PWC APEC CEO Survey Towards Resilience & Growth2013

www.pwc.
com
Towards resilience
and growth
PwC 2013 APEC CEOSurvey
2013 APEC CEOSurvey
Welcome
Wishnu Wardhana
APEC CEOSummit 2013, Chair
APEC Business Advisory Council (ABAC) 2013, Chair
PT Indika Energy Tbk, President Director and Group CEO
2013 APEC CEOSurvey
2013 APEC CEOSurvey
About this report
Dennis Nally
PricewaterhouseCoopers International Limited, Chairman
Contents
1. The right model for a changing
region
2. Agent of change
3. Bridging infrastructure gaps
4. Where business and regional
policy priorities intersect
5. Chartpack
6. Foundations of the Future
2 | PwC
transition
Building the right model to prosper in a
changing region
- - | 3
We are most impressed with Americas energy revolution, and it is
Chinas the engine that drives things, and its
PwC 2 ;
Considering your organisation's investments in APEC economies over the next 12 months, are you planning on.? | - 478
(excludes 'don't know' and 'no answer' responsesj
- 2013: 478; 2012: 356

4 | PwC
will be the political systems
in Asia. Asia is becoming
a democratic region.
We believe in Indonesias
potential, with its young
populationThe challenge
growth momentum. Theres a
need to address things like the
lnvestments are selective as businesses tune allocations for domestic-
market growth potential over the next 3- 5 years.
An overall rank was scored from responses ranked in order from economy with most
increased investment.
PwC
Please select the top 5 APEC economies where your organisation is increasing
- 443 (excludes 'none of the above' and 'not
answered' responsesj
- - | 5
Innovation and
services capabilities
capture newinvestments
Resilience must come from within.
Oxford Economics; PwC analysis
6 | PwC
--- -
The promise of business growth from rising middle-income consumers has been clear for a decade.
PwC
Thinking of those APEC economies where your organisation is increasing investment over the next 12 months, what proportion will be
allocated to the following areas? | - 443
- 478 (excludes 'not applicable,'

'don't know,' and 'no answer' responsesj
- - | 7
We are restructuring, and were moving nowto much
working with customers and understanding their needs.
products will be created in the process leading
to Renminbi (RMB) internationalisation?
- -
Oxford Economics; PwC analysis
8 | PwC
Agent of change The winners in this industry,
in any industry, will be
the ones who really start
to think end to end, all the
through their company, out
to their distributor network
and to their end users.
- - | 9
Putting middle-income demand at the centre of business expansion strategies will likely lead to different
distribution channels, new partnerships, and more innovation.
PwC
To what extent are you making, or will make, changes in the following areas to capitalise on this development (expanding middle-
-
'not applicable,' 'don't know,' and 'no answer' responsesj
10 | PwC
-- - - - -
PwC
To what degree are the following areas of your organisation prepared to adjust to capitalise on the rise in middle-income consumers in
-
answer' responsesj
- - | 11
with two or three operators, and costs will be much lower.
Biggest need for technical, managerial skills, and executives as CEOs set growth plans for the region.
PwC
Please indicate where your organisation is experiencing skills shortages in the APEC region. | - 334, CEOs who cite skills
shortages as a barrier to business growth
12 | PwC
Sizing up mobile
opportunities and digital
- - | 13
--
Mobile sales and payments are chief pathways to digital growth.
PwC
Thinking about opportunities in the digital economy, is your organisation active or planning to be active in.? | - 478 (includes
Select the option that best describes your organisation's role as a services provider and / or major customer in the following emerging
mobile services markets. | - Major customer: 133 (excludes 'other' responsej; Services provider: 218 (excludes 'other' responsej
14 | PwC
- -- - - -
Opportunities centre around connecting more closely within the company and with partners.
PwC
| - 478 (excludes 'neither / nor,' 'don't know,' and 'no answer' responsesj
- - | 15
People are becoming more responsive than in previous
it possible. This is a good thing though as it opens up opportunities.

What happens as smartphone use hits critical mass? Mobile disruption in the form of new business models in
health, automotive, and more.
16 | PwC
infrastructure development?
Bridging the infrastructure gaps in
- - -
meet the demand.
PwC
To what extent is your organisation pursuing business relationships in the following areas, because they are important to your
Private-public infrastructure models | - 478 (excludes 'not applicable,' 'don't know,'
and 'no answer' responsesj
economy?-Existing lT infrastructure | - 478 (excludes 'neither / nor,' 'don't know,' and 'no answer' responsesj
- - | 17
The region is developing a large
the region, being intermediated
away into Europe or America. We
need mechanisms to make sure that
well in Asia and used inside Asia
the countrys gross domestic product.
lnfrastructure development is needed to support rising prosperity.
