If we act in isolation, both from the region, and from domestic partners, we will lose many of the benefits that will spill-over from the Asian century. Business, government and society need to act together to make the most of this opportunity.
Guest speaker at The Australian Club's International Table luncheon, Corrs Partner and CEO John W. H. Denton spoke of Australia's ever increasing role in trade and investment in Asia.
John talks of the five key areas, highlighted by the Asian Century White Paper, that will see Australia ready itself for the Asian Century.
Click 'text version' to read John's speech.
Thank you for having me here to speak today. I’ve been asked to speak on the topic of Australia’s planning for the Asian century:
• the problems and opportunities that may come from the Asian century; and
• the relative merits of opportunities in different countries. That alone is quite a lot of ground to cover, and I have to do all that while holding to the well-held rule that business is not to be discussed in the club. I shall try my best!
I’ll firstly speak on the government planning around the White Paper.
The Government commissioned the Australia in the Asian Century White Paper to be a ‘roadmap’ for Australia to navigate this century. The ultimate goal is an Australia that is prosperous and resilient, fully part of the region and open to the world.
As part of this roadmap, a major part of the White Paper was assessing how ready we were for the Asian Century — how we, Australia, is placed to make the most of the century to come.
At the moment, I’d argue that we’re doing very well from Asia.
We have one of the strongest economies in the world. Unemployment is low. Inflation is contained. The terms of trade are high. Though coming off a record high.
Although commodity prices appear to have passed their record peak, considerable minerals and energy investment is still to come and large-scale production and exports are yet to flow.
So that’s a bit of a “good news story”.
But it leads to the question of what comes next? What must be done to maximize our opportunities in the Asian Century? The answer: The task force thought that now is the time to push for far greater domestic reform.
We sought in creating this white paper to think not just of incremental change, but instead to think about the ambition, and mindset, of the nation. Coming at the problem in this way forced us to think though how we will do things differently. In our view ‘more of the same but faster’ will not be enough for Australia. Why? Because the scale of the opportunity is unlike anything we have seen before.
Our response to this call to action can be seen in the five key areas of the Asian Century White Paper.
The first is building on our strengths, and reinforcing the things we already do well. Because we must keep our own house in order, as this is what makes us attractive to Asia.
The second is developing the capabilities of our people, and making sure they understand the region. We need these capabilities and this understanding in order to build stronger relationships and partnerships across the region.
The third is ensuring that we have businesses that successfully operate in Asian markets. We need our business sector to have strong relationships with others in the region. We'll need new business models and new mindsets to operate at our best in Asian markets, and to seize the opportunities in our region.
The fourth is keeping our region stable. It’s in our interest to build trust and cooperation in the region, and to secure a greater role for Asian countries in the rules-based regional and global order. We'll do this while maintaining a strong alliance with the US, and encouraging China to fully participate in regional developments. It is not as has been misrepresented to down play ASEAN but to work with it as well.
The final key area is to strengthen Australia's relationships across the region at every level. A wide range of groups — from businesses, to educational institutions, to community groups, to unions, to cultural organisations and even to sports teams — can enjoy stronger relationships through Asia. It will be these relationships that form the base for future improvements in Australia's relations with Asia. And build a stronger platform for enhanced diplomatic efforts.
There are an enormous number of actions necessary to implement these themes. A framework in which we can implement these goals has been announced. Some of the actions that have already occurred include:
• A dedicated Cabinet Committee to oversee implementation, which will includes the Prime Minister, Treasurer and other senior Ministers;
• Dr Craig Emerson has been appointed as the Minister assisting the Prime Minister on:
1. Asian Century Policy; and
2. to oversee implementation of White Paper commitments; and
3. engagement with key partners in Australia and in the region;
• Individual Ministers will be responsible for advocating and pursing their relevant policy directions in the White Paper, in conjunction with their relative public service Ministries;
• And To tie all these responsibilities together, a cross-agency Taskforce has been established in the Department of Prime Minister and Cabinet to support whole-of-government implementation of the White Paper
• Finally as with the White Paper development, a Strategic Advisory Board of external experts will have an ongoing role in promoting public dialogue and advising Government on implementation and emerging policy issues. This will include the original external panel members, including me. But others will be appointed.
