Companies must look offshore for growth

Authors: Andrew Robb and Luke Hurst
Publication: The Australian

China’s second Belt and Road Forum for International Co-operation, which concluded last weekend, featured strong participation from corporate Australia, despite only “low-key” official involvement.

Representatives from top Australian banking, finance, energy and engineering firms joined business leaders from more than 120 countries in Beijing to explore opportunities stemming from China’s landmark trade and infrastructure initiative, in which China invested over $21.4 billion in 2018. This strong interest from global business is yet another indication of the new reality for many Australian companies — growth requires innovation and looking for opportunities beyond our borders.

As other developed economies slumped into recession, Australia has maintained 28 years of continuous economic growth on the back of our relative closeness to Asia’s booming markets for bulk commodities and the high natural barriers to competitors entering. But distance as a competitive advantage is relative and dynamic. It’s relative to competitors’ distance from the same markets; it’s dynamic because changes to supply and demand, policy, and technology impact the magnitude and direction of the advantage.

For example, in 2002, iron ore was only around $US2 per ton cheaper to ship from Australia to China than from Brazil (our major competitor in the market). At the peak of the boom, in 2008, Australia’s freight advantage over Brazil had increased to $US63.75 per ton.

But as the dust settles on China’s demand boom, Australia is left wondering where the next source of growth will come from. And while we stand still, many of our Asian neighbours leapfrog technologies and embrace a digital transformation of their societies and economies.

Rising economies like India, Indonesia and Vietnam present huge markets with growing disposable income. By 2030, Asia’s lower-middle income countries will have middle-class markets that are $US15 trillion ($21.3 trillion) bigger than they are today — that’s growth of more than 11 times the size of Australia’s current GDP. But Australian businesses have made few inroads in these emerging economies. In 2017-18, the value of Australian exports to China was $123.3bn, which was $5.7bn more than our combined exports to our next four biggest export partners (Japan, South Korea, the US and India).

Australia’s over-reliance on a few sectors is illustrated by our lack of economic complexity — a measure of the diversity and sophistication of a country’s exports. In 2017, Japan led the world in economic complexity ranking. Only cars (15 per cent) held a greater than 5 per cent share of Japan’s 349 export categories. In the same year, Australia’s 134 export categories were dominated by iron ore (20 per cent), coal briquettes (19 per cent), gold (12 per cent) and petroleum gas (8.3 per cent) and ranked 59 out of 122 economies, placing us behind Kuwait and Kazakhstan, respectively.

While we do well delivering our services like higher education and tourism at home to foreigners, if Australia is to continue its economic prosperity we need to take these world-class offerings to Asia. Research previously undertaken by Asialink Business found that annual services exports to Asia could be worth more than $160bn by 2030, while supporting more than one million Australian jobs. But businesses have been slow to shift their mindset and make the investments on the ground in key markets like India, which are needed to realise this potential.

Australia’s ability to reduce the distance from Asia’s massive services markets will define our future economic prosperity. But unlike natural resource markets, Australia is relatively isolated from major global markets for services where sophisticated competitors operate out of regional hubs such as Hong Kong and Singapore.

Our relative distance from markets can be reduced through bilateral policy initiatives that make it easier to do business with our neighbours. The recent Indonesia-Australia FTA is another step towards broadening Australia’s opportunities in the region, for example improving access to vocational education and training markets in Indonesia. But bilateral trade liberalisation will have only a small impact when many Australian businesses are not capable of competing in Asia. They lack relationship building skills, knowledge of and experience in Asia and the cultural intelligence that is vital to building the long-term relationships that open doors.

The reality is that only 13 per cent of small to mid-sized enterprises currently export to markets outside of Australia. This is a massive opportunity lost when you consider SMEs employ 7 million Australians and contribute 56 per cent of GDP.

The costs associated with taking a venture beyond our shores are significant, and shortcuts can be fatal. Solutions to fill Asia-capability gaps in the short run, such as engaging an in-country agent, won’t help Australian businesses compete in the long run. If we don’t increase Asian experience, knowledge and networks in Australian businesses there’s little hope to win against increasingly sophisticated regional competitors who are closer to the action.

At the midway point in the federal election campaign, voter confidence in the government’s ability to future-proof our economic prosperity is proving critical. This prosperity is inextricably linked to the Asia capability of our business leaders. Without it, our companies will continue to compete for the attention of the 24.6 million Australians — a similar number are living in single cities in India and China.

Andrew Robb AO is the chair of Asialink Business and a former Australian trade minister. Luke Hurst is the director of research at Asialink Business.

Joe Robb