Key trends in Asia that you should be aware of
In this article, I will be sharing with yall one of the topics discussed within the 84-page paper by Mckinsey titled: The future of Asia.
As the discussion paper is segmented into different topics, the focus of this article will revolve around the key trend in Asia that you should be aware of and that is:
The formation of Asia-for-Asia Supply Chain, the gap created by China’s development and the countries positioned to benefit from it.
All information presented is extracted from the discussion paper itself.
I am merely summarizing the findings and providing some of my inputs alongside what was discussed in the article.
Let’s talk about China
It is safe to say that everyone knows by now that China is one of the world’s leading manufacturer and the reason China’s dominance is none other than the cost advantage that it has over other players.
However, over the years as China economy develops, a few key things happened:
Businesses in China acquired the capabilities to create and capture value in a different part of the supply chain that they once were unable to perform.
Cost of labour had increased significantly and as of today, the manufacturing labour cost in China is triple than the cost in countries within the emerging and frontier Asia category
Straining of diplomatic ties with the western partners results in a more complex global trade climate specifically between China and the countries involved in the disputes.
As a result of these developments, China has shifted its focus from labour-intensive to being a knowledge-intensive manufacturing powerhouse.
Businesses that once conducted their labour-intensive manufacturing in China are starting to shift their production towards emerging and frontier Asian countries.
Challenges and Opportunities within Emerging and Frontier Asia
While it may look good on paper, it is important that we acknowledge the challenges faced within our region today and some potential solution that may unlock the value ahead.
In terms of Business-related challenges There is still a persistent gap in the capacity and quality of infrastructure resulting in a high cost of operation due to its inability to benefit from economies of scale.
Therefore, while the labour cost is indeed cheaper as compared to China, the overall production cost may not be cheaper.
However, the situation may improve as both emerging and frontier Asia experiences rapid urbanization and influx of FDIs from China and other advanced economies.
With more cities popping up and an increase in production capacity, it is only a matter of time before the Emerging and Frontier Asia dominate in the area of labour-intensive manufacturing.
In terms of Institutional problems
It is of no surprise that emerging and frontier Asia is still plagued by corruption and inefficient bureaucracy. This results in difficulties for businesses to acquire the necessary assets and establish operations
However, the situation is indeed improving – particularly India – and as more and more countries continue to make progress in this area, we can expect more business activities and investments in the Emerging and Frontier Asia.
In terms of Skill gap
Despite having the highest volume of the working-age population, there may still be difficulty in hiring the labour needed to perform the necessary operations.
However, as the literacy rate in Asia catches up to the more developed regions, alongside the potential of online learning, I am hopeful that the skill gap will be closed in the future. Slowly but surely.
What about automation?
On the topic of automation, the Automation potential of countries varies a great deal.
Advanced economies face a higher displacement rate as compared to emerging and frontier Asia, where wages are lower.
According to McKinsey, their midpoint adoption rate scenario suggests that in Asia, for instance, 26 percent of current work activities could be displaced by automation in Japan by 2030 but only 6 percent in India.
In economies where wages are lower, there is less incentive to automate as a way of cutting the wage bill, and therefore adoption rates can be slower.
Why use machinery that is not flexible when you can achieve the same production capacity at the same operating cost by hiring human labor.
Furthermore, there is no need for intensive initial capital investment and businesses need not fear the risks of investing in machinery that may be rendered obsolete by future technology advancements.
Why does it matter to you?
Investing is like playing a game of chess, you have to estimate and understand how your opponent will move in his next turn and position your pieces carefully to ensure your success.
The insights provided by McKinsey serve as an indication of how our opponent – the economy of Asia – is likely to behave in the near future.
As such, by understanding the key trends and developments in Asia, we can then select the right pieces to invest in that will provide us with the right kind of risk-return exposure.
Moving forward, the next step is to allocate your resources appropriately among the respective mutual/exchange-traded funds to achieve your desired risk-return behaviour in response to your investment objectives.
Naturally speaking, that is if you have a clear understanding of your own investment objectives and financial plans in the very first place.
If you are reading this and would like to kick start your retirement or investment planning, you can reach out to me here and I’ll help you make sense of the options available at your current stage.
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My next few articles will revolve around the topics discussed within the 84-page paper so that you will not need to spend the time needed to read through the entire paper yourself
Disclaimer:
This article is meant to be the opinion of the author and is for information purposes only.
This article should not be seen as a financial advice
This advertisement has not been reviewed by the Monetary Authority of Singapore
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