Lucrative trifecta sends trade barriers tumbling

There is little doubt that 2015 has been a momentous year for Australian businesses looking to tap new opportunities with Asia.

Barriers to trade have fallen to their lowest levels ever, partly as a result of new trade agreements with our three biggest north Asian partners. Businesses have also benefited from greater access to capital from a growing pool of regional investors, combined with low global interest rates.

Demand for quality products and services from Asia's middle-class consumers, now numbering in excess of 500 million, has continued to surge.

Further, increasing smartphone connectivity has enabled consumers everywhere to carry the globe's marketplace in their pocket, creating new e-commerce opportunities for small and medium businesses and levelling the playing field.

While volatility in China's sharemarket this year has dominated headlines, Asia continues to be a major growth engine of the global economy, according to the latest statistics from the World Bank.

Even with the gradual moderation of growth in China, Asia's GDP is expected to average 6.5 per cent in 2015. This is more than double the global average of 2.8 per cent.

The protagonists in Asia's growth story are its emerging middle classes, who are on track to grow to 3.2 billion consumers by 2030. 

Household incomes across the region are increasing rapidly, driving demand for world-class goods and services.

This is a positive for Australian businesses, as our national economy undergoes an important transition in its engagement with Asia, rebasing the engagement more widely than commodities trade.

Take our relationship with China: as China restructures its economy towards domestic consumption; it will need to import more goods and services to meet this demand.

This is good news for Australian exporters who are globally competitive in services, for instance our financial, transport, education, tourism, architecture and professional services providers.

A 2015 report on Australia's Jobs Future, by Asialink Business, ANZ and PwC found that by 2030, Australia's services exports to Asia could be worth $163 billion annually and support one million jobs for Australians. This accounts for the direct export of services, services embodied in the creation of goods, and foreign affiliate sales — which is particularly important as more Australian services businesses seek to invest in the region to be closer to their end consumers.

Australia's three new trade agreements with our biggest north Asian trading partners, China, Japan and Korea, are helping Australian services providers to play to their strengths, by harnessing the complementary nature of our economies.

The recent passage of the China-Australia free-trade agreement through parliament cemented the third pillar of the north Asian trade trifecta. This trifecta complements the existing agreements with other Asian trading partners such as Singapore, Thailand and ASEAN, which have progressively delivered benefits for Australian businesses over the past decade.

Under the ChAFTA, Australian financial and legal firms are able to do business in China for the first time, and there are benefits for other service industries too.

Take aged-care services. In 2014, China had more than 200 million people aged over 60, accounting for 14.9 per cent of the total population — and the Chinese government is actively seeking to improve the quality and availability of care.

The ChAFTA permits Australian hospitals and aged-care institutions to set up in China, opening the way for Australia's private health sector to significantly expand.

While not on quite the same scale, it is a similar story for the Japan and Korea FTAs. Almost a year on from their entry into force, these agreements are unlocking a diverse range of opportunities for Australian service providers, in industries ranging from engineering, to telecommunications, finance and design.

The other big winner from the north Asia trade agreements is agriculture, with all three agreements significantly reducing tariffs.

China is expected to account for 43 per cent of global growth in demand for agricultural products to 2050. And Australia, with its reputation for clean, safe and high-quality produce, is uniquely positioned to meet this demand.

Consider China's rising appetite for safe, high-quality dairy. Under the ChAFTA all tariffs on Australian dairy products are being eliminated.

By 2017, demand for milk in China will exceed domestic production capacity by 17 billion litres. That's nearly double Australia's total annual production of 9 billion litres.

Across the region Australian agribusiness no longer faces a question of whether there is a market, but a question of how the scale of these markets can be met, and how we can add value to commodity products.

Australian wagyu, for example, is already making its mark in Japan's high-end beef market. In his trip to Japan in early November, Agriculture Minister Barnaby Joyce observed that following the free-trade agreement, Japanese consumers were now "literally lining up" to buy Australia's quality offering.

Similarly, Australian exports of cauliflower and cabbage to Korea — the staple ingredients for traditional kimchi — have risen by 8000 per cent since that trade agreement came into effect.

The north Asian trade trifecta has also heightened the interest of foreign investors in Australia.

As a nation, Australia has been built with foreign investment — and the latest wave, from our North Asian partners, is giving local businesses greater access to capital to expand, innovate and grow. For example, the acquisition in May of iconic Australian logistics company Toll by Japan Post is enabling Toll to expand worldwide and through this partnership, become part of a global transport and logistics network.

Yet while the trade agreements undoubtedly unlock opportunities and reduce barriers, persistent gaps in skills means that Asia remains a challenge for many Australian businesses.

The 2015 Australian International Business Survey, commissioned by the Export Council of Australia, with support from Austrade, EFIC and the University of Sydney, highlighted that a lack of Asia capability was the No 1 problem holding businesses back.

Specifically, businesses identified a lack of understanding about local culture, language and business practices as their biggest hurdles. In fact, over 60 per cent of respondents identified differences in building long-term relationships and in negotiation strategies as a major challenge.

Businesses looking to take advantage of the new north Asia FTAs, or expand elsewhere in Asia, should undertake significant research into their target markets on the scale of the opportunity, market drivers, industry structure, the regulatory environment, and competitor landscape.

Preparedness is undoubtedly a key to success as highlighted by the success of professional services and translation firm Nihao Global's expansion into China.

Since opening in 2013, the company has expanded to 19 major Chinese cities and has over 300 staff. In a recent case study, Nihao Global's president observed that the firm's success resulted from over four years of dedicated research and planning.

Patience is an essential virtue when investing in Asia and this can present challenges when explaining a long-term growth agenda in early years to profit-focused boards and institutional investors. However, we now know that investing in long-term growth and driving profit in the near term do not need to be in conflict with each other.

As recent research by ANZ in its Opportunity Asia report highlights, over 40 per cent of large businesses doing business in and with the region achieved their return on investment within three years, while 47 per cent of Australian businesses reported that Asian profit margins were higher than domestic profit margins.

Relationships at all levels matter. What is often overlooked is that relationships with all stakeholders matter, not just with potential partners, suppliers and customers. For instance, Australian high-value manufacturer Mack Valves's success with its facility in India has been a result of the ability of the management team to provide exceptional working conditions to its employees, in turn improving plant productivity and organisational sustainability.

Investing in relationships with all stakeholders takes time, effort, an open mind and a genuine interest in partnerships. But it is only through these partnerships, combined with patience and preparation, that businesses can truly unlock the potential of the Asian growth opportunity.

This article originally appeared in The Australian on 11 December 2015.

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Heather Chai

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