Asian Cities To Fuel Economic Expansion, According to Economist Intelligence Unit Report Commissioned by InvestKL
In a series of six new reports released Monday to a select audience in London, The Economist Intelligence Unit (EIU) revealed dynamic growth across Asian industries, reinforcing the view that the balance of economic power is shifting eastward.
The EIU's "industry dynamism" barometer, commissioned by InvestKL (Greater Kuala Lumpur's investment promotion agency), measures the resilience and growth potential of six industry sectors across Asia: engineering services, environmental technology, food processing, healthcare, oil & gas, and wholesale & retail. Findings indicate that continued corporate investment in Asia will support longer-term opportunities, with Asia "standing out" as being the most exciting part of the world for growth and development.
Editor of the reports, Charles Ross, noted that "overall growth is strong across the region and that is reflected in the positive prospects observed for many industries." However, Mr. Ross cautioned that "rising labor costs and talent shortages will continue to challenge some companies."
Speaking at the launch of the reports, Zainal Amanshah, CEO of InvestKL said that the findings "reinforce the importance of Asian cities as drivers of the region's growth." Mr. Amanshah continued to note that "cities such as Greater Kuala Lumpur, with its ease of access to the rest of the region and business-friendly environment, are perfectly positioned to serve as corporations' Launchpad into Asia, especially when helped by federal initiatives targeted at driving growth in the six sectors."
Summary of findings:
Engineering Services
"Remarkable rates of economic growth make Asia THE part of the world for engineering services firms, with this region accounting for 36.6% of global GDP in 2013, up from 26.8% in 2001," said Mr. Amanshah of the findings in this sector, which is also a key economic area identified by the Malaysian government.
Rapid economic growth translates into a wide range of engineering opportunities (between US$8trn and US$9trn of new infrastructure needed between 2010 and 2020).
Asia's engineering companies are growing at breakneck speed as they capitalize on these opportunities (between 2005 and 2011, the approximately 120 engineering companies listed on the region's stock exchanges grew top-line revenues by an average of 20% every year).
Asia is becoming a major center of R&D activity as well (R&D spending in Asia was up from 27.2% of global spending in 2002 to 33% in 2009 – more than North America or Europe).
Environmental Technology
"The huge wave of urbanization sweeping Asia requires a lot more investment in ensuring our urban environments and infrastructure are more efficient," Mr. Amanshah noted. "The opportunities for companies that can provide sustainable solutions limiting the environmental impact of our rising population are significant - to put them into context, this region already emits more carbon dioxide than the US, EU and Russian Federation combined."
Policy support for renewable energy in Europe has fallen away, but is strong in Asia
Asia is experiencing record levels of cleantech investment – across the 6 years of this study, value of fixed assets per company increased by an average of 9% every year
The combined revenues of Asia's cleantech firms more than doubled over the period of the study (growth rate of nearly 13% a year from 2005 to 2011)
While overall growth is strong, rising labor costs have squeezed profit margins
Food Processing
"We already account for more than half of the world's population. By 2040, we will add another 800 million people to our count – all of whom are rapidly getting richer," said the CEO of InvestKL. "Asia's spending on food is forecast to double between 2007 and 2050 in real terms – representing three quarters of the global increase over the same period."
Rapid urbanization is changing food consumption patterns, and creating opportunities for more efficient distribution.
Asia's food companies are growing at breakneck speed as they capitalize on these opportunities (between 2005 and 2011, the 400 or so food companies listed on the region's stock exchanges grew top-line revenues by an average of 23% every year)
Companies will need to invest in innovation in order to tailor their products to the vast diversity of local taste preferences across the region – global brands will have to localize their products, while Asia will be a source of new hone-grown food ideas (such as the halal-certified food market).
The food opportunity in Asia extends upstream into rural supply chains too.
Healthcare
With populations and incomes rising, Mr. Amanshah noted that "health spending is growing even faster – Asia's share of world health spending is expected to rise from 21% in 2012 to 24% by 2017. Although parts of our region's population are still in need of basic healthcare services, more and more are beginning to require treatment for 'diseases of the affluent'."