Economist lntelligence Unit, based on research from World Bank, McKinsey
Global lnstitute; PwC estimates
18 | PwC
infrastructure development
We cannot ignore the current economic growth, which
And as Pertamina is an energy company, we have to
political stability in the region, we can improve the investments
- - | 19
- - -
CEOs believe changes to regulatory and trade infrastructures are most crucial for business. When it comes to
their economies, developing the tech grids and urban transport are the paths to growth.
PwC
To what degree would further development in the following infrastructure categories in the APEC region create growth opportunities for
your organisation? | - 478 (excludes 'not applicable,' 'don't know,' and 'no answer' responsesj
To what degree would further investment in the following infrastructure categories create growth opportunities for your principal
economy? | - 478 (excludes 'not applicable,' 'don't know,' and 'no answer' responsesj
20 | PwC
wordsValue chain
Where business and regional policy
We have our own port in
IndonesiaWe also have
rail, barge and our own
hauling roads. So what we
need to invest more in, in
utilisation or synchronisation
as well as optimisation.
Many relatively small
sellersare engaging with
international customers
in a way thats much more
much lower costs and much
transactions than ever
got ahead and the policies
are waiting to catch up.
- - | 21
agreements that cover 10 or
economies, you take a great
That reduces costs. It reduces
waste. It makes things more
available because companies
will make the products
Harmonised regulations
would help us access markets
more easily. Basically,
we would knowwhat
we need to do to get our
products across borders.

Regulatory consistency could unleash more investment in the region.
Corporate governance, intellectual property protection, and services top
the list.
PwC
How likely or unlikely would your organisation be to invest more in the APEC region if
the following regulations or standards were harmonised across the region? | - 478
(excludes 'not applicable,' 'don't know,' and 'no answer' responsesj
And of these, where is the goal of uniform standards or regulations across the region
most important to your organisation's growth prospects, if at all? | - 478 (excludes
22 | PwC
What qualities make
an economyor a
regionresilient?
commitment to sustainable growth. Our ability to create
what is beyond our property line. Air pollution, oil spills at
our resort property line, and require collective and aligned
action between business, communities, and regulators.
- - | 23
PwC
To what extent do you agree or disagree. Multiple regional trade tracks are creating more growth opportunities for our organisation
- 478 (excludes 'not applicable,'
and 'no answer' responsesj
24 | PwC
GDP percentage gains by 2025 above 'business-as-usual' baseline depending on the implementation of
proposed trade paths.
by Peter A. Petri, Michael G. Plummer, and Fan Zhai, Peterson lnstitute for lnternational Economics, Policy Analyses in lnternational
Economics No. 98,' November 2012. Please note that the authors amended the study to add Japan and Korea as signatories in the
following addendum: 'Adding Japan and Korea to the TPP' by Peter A. Petri, Michael G. Plummer, and Fan Zhai.
- - | 25
- -
Global connectedness seen as less important than other qualities that help an economy bounce back from
PwC
We'd like your view on what makes one economy more resilient for your business growth and operations. | - 478 (excludes not
applicable,' 'don't know,' and 'no answer' responsesj
From the following list, please select the top 3 APEC economies which you consider to be the best prepared to capitalise on change
and / or bounce back from disruption - 478 (excludes 'not applicable,' 'don't know,' and
'no answer' responsesj
2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a
separate legal entity. Please see www.pwc.com/structure for further details.
www.pwc.com/us/apec/2013
Source: PwC 2013 APEC CEO Survey; 2012 APEC CEO Survey
Q: Considering your organisations investments in APEC economies over the next 12 months, are you planning on? | Base: 478 (excludes don't know and no answer responses)
Q: How confident are you about your organisations prospects for revenue growth Over the next 12 months? Over the next 35 years? | Base: 2013: 478; 2012: 356
2013
52%
2012
54%
Over the next 35 years
2013
42%
2012
36%
Over the next 12 months
3%
Decreasing investments
Increasing investments
68%
26%
Investments stay
the same
Most CEOs increasing investments in Asia Pacic operations
In 2013, more are condent in revenue growth prospects over the next year.
Towards resilience and growth: Asia Pacic business in transition
CEOs who are very confident in revenue growth
Note: An overall rank was scored from responses ranked in order from economy with most increased investment.
