of economic power from West to East.

(Roberto G. Manabat is the Chairman and Chief Executive Officer of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])