In the hospital sector, Asia will need an additional 180 million new hospital beds in the next decade. In pharmaceuticals, Asia's market will grow more than 13% annually – from US$214.2bn in 2010 to US$386bn by 2016.
In 2007, Asia and Oceania together accounted for 18.1% of global biomedical research. By 2012, that share had grown to 23.8%
Between 2005 and 2011, revenues at Asia's listed healthcare fims rose by almost 23% a year. Profits rose even more swiftly, by 31% a year.
Competition is intensifying as the number of firms entering the sector grows. Costs, especially labor-related, are rising rapidly. And regulations are getting much more stringent as a growing middle class demands greater safety, security and consumer protection.
Oil & Gas
"ExxonMobil expects a significant rise in Asia's share of global energy consumption, from 38% in 2010 to 45% by 2040," said Mr. Amanshah. "Meeting this rising demand for oil and gas in this region will be challenging, even though some countries are net energy exporters (such as Malaysia and Brunei)."
Growth in the demand for gas will outstrip all other fuels, given its cleaner environmental characteristics and superior flexibility.
Most countries import more than they produce. BP calculates that Asia produced 8.3m barrels of oil a day in 2012 (9.6% of global production), but consumed 29.8m barrels of oil a day, (33.5% of global consumption).
Despite being a net energy importer, the Asia Pacific region still has plenty of potential for upstream development. The biggest opportunities exist in new gas fields, such as in Myanmar and Papua New Guinea.
In order to extract gas from Asia's more complicated fields, regional oil and gas companies are investing more heavily in new technologies (in 2011, Asia's 50 listed O&G firms spent US$2.13bn on R&D, up from US$368m in 2004)
Given the landscape of opportunity in Asia, the region's listed oil and gas companies are reporting strong revenue growth. In 2004, revenue per company in the sector stood at US$2.9bn. By 2011 that had grown to US$10.2bn, an average annual growth rate of 20%
But while growth is rapid, the industry also faces significant challenges in the form of rising competition, rising costs, and shortages of talent. Reflecting these issues, the return on capital employed for Asia's listed oil and gas sector fell from 19% in 2004 to 8.3% in 2011.
Wholesale and Retail
"The population of Asia is predicted to be 4.6 billion by 2040, with average consumer wealth rising in tandem," said Mr. Amanshah. "To put the impact of this population increase in perspective, in 2001 Asia accounted for 26.8% of global GDP measured using purchasing power parity – by 2013, our share had risen to 36.6%. Significant urbanization and penetration of modern retail formats are driving sales."
Between 2013 and 2018, the EIU forecasts that retail sales in Asia Pacific will grow by 10.2% every year, whereas globally retail sales will grow by only 6.9% a year.
In 2013, Asia had 80m square meters of modern retail space, but this will rise to 135m square meters by 2018.
Retail opportunities are highly varied, from mass market grocery chains and fast-food outlets to high-end fashion stores and luxury boutiques. The opportunities for online retail look especially potent, with growth rates of close to 17% a year.
Asia's homegrown retail companies are growing rapidly. Between 2005 and 2011, revenues at Asia's listed retail and wholesale firms rose by an average of 21% every year. Most of this growth was organic in character.
While topline growth is exciting, a number of structural issues are making profits growth harder to achieve. Human capital with retail skills is in short supply, forcing companies to invest heavily in training. Wages are rising, with staff costs up from 3.5% of operating revenues in 2005 to 5% by 2011.
Further reinforcing the eastward shift of power is a study by McKinsey & Co quoted by the EIU in the reports, which notes that 420 cities in emerging markets (more than half of which are in Asia) are expected to contribute 45% of global GDP growth between 2010 and 2015. The report further notes that Southeast Asia will have many significant economic engines of its own, with urban population growth and productivity improvements rising faster than in rural areas, driving incomes up at a much faster pace. This combination of faster population growth and faster income growth led the EIU to conclude that it "makes cities the dynamos of the future".
The six papers, covering engineering services, environmental technology, food processing, healthcare, oil & gas, and wholesale & retail sectors, can be found here.