Source: PwC 2013 APEC CEO Survey
Q: Please select the top 5 APEC economies where your organisation is increasing investments over the next 35 years. | Base: 443 (excludes none of the above
and not answered responses)
10
Australia
10
Japan
12
Viet Nam
13
US
13
Thailand
14
Malaysia
15
Singapore
15
Hong Kong,
China
22
Indonesia
31
China
Investment destinations for
rest-of-APEC economy CEOs
10
Mexico
13
Singapore
14
Canada
14
Japan
15
Hong Kong,
China
15
Indonesia
26
New Zealand
29
Australia
35
US
35
China
Investment destinations for
mature APEC* economy CEOs
*Mature APEC: CEOs with primary
responsibilities for operations in Australia,
Canada, Japan, New Zealand, US
Asia Pacic: Where are CEOs increasing investments?
Investments are selective as businesses tune allocations for domestic-market growth potential over
the next 35 years.
Source: Oxford Economics; PwC analysis
-6.1%
6%
5.6%
Chile
-7.7%
6.6%
6.8%
The
Philippines
-5.2%
5.8%
6.3%
Peru
-6.6%
8.4%
7.8%
China
-11%
7.7%
5.6%
Malaysia
Exports % GDP
Consumption
GDP
Change in exports as a percentage of GDP from 2008 to 2012 in selected Asia Pacific economies, and 2012 growth in private
consumption (the volume of goods and services consumed by households), in local currency.
Decoupling from export-led growth in Asia Pacic
Resilience must come from within.
Q: Thinking of those APEC economies where your organisation is increasing investment over the next 12 months, what proportion will be allocated to the following areas? | Base: 443
Q: Expanding middle-income consumption across much of Asia Pacific is expected to increasingly drive future economic growth for the region. To what extent is this trend influencing
your organisations growth strategies for the region? | Base: 478 (excludes not applicable, don't know, and no answer responses)
3.8%
Access raw materials /
components
5.4%
Create infrastructure
partnerships
6.9%
Access and develop
technology
11%
Expand manufacturing /
assembly capacity
11%
Access and
develop talent
19%
Acquire assets /
operations
19%
Expand services /
distribution capacity
24%
Develop new product
or service
CEO investment allocations over the next year
87% of CEOs say
middle-income consumers
influence their growth
strategies.
44% to great extent
43% to some extent
Middle-income consumers in Asia Pacic driving new
business investment
The promise of business growth from rising middle-income consumers has been clear for a decade.
Now businesses are actively investing for a future of domestic consumption-driven growth in Asia Pacic.
Source: Oxford Economics; PwC analysis
8.8%
China
6.3%
The Philippines
5.5%
Chile
3.8%
APEC
Excluding Brunei
Darussalam, Papua
New Guinea,
and Peru
3.7%
World
Projected average annual growth in financial services sector output, 20132017
Services sectors projected to benet as Asia Pacic incomes rise
Q: To what extent are you making, or will make, changes in the following areas to capitalise on this development (expanding middle-income consumption across much of Asia
Pacific)? | Base: 412, CEOs who cite middle-income influence on growth strategy (excludes not applicable, don't know, and no answer responses)
37%
31%
9%
R&D located in
these markets
35%
34%
14%
Acquisition strategies
34%
38%
14%
Partnerships with
global companies to
expand in these
markets
26%
41%
15%
Sourcing / supply
chain
25%
43%
21%
Partnerships with
local companies to
expand in these
markets
19%
41%
25%
Distribution network
16%
48%
24%
Customer service for
these markets
14%
54%
21%
Investment / capital
spending
17%
48%
24%
Approaches to
marketing / brand
12%
48%
29%
Product / services mix
to address specific
needs
No change Moderate change Significant change Where CEOs are changing strategies the most
Asia Pacic CEOs change strategies to sync with new consumers
Putting middle-income demand at the centre of business expansion strategies will likely lead to different
distribution channels, new partnerships, and more innovation.
Q: To what degree are the following areas of your organisation prepared to adjust to capitalise on the rise in middle-income consumers in Asia Pacific? | Base: 397, CEOs who cite
middle-income influence on growth strategy (excludes not applicable, don't know, and no answer responses)
12%
57%
16%
Procurement /
sourcing
11%
60%
20%
Customer engagement /
services
10%
61%
21%
Marketing / brand
management
13%
54%
20%
Executive suite
11%
59%
22%
Sales
13%
52%
24%
Board of directors
9%
55%
26%
Finance
20%
55%
15%
Government / trade
relations
19%
49%
15%
R&D
17%
63%
14%
Human resources
Not prepared Well prepared Somewhat prepared How prepared is the organisation?
Stress points in R&D and HR as CEOs pivot for consumer demand
As CEOs orient for relevance in a changing Asia Pacic, R&D and HR are seen as among the least prepared.