And there have already been a range of outcomes from these processes.
Along with some other 15 countries in the Asian region, the government has launched negotiations for a new trade agreement, ‘the Regional Comprehensive Economic Partnership’:
• It has introduced a new visa class for foreign investors to live here permanently.
• It has released a number of plans for industry, including an Asian Century Business Engagement Plan for small business.
• And it will give more than 10,000 Australian students grants to study in Asia.
• It is developing 5 key country action plans.
• But the key priority for the first 12 months is to raise awareness and increase momentum on the White Paper.
So I’d like to take that as a starting point for me to discuss why I think this momentum is so important, and why I think we must act now. I discussed the vast scale of the change facing us at the start of this speech. And I think it’s worth pausing now to reflect on the size of the opportunity facing Australia.
Even under the slowest economic growth scenario modelled in the White Paper, Asia will be the world’s fastest growing region by 2025 and will in 2025 have 3 of the largest 5 economies in the world. Already, 4 of our 5 biggest trading partners are in Asia.
To make these figures less abstract, I’ll try and show what this will mean for a number of key sectors.
The first segment of great interest to Australia is the Asian infrastructure market. The region needs large-scale investment in infrastructure and fast.
The Asian Development Bank (ADB) recently estimated that the 32 ADB developing member countries are expected to need almost US$8.2 trillion to meet their infrastructure needs to 2020. Most of this investment (around 68 per cent) is needed for new infrastructure.
And Australia has a skill set that is particularly suited to participation in these projects. We have experience with infrastructure funding, infrastructure building and the many services that go with both of these.
Another area of great possibility in the Asian century will be the flow-on effects of greater financial sector integration in Asia. Asia's massive foreign exchange reserves, high savings rates and strong private investment flows have already made it a major net exporter of capital throughout the world.
It is estimated that by 2050 Asia will account for as much as 45 per cent of global financial assets, with Asia becoming a source of much of the world’s foreign direct investment.
This investment could be a great boon to Australia’s economic future. Foreign investment supplements domestic savings and provides additional capital for economic growth. It supports existing jobs, and creates new opportunities. It can bring in new ideas, help create new infrastructure and increase our productivity through knowledge transfer and exposure to more innovative work practices.
But this investment won’t come for free. We’ll need changes in our mindsets. We’ll need a better understanding of the benefits investment can bring and community acceptance of it is necessity. And we’ll need greater openness in our economy and society towards not just investment, but to investors as well. A successful investment climate will be one that embraces and integrates investors into the community.
Looking outwards we’ve got a long way to go to reach our potential to invest with Asia. Recent estimates reveal that 76 per cent of Australia’s merchandise trade is with Asia, but this figure is languishing at 20 per cent for investment (BCA, 2012).
An area that will help this will involve integration of Australian businesses into Asian supply chains.
Supply chain integration has been critical to the growth of the Asian century. Intricate regional production networks have emerged throughout Asia — starting with the Japanese ‘flying geese’ of the 1970s and moving to the ‘China Circle’ of the past few decades.
These models have greatly increased flows of intermediate goods between Asian economies, and allowed Asian countries to specialise and increase the scale of production rapidly.
Asia has profited handsomely from this powerful global advantage, particularly in manufacturing.
Making the most of these Asian supply chains will require Australian business to concentrate on the areas that will maximise profit. Following what is commonly called the “U-shaped curve model”, businesses are most profitable at either end of the supply chain. That is, the branding of the company, the idea for the product and the industrial design (the start of the curve), and the retail sales, service contracts and sales of parts and accessories (the end of the curve).
The manufacture, assembly, shipping and distribution elements in these supply chains are unlikely to be quite as profitable for Australian businesses. These areas are also highly competitive throughout Asia.
So future successes will be built on how well we move up this value chain. We need to continue to be ahead of the curve — if you’ll excuse the pun — on our branding, in our product ideas and industrial design and in our retail sales, service contracts and sales of parts and accessories.
