Leadership Matters

Perspectives on the key issues impacting senior leaders and their organizations
December 17, 2018

Industrial Asia in 2019: The (optimistic) view from the top

Interacting frequently with senior business leaders in Asia, I am always struck by the diversity of business challenges our region faces. It does seem, however, that given the recent trade difficulties between the U.S. and China, things have reached a whole new level. We set out to ask a few Asia Pacific (APAC) heads of industrial companies to look into their crystal ball for 2019. Here are their predictions for business in the region:

The case for optimism

Building on great momentum

A solid 2018: In general terms, 2018 has turned out to be a good year for industrial companies in Asia Pacific. The political and regulatory environments have been relatively stable. Demand growth has remained strong in emerging Asia, and more mature economies such as Japan and South Korea are still experiencing positive GDP growth. Australia has been a bit of a question mark for some, but the majority of APAC presidents we spoke with feel their regional business is on a solid trajectory. Emerging markets that are getting increasing attention beyond the “usual suspects” (i.e., China and India) are Indonesia and Vietnam.

Lower oil and commodity price risk: After a few years of relative volatility and generally low energy prices, there is some renewed optimism in commodities markets. According to Paul Atkinson who manages Prysmian in the region, “The oil and gas sector is now gaining back momentum, even if it is not going to be as good as it used to be a few years back.” He also sees large investments coming into the Asian renewable energy sector. Alexander Lenz, CEO of Conergy, an Asian solar developer recently acquired by Macquarie, agrees: “For our sector, there is only one way and it is up!” Most importantly, business leaders in the region feel they have regained some visibility in commodity prices, which are often an input cost for their products. This reduced volatility is helping them mitigate business risk and better plan for investments.

The inevitability of demographics

Growing middle class: Asia Pacific is home to about 60 percent of the world’s population. The middle class is large and rapidly growing, with two-thirds of the global middle class projected to be in Asia by 2030 according to HSBC research. China, India and Indonesia alone account for more than 3 billion people today and have a growing appetite for goods and services.

Increasing urbanization: The great migration of the population from farmlands to urban areas in most Asian emerging markets creates new demands. The aging of the overall population, driven by lower fertility rates and higher life expectancy, is driving people ever closer to city centers for better access to employment, products and services. As an example, Harry Boot, who leads global ingredient provider Tate & Lyle’s business in Asia Pacific, sees that growing urbanization is “causing more consumers to look for more convenient food and beverage options that fit with a busy lifestyle and support a healthier, more balanced diet.” More broadly, the development of these Asian mega-cities offers last-mile service opportunities to a range of sectors including logistics, retail, utilities and healthcare.

The pursuit of higher standards

Rising environmental standards: Some of the largest and most influential emerging Asian economies — with China as a case in point — are raising the bar on environmental issues and enforcing more drastic standards. For instance, those living in Beijing or Shanghai will have seen some dramatic improvement in air quality levels in the last couple of years. This higher benchmark was linked to the closure of many plants, often owned by local industrial players. This took supply capacity off the market, which, in turn, helped companies maintain or raise prices in the region. This trend is likely to be sustained and support profit margins

Improving health outcomes: Our modern lifestyle is becoming sedentary and less active, creating growing health concerns (56 percent of diabetes cases worldwide are in Asia Pacific today, according to the International Diabetes Federation, including 44 percent in China and India alone). Food scares are also on the rise. Boot observed, “With obesity and diabetes rates in the region continuing to rise, we are seeing high and growing demand for our solutions which help brands to lower sugar, fat and calories in products.” For consumer-led industrial sectors, quality and health are increasingly a priority, from clean label foods to sophisticated facility management services, water treatment and sanitation. Companies that provide value-added products and services to their customers will be well-positioned as Asian consumers are becoming more discerning and demanding regarding their health. According to Dane Hudson, APAC president for ISS, a facility services company, “We are working hard to shift to outcome-based contracts with our clients, which will give us a great opportunity to grow in this region.”

The clouds on the horizon

The macro question mark: “My biggest worry is Air Force One,” mentioned one APAC president who has a significant share of his products manufactured outside of Asia and imported into the region. Highly publicized global trade wars have not yet created lasting impacts on trade flows within Asia, but they are a risk that cannot be ignored. Many of the APAC presidents we have spoken with are keeping a close eye on the macro situation, including on currency fluctuations that may impact earnings repatriation. However, in the short term, their approach has been mostly limited to contingency planning without the need for concrete actions yet.

The scarcity of talent: As Sean Toohey, Ecolab’s APAC president, put it: “Great leadership trumps economic risk.” In his view, developing and hiring strong leaders across emerging Asia is the most critical factor to unlock business performance. However, this can be very challenging. Pascal Milland, APAC SVP of service operations for Sodexo, a service company that has 75,000 employees in the region alone, shared the view that, “In Asia, people is one of the main issues to support our growth.” From front-line to middle to top management, it can be very hard to find people with the right technical and leadership skills. Most companies we spoke with aim for a strategy of “Asian talent in Asia,” but the talent supply pool is often limited. At the same time, sustained business growth, the war for talent with local companies and high turnover rates create ever-increasing demand.

Where to from here?

On balance, almost every APAC president that we spoke with, to various degrees, is optimistic about 2019. This should be cause for celebration. While it is always risky to venture into predictions in our increasingly uncertain world, it looks like the future is still bright for Asian industrial markets.