Q: Please indicate where your organisation is experiencing skills shortages in the APEC region. | Base: 334, CEOs who cite skills shortages as a barrier to business growth
21%
4%
Service workers
6%
2%
Agricultural workers /
labourers
17%
1%
Office support /
clerical workers
19%
7%
Production /
assembly workers
49%
21%
Technical
e.g., IT, research, engineers
41%
7%
Professional services
e.g., financial, law,
doctors
52%
16%
Executives
57%
12%
Managers
39%
7%
Sales workers
Significant shortages Some shortages Where skills are in short supply
Wheres the real talent crunch in Asia Pacic?
Biggest need for technical, managerial skills, and executives as CEOs set growth plans for the region.
Q: Thinking about opportunities in the digital economy, is your organisation active or planning to be active in? | Base: 478 (includes not applicable, don't know,
and no answer responses)
Q: Select the option that best describes your organisations role as a services provider and / or major customer in the following emerging mobile services markets. | Base: Major
customer: 133 (excludes other response); Services provider: 218 (excludes other response)
17%
21%
Health services
e.g., remote monitoring
32%
22%
Education services
e.g., remote learning
32%
12%
Media and entertainment
44%
19%
Legal and professional
services
46% 44%
Financial services
e.g., mobile payments
53%
46%
Mobileenabled sales
services
Services provider Major customer Where CEOs see opportunities in emerging mobile services
22%
CEOs active in
developing mobile
products and
services
One in ve Asia Pacic CEOs are pursuing mobile products
and / or services
Mobile sales and payments are chief pathways to digital growth.
Q: Do you consider each of the following to be chiefly an opportunity or a barrier for your organisation to benefit from the digital economy? | Base: 478 (excludes neither / nor,
don't know, and no answer responses)
6%
6%
39%
18%
My organisations culture
21%
13%
17%
6%
Cyber-security
4%
3%
47%
15%
Integrating with suppliers and
other partners
11%
9%
35%
15%
Existing IT infrastructure
6%
3%
39%
9%
Integrating and managing
digital channels
15%
12%
19%
4%
Current legal framework for
cross-border data flows
18%
9%
17%
5%
Current customer privacy
protections / standards
Emerging opportunity Existing opportunity Existing barrier Emerging barrier
Uncertainties around standards for data sharing slowing
digital expansion
Opportunities centre around connecting more closely within the company and with partners.
Source: eMarketer (20132017 projected), based on survey and traffic data from research firms and regulatory agencies, historical trends, companyspecific data, and
countryspecific factors
59%
11%
Russia
43%
16%
China
44%
7.8%
Mexico
70%
15%
Japan
74%
38%
Korea
64%
30%
US
2017 (projected) 2011 Smartphone user penetration as a percentage of population in select APEC economies
Individuals of any age who own at least one smartphone and use the smartphone(s) at least once per month
Smartphone penetration: The number to watch in mobile innovation
What happens as smartphone use hits critical mass? Mobile disruption in the form of new business
models in health, automotive, and more.
Q: To what extent is your organisation pursuing business relationships in the following areas, because they are important to your organisations growth over the next 35 years?
Private-public infrastructure models | Base: 478 (excludes not applicable, don't know, and no answer responses)
Q: Do you consider each of the following to be chiefly an opportunity or a barrier for your organisation to benefit from the digital economy?Existing IT infrastructure | Base: 478
(excludes neither / nor, don't know, and no answer responses)
49%
of CEOs believe pursuing
private-public infrastructure
models in Asia Pacific are
important for growth for
their companies over the
next 35 years.
20%
of CEOs say existing IT
infrastructures are a barrier
or emerging barrier to
business growth.
Open to new ways of investing and developing infrastructure
Asia Pacic has a great need for direct investment into infrastructure. Public nancing alone likely cannot
meet the demand.
Source: Economist Intelligence Unit, based on research from World Bank, McKinsey Global Institute; PwC estimates
$193
Projected infrastructure spend
$343
Projected infrastructure need
Indonesias infrastructure funding requirements (20132017)
In US$ billions
2.6%
US
2.7%
The Philippines
3.2%
Indonesia
5%
Japan
8.5%
China
10%
Viet Nam
3.8%
World
Infrastructure investment as a percentage of GDP (latest data available)
Room to invest in infrastructure in Asia Pacic
Infrastructure development is needed to support rising prosperity.