We’ve got a bit of a way to go with this. While we’ve achieved an increase in Australian-produced, elaborately transformed manufactures to China and we’ve greatly boosted commodity exports to Asia as a whole, the White Paper notes that our manufacturers have relatively low participation in these Asian value chains.
I think this is something that must change. There will be opportunities for Australian services firms and manufacturers to become part of the region’s interconnected production networks.
But it will be difficult. Some sectors will be unable to maintain existing industry structures — and so we will need to think about how best to position these industries. Most importantly, we’ll need to act now so that our industries are ready for the opportunities that can come out of the Asian century.
Acting now is not a matter simply of us changing our practices to make them more ‘Asia-focused’. Acting now is a matter of rethinking how we work with Asia, as partners.
Asia will become an increasingly significant source of new ideas, technologies and leading-edge science for Australia.
Our population — more than a quarter of whom were born overseas — and our large diaspora can help to build social, business, and, cultural networks that help us work together with Asia to make the most of their new ideas.
These networks are vital. They bring with them many, often-unanticipated benefits. Today's students, tourists, and friends are tomorrow's investors, business partners, professors and political leaders. Being intertwined in Asia requires us to be intertwined through people.
Businesses can enjoy similar benefits. More sophisticated relationships between our firms and Asia will encourage us to share knowledge, and to specialise in the things we do best.
To do this, we need more knowledge of Asian institutions and ‘cultural norms’. This is where the notion of one-third of all board members and senior public servants having a ‘deep knowledge of Asia’ has relevance.
But we also need to shift our mindsets. We need to look afresh at the opportunities that are happening before us, in our very region. We need to work now to build the relationships that will make us more effective there in 20 or 30 years time. And we need to figure out what we can create with and give to Asia, as well as what it can give us. Anachronistic thinking will be to our peril.
Given that, I’d like to use the second part my speech today by trying to analyse how I see the region progressing, and attempting to evaluate some of our future opportunities.
I’ll start with the development success stories, the advanced economies in Northeast Asia of Japan, South Korea and Taiwan.
They depend heavily on international markets for energy and resources, and Australia is their primary supplier. All of these markets are mature economies, and are highly likely to grow more slowly than other Asian economies. All three also have significantly ageing populations, and this demography will greatly change the structure of their economies and society.
These countries are large and highly sophisticated markets. They focus on high value-add goods and services that use advanced technology. They have highly educated and skilled workforces and are — and will continue to be — major sources of investment globally.
All of these countries will remain vital partners for Australia. They will continue to depend heavily on us for their energy and raw material security. They’re also likely to be heavy consumers of tourism, education and high-end food exports.
They’ll also be major investors, not just in Australia, but throughout Asia. As I discussed earlier, this investment will boost the very successful, highly integrated regional supply chains and value chains dominated by firms from these countries.
Our challenge is to try and break into these supply and value chains. This will also give Australian business the benefits of these countries’ pre-established links into markets in Asia.
China remains the major success story of the Asian Century. It’s averaged close to 10% GDP growth for the past three decades, growing to become the second-largest economy in the world. And even though it’s likely to fall in the next few decades, it’s unlikely that growth will be below 7% per annum for the next decade at least.
With this GDP growth will also come a rise in household consumption as China’s middle and high-income households grow. In less than a decade’s time, McKinsey estimates that China will have around 91 million households with incomes over $35,000 per annum, up from around 24 million high-income households in 2010 (McKinsey&Co, 2012).
This will lead to more demand for high-end consumer goods and sophisticated financial services. It will also mean that China will become a much larger final destination for traded goods (as opposed to a destination for parts and components for processing trade), including services and food.
These are both markets in which Australia can compete strongly, and China will present a major opportunity for Australia for decades to come.
India is expected to be the third-largest economy in the world by 2025, behind China and the United States. Its economy is projected to grow at 6.75 per cent a year on average from now until 2025. And India’s young population means that — should it reap its ‘demographic dividend — economic growth will remain high for a long time to come.