Q: To what degree would further development in the following infrastructure categories in the APEC region create growth opportunities for your organisation? | Base: 478 (excludes
not applicable, don't know, and no answer responses)
Q: To what degree would further investment in the following infrastructure categories create growth opportunities for your principal economy? | Base: 478 (excludes not applicable,
don't know, and no answer responses)
27%
16%
Water supply and treatment
31%
16%
Links from established centres
to developing centres
35%
26%
Financial infrastructure
35%
21%
Social infrastructure
healthcare
40%
19%
Social infrastructure
education
40%
27%
Energy
41%
32%
Regulatory and legal
infrastructure
42%
31%
Trade infrastructure
44%
26%
Information and
communication tech grid
44%
26%
Transport networks in
urban areas
Further investment would create significant growth opportunities for principal economy
Further development in the APEC region would create significant growth opportunities for company
Where is infrastructure needed most?
CEOs believe changes to regulatory and trade infrastructures are most crucial for business. When it comes
to their economies, developing the tech grids and urban transport are the paths to growth.
Q: How likely or unlikely would your organisation be to invest more in the APEC region if the following regulations or standards were harmonised across the region? | Base: 478
(excludes not applicable, don't know, and no answer responses)
Q: And of these, where is the goal of uniform standards or regulations across the region most important to your organisations growth prospects, if at all? | Base: 478 (excludes
not applicable, don't know, and no answer responses)
4%
9%
Labour / employee
rights
3%
11%
Consumer protection
and labelling
6%
14%
Environmental
3%
16%
Data security /
privacy
12%
16%
Product certification
and safety
13%
19%
Tax / accounting
18%
20%
Services regulations /
restrictions
16%
22%
Intellectual property
protection
13%
22%
Corporate
governance
Most important to organisations growth prospects
Highly likely to invest more in the APEC region if the following regulations or standards were harmonised across the region
Whats holding back more business investment in
Asia Pacic economies?
Regulatory consistency could unleash more investment in the region. Corporate governance, intellectual
property protection, and services top the list.
Q: To what extent do you agree or disagree Multiple regional trade tracks are creating more growth opportunities for our organisation in Asia Pacific? Multiple regional trade tracks
are creating more uncertainty or administrative costs for our organisation in Asia Pacific? Multiple regional trade tracks will likely converge in a single Free Trade Area of the Asia
Pacific? | Base: 478 (excludes not applicable, and no answer responses)
Multiple regional trade tracks will likely
converge in a single Free Trade Area
of the Asia Pacific.
19%
9%
24%
42%
But not yet clear how trade
tracks will evolve
Multiple regional trade tracks are creating
more uncertainty or administrative costs
for our organisation in Asia Pacific.
26%
8%
35%
22%
Uncertainty or administrative
costs for our organisation in
Asia Pacific
Multiple regional trade tracks are creating
more growth opportunities for our
organisation in Asia Pacific.
14%
6% 6%
69%
Growth opportunities
for our organisation
in Asia Pacific
Multiple regional trade tracks are creating more
Neither / nor Dont know Disagree Agree
CEOs welcome momentum on Asia Pacics many evolving trade
negotiation tracks
Even as one in ve believe costs, complexity for their business are rising as a result.
Source: The data included is based on studies in The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment by Peter A. Petri, Michael G. Plummer, and
Fan Zhai, Peterson Institute for International Economics, Policy Analyses in International Economics No. 98, November 2012. Please note that the authors amended the study to add
Japan and Korea as signatories in the following addendum: Adding Japan and Korea to the TPP by Peter A. Petri, Michael G. Plummer, and Fan Zhai. http://www.asiapacifictrade.org
6.3%
Chinese Taipei
8.9%
Malaysia
9.3%
Russia
20.9%
Hong Kong,
China
21.5%
Viet Nam
Free Trade Area of the Asia-Pacific Track
The FTAAP includes various bilateral trade pacts
among all 21 APEC members
1.7%
The Philippines
1.8%
Thailand
1.9%
Malaysia
4%
Viet Nam
10.5%
Hong Kong,
China
Asian Track
This path assumes Regional Comprehensive
Economic Partnership is successfully implemented;
RCEP includes 10 ASEAN nations plus Australia,
China, India, Japan, New Zealand, and Korea
1.9%
Singapore
2%
New Zealand
2%
Japan
5.6%
Malaysia
10.5%
Viet Nam
Trans-Pacific Partnership 12 Track
This path assumes TPP is successfully implemented
with the following 12 economies: Australia, Brunei
Darussalam, Canada, Chile, Japan, Malaysia,
Mexico, New Zealand, Peru, Singapore, US, and
Viet Nam
Who benets? Asias potential trade paths
GDP percentage gains by 2025 above business-as-usual baseline depending on the implementation of
proposed trade paths.
Q: Wed like your view on what makes one economy more resilient for your business growth and operations. | Base: 478 (excludes not applicable, don't know,
and no answer responses)
Q: From the following list, please select the top 3 APEC economies which you consider to be the best prepared to capitalise on change and / or bounce back from disruption
over the next 35 years. | Base: 478 (excludes not applicable, don't know, and no answer responses)
Three models of resiliency
Economies CEOs think are best prepared
to handle change
45
Global
connectedness
55
Workforce / culture
adaptability
61
Leadership
public & private
65
Business
adaptability
70
Regulatory
environment
80
Macroeconomic
stability
Mean ranked score of resilience qualities
What makes an economy or a region resilient?
Global connectedness seen as less important than other qualities that help an economy bounce back from
disruption. Macroeconomic stability and regulatory consistency matter most for CEOs in Asia Pacic.
3
Singapore
2
US
1
China
Note: CEOs were asked to select from a list of 35 Asia Pacific economies, which included 21 APEC economies and those seeking APEC membership, as well as others. Business
leaders whose primary responsibility is Indonesia represent 12% of the total respondent pool. While many in this subset did indeed vote for Indonesia, some also chose Myanmar,
Macau, Mexico, or Viet Nam as the dark horse most likely to surprise.
Q: Which of the following Asia Pacific economies do you believe will be the dark horse in the next 35 years? | Base: 478 (excludes none of the above and no answer responses)
3%
Malaysia, Japan,
Russia
More positive upside
surprise in (Japans) policy
direction.
3%
Colombia
This country has sensible
politics and economic
agendas and is poised for
rapid gains.
4%
US
The raw materials they so
desperately need to
compete are right under
their nose.
5%
India
Growing economy, rising
living standards, increasing
middle-class wealth,
increasing exports,
education focus,
technology developments.
7%
Viet Nam
The next round of growth
will be more significant
pending Vietnamese
participation in the Trans-
Pacific Partnership.
7%
The Philippines
Transparency in business
transformation and much-
improved corporate
governance.
8%
China
High productivity,
competitive production
costs, growing
technological mastery.
11%
Myanmar
The economy will open up
much more quickly than
many are anticipating.
19%
Indonesia
Skilled labour force, growing
resource-based economic
activity, consolidation of
democracy.
We asked 478 business leaders with operations in Asia Pacic to
share their dark horsethat is, to tell us about the one economy in
the region they believe could surprise with more opportunity than is
currently expected. Indonesia leads the pack, but many others were
offered. This is a sample of what they said. To nd more of their
views on favourable trends in a wider range of Asia Pacic
economies, please go to: www.pwc.com/us/en/apec-ceo-summit
Sifting for future business opportunities can be a complex exercise
in a region as diverse as Asia Pacic, which in this report spans to
economies on either side of the Pacic Ocean. Expanding middle
classes were an obvious attraction; ample natural resources drew
others. But these arent the only qualities that can set the stage for
business investment. Increasing transparency; youthful populations;
relative wage costs; infrastructure plans; and political stability were
frequently cited as important qualities that create room to grow.
Trends that favour future investment
Asia Pacic economies that CEOs believe could surprise and why.
What is holding back
business investment in
Asia? And what can be done
to remove these obstacles?
2013
www.pwc.com
Foundations
of the future
1. Introduction............................................................ 1
2. The quantity and quality of business investment ..... 2
3. Attracting and repelling investors ........................... 6
4. Infrastructure frustrations ...................................... 8
5. Noodle bowl indigestion ....................................... 12
6. Conclusion ............................................................ 15
Contents
About the report
Foundations of the future is a report prepared for the APEC Business Advisory Council (ABAC) by
PwC in its capacity as the Knowledge Partner of the APEC CEO Summit 2013.This report explores
some of the major impediments faced by businesses investing in the Asia Pacifc region,
particularly around infrastructure. It examines the central role governments can play in easing
these barriers and facilitate the freer fow of capital for economic growth.
The reports content draws upon the views and insights of CEOs and business leaders with
operations spanning Asia Pacifc. PwC developed this report with the support of the Economist
Intelligence Unit (EIU) who conducted research and in-depth interviews for this paper.
We would like to thank all interviewees for their time and insights.