For India — and the rest of South Asia, who face similar conditions — making the most of this demographic dividend will be a major challenge. And it’s a major challenge we can help them with. India’s growing middle and upper classes will want more tourism, education, food and other consumption goods — the challenge for us is how we supply it. Education — as Australia’s current largest service export to India — looks a particularly safe bet.
Services and consumption goods aside, India looks a less attractive market for Australia’s current export mix. This is because India has sought to remain largely self-sufficient in mineral production, making it less open to trade and investment in the mining sector than its Northeast Asian counterparts such as China.
So to succeed in the Indian market in areas other than services or consumption, we’ll need to encourage Indian industry to open up and seek foreign investment, technology and know-how.
Moving closer to home, it’s predicted that Indonesia will be the 10th-largest economy in the world by 2025. And Indonesia’s large population and rapid recent economic growth mean that its economy is highly likely to surpass ours in the next few years.
But trade and economic links between Australia and Indonesia are lower than they should be given Indonesia’s proximity to Australia, it’s potential for economic growth and its size. Indonesia currently ranks as Australia’s 12th-largest trading partner, behind other Southeast Asian neighbours Singapore, Thailand and Malaysia.
This appears another major opportunity for Australia. By 2030, Indonesia is likely to have the 4th largest middle-class spend globally after India, China and the United States (Kharas & Gertz, 2010). This future market appears particularly attractive for our goods and services.
Finally, although each of these individual countries will undoubtedly be essential to Australian business, it’s important that we keep our focus on broader agreements on trade and investment in Asia.
Meetings such as the East Asian Summit and APEC are critical to shaping future business opportunities — it’s at these meetings that we shape the rules of the game under which Australian business will play.
To give an example, education remains a highly promising future market for Australia. While much of Northeast Asia — our biggest trading partner — has already experienced its demographic dividend and is rapidly ageing, the working-age populations of India, Malaysia, the Philippines and Indonesia, as well as the rest of South Asia, have yet to peak.
So these countries will most likely grow quickly, and urbanise quickly. And these young, urban Indians, Malaysians and Filipinos (amongst others!) will want to be educated.
Some of these students are likely to want to come to Australia. In 2009 there were around 2.5 million Asian originating international higher education students worldwide. The OECD currently projects that the number will reach seven million international higher education students by 2020 (Altbach, Reisberg, & Rumbley, 2009). And this demand for higher education will continue past 2020 as more people seek higher pay and upward mobility in emerging Asia.
Many more of these students will want to be educated at home. So the OECD estimates that for example by 2020 China and India will graduate the most students of any country worldwide, and that Indonesia will be the world’s fastest growing market for higher education services.
Australia needs to help this process. A good start will be to continue our assistance to ASEAN to help it successfully conclude its Economic Community process. This would allow the free flow of skilled workers and the recognition of qualifications throughout the region. It would be good for ASEAN — and good for Australia.
So there’s a lot we can do to help the region, and to help ourselves.
We’ve already executed a number of education and training projects through AUSAID and other Government agencies. Our educational organizations regularly promote Australian education and training in South East Asia. Private industry in areas as varied as mining, finance and manufacturing have established collaborative education and training programs with partners from South East Asia. And, under the White Paper, we’re establishing our first ever Ambassador to ASEAN.
All these activities under the simple rubric of ‘education’ help strengthen our bonds with ASEAN members. They will subsequently benefit the region, and us as a nation.
And this returns me full circle to the topic I started on today — the key themes of the Asian Century white paper. As this process I have just described shows, we can’t just take one of the key areas and ignore the other elements. We’ve got to bring this together as a whole, and as a complete package.
So this will not be business as usual, and simply faster but a whole new mindset.
The process above also highlights a key assumption underpinning the White Paper: joining activities together is critical to making the most of the Asian century. Acting in isolation — both from the region, and from domestic partners — will lose many of the benefits that will spill-over from the Asian century. We all — business, government, society — need to act together to make the most of this opportunity.
So thank you for the opportunity to speak on this issue today — I think there’s a lot we can do. And I look forward to us doing it together.
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