September 2013
Interviewees, in alphabetical order:
Johan Bastin, CEO, CapAsia
Michael Deegan, national infrastructure coordinator, Australian Government
Paul Graham, CEO, Asia Pacifc, Middle East and Africa, DHL Supply Chain
Benoit Henry, CEO, Asia Pacifc, commercial tyres, Continental
Lars Rasmussen, CEO, Asia Pacifc, Moog
Mark Rathbone, APAC leader, capital projects and infrastructure, PwC
Greg Slater, global head of trade and competition policy, Intel
Siddharth Varma, CEO, Asia Pacifc, Yum Restaurants
Tan Sri Dr Francis Yeoh, group MD, YTL
1 Foundations of the future
1. Introduction
1 World Bank national accounts data for 2009, the latest year available
2 In this report Asia and the Asia-Pacic region refer to the following economies:
Australia, Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia,
Japan, Laos, Malaysia, Mongolia, Myanmar, New Zealand, Pakistan, Papua New
Guinea, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Vietnam
The science of understanding how an economy
grows is complex and hotly debated. But one
ingredient that everyone agrees is necessary is
fxed capital investment. Unless an economy builds
roads, factories, and schools, it is hard for that
economy to grow.
Fixed capital investment can come from the
government or the private sector, but in most
countries in Asia it is the latter that contributes the
greatest share. In Thailand, for example, 73% of all
fxed capital investment the sort that goes into
physical assets, like ports and computers and offce
blocks comes from private sources. In India, the
fgure is 74%, while in the Philippines it is 80%.
1
The implications are two-fold. First, governments are
not investing enough in building their nations fxed
assets and infrastructure. There is a substantial defcit
in inherently public sector infrastructure the type
that doesnt offer strong returns to the private sector
and often needs government subsidy to be viable. For
example, across the emerging markets in Asia, most
economies lack effcient transports networks, power
supply and distribution, water supply and distribution.
And second, if governments continue to under-
invest, they need to create an environment that
attracts even more investment from the private
sector. Governments must create the right
conditions for businesses to feel confdent about
deploying their capital in new projects over long
time periods.
Given that much of Asia today has relatively low levels
of income, the region has a pressing need to pursue
rapid economic growth. It needs to attract the
necessary fxed-capital investment to support
economic development and rising prosperity. But is
the region doing enough to attract this private capital?
This paper looks at the investment landscape for
private business in the Asia-Pacifc region.
2
By
talking to CEOs from a range of sectors, it gathers
opinions about what factors are preventing
businesses from investing. Further, it assesses what
could be changed in order to reduce these barriers
and obstacles. The paper looks at the general
investment climate, and then focuses on two issues
in particular: infrastructure, and the evolving
network of free-trade deals.
Foundations of the future 2
2. The quantity and quality
of business investment
Although the picture varies, many countries in the Asia-Pacifc
region are already attracting lots of business investment. Asia
is well known for having high rates of saving, and these
savings are being used to invest in assets such as new
infrastructure, houses and factories.
Chart 1: Fixed capital investment as a share of GDP (%), 2012*
*Figures rounded to the nearest tenth.
Source: Economist Intelligence Unit
World
22.2%
Myanmar
16.3%
Pakistan
10.9%
USA
12.7%
New Zealand
18.8%
Philippines
19.4%
Taiwan
19.5%
Cambodia
20.3%
PNG
20.7%
Japan
21.2% 24.1%
Singapore Bangladesh
25.4%
Malaysia
25.7%
Thailand
28.5%
Australia
28.5%
Vietnam
28.2%
South Korea
26.7%
Hong Kong
26.4%
Sri Lanka
28.9%
India
29.9%
Indonesia
33.2%
Laos
29.2%
China
46.1%
Mongolia
48.3%
In 2012, total fxed-capital investment (public and private
sector) accounted for 22% of the global economy. In Asia,
most economies had an investment ratio that was above this
global average. In Mongolia, for example, investment made up
almost 50% of the economy, thanks in large part to its mining
boom. (See chart 1.) In China, fxed asset investment was 45%
of GDP. (China is a little different from many Asian countries
in that half of this substantial investment comes from the
government and half from the private sector.)
Flirting with foreigners
A different window onto the investment picture in Asia comes from looking at
infows of foreign direct investment (FDI). High levels of FDI suggest that a
country is an attractive place for companies to put their money. Chart 2
(below) compares the Asia-Pacifc regions share of the global economy with
its share of global FDI. During the 1990s, the region was attracting FDI in
proportion to its share of the world economy. After the Asian Financial Crisis
of 1997 and 1998 FDI fows dropped markedly, but more recently they have
recovered. In 2012, Asia accounted for 32% of the global economy and 30%
of global FDI.
Chart 2: Global share of gross domestic product and
foreign direct investment (%) for Asia
GDP and FDI measured in US$ at market exchange rates
0
5
10
15
20
25
30
35
Asias share of global FDI
Asias share of global GDP
Emerging economies that are building their
infrastructure, cities and industrial base for the frst
time need to have higher investment ratios than
developed economies. While some of emerging Asia is
attracting this needed investment, it is painfully clear
that some countries are not. In Pakistan, for example,
total investment in fxed assets only amounts to 12%
of GDP. In Cambodia it is only 20%. Some observers
argue that India, with an investment ratio of 30% of
GDP, wont achieve its full potential until this is closer
to 35%.
High rates of investment tell only part of the story,
though. As well as the quantity of investment, it is
important to consider its quality. Is the investment
going into the most productive parts of the economy?
Is it creating the sort of assets that a country most
needs for its future?
In Indonesia, for example, the headline investment
ratio of 34% of GDP looks impressive. But a lot of this
investment is going into building high-end apartments
and real estate, and very little is going into the
infrastructure that is needed to allow for continued
and sustainable economic growth. For Indonesia to
enjoy high rates of growth in the future, it needs to put
money into transport networks, power stations and
other utilities. In China, commentators have long
argued that some of the countrys investment is
creating too much capacity in certain industries such
as steel. In countries like China and Indonesia,
policymakers need to examine why some parts of the
economy are attracting too much investment and
other parts too little.
High rates of investment tell
only part of the story, though.
As well as the quantity of
investment, it is important to
consider its quality.
While this picture looks reasonable, the region should arguably be
attracting more. Asia is the fastest-growing part of the global economy,
which suggests that foreign businesses should be investing in the region
today in anticipation of all the future growth to come.
Behind the headline fgures, its clear that some parts of the region are
outperforming in their ability to attract FDI. In particular, the countries
of the Association of South-east Asian Nations (ASEAN) and China are
outperforming. However, other parts, notably Japan and India, are
underperforming. (See charts 3, 4, 5 and 6, below.)
The reasons behind underperformance or outperformance in attracting FDI
vary depending on the country. However, investors clearly favour certain
kinds of investment environment over others, as the next chapter explains.
GDP and FDI measured in US$, at market exchange rates
foreign direct investment (%) for China
Chart 4: Global share of gross domestic product and foreign direct
investment (%) for the Association of South-east Asian Nations (ASEAN)
0
2
4
6
8
10
12
14
16
18
Chinas share of global FDI
Chinas share of global GDP
0
1
2
3
4
5
6
7
8
9
10
ASEANs share of global FDI
ASEANs share of global GDP
foreign direct investment (%) for Japan
foreign direct investment (%) for India
-5
0
5
10
15
20
Japan's share of global FDI
Japan's share of global GDP
0
0.5
1
1.5
2
2.5
3
Indias share of global FDI
Indias share of global GDP
3. Attracting and
repelling investors
When a company makes an investment in a new market many
factors feed into the decision. Some of these factors are beyond
the reach of policymakers. For example, the size of a domestic
population, the presence of natural resources and the
geographic location are important considerations that
governments have little control over.
But many other areas can be addressed. The frst barrier that
companies face is whether they are even allowed to invest. All
countries have some degree of restrictions around foreign
ownership of certain industries. However, Asia has much higher
foreign restrictions than the rest of the world.
Source: World Bank
A study by the World Bank looked at 31 different industrial
sectors and calculated the average ownership allowed by
foreign investors in different countries.
3
The nations of East
Asia and the Pacifc have signifcantly higher restrictions than
everywhere else in the globe. (See chart 7, below.) The same
report also shows that 50% of all countries in East Asia require
foreign frms to obtain approval before making an investment
in light manufacturing. In Latin America and Eastern Europe,
by contrast, not a single country requires such approvals.
Chart 7: Average % ownership of companies
allowed by foreign investors across 31 sectors
3
Investing across Borders 2010, World Bank
Eastern Europe & Central Asia
Latin America & Caribbean
High-income OECD
Sub-Saharan Africa
South Asia
East Asia & the Pacic
Middle East & North Africa
94.3%
91.6%
91.2%
90.2%
88.2%
74.4%
83.5%
Assuming that companies are allowed to invest, they then
look at many other factors. The quality of macroeconomic
management is important. Investors prefer countries with a
stable currency, low infation and steady GDP growth, and
they are put off by too much volatility. The political system
must be equally stable. Just as important are the supply of
workers with the right skills, the presence of good
infrastructure, the character of the regulatory environment,
the reliability of the legal system and the level of transparency
in the market.
Like most companies, when we think about a location for a
new investment, we have a set of screens, says Greg Slater,
global director of trade and competition policy at Intel, a US
semiconductor manufacturer. One of the most important
screens is the availability of the right sort of workers. A lot of
countries are rejected because the human capital isnt right.
At Moog, a US engineering group that makes motors and
motion control devices, the most important screen is economic
stability. In order to invest, we have to be sure that the
economy is being well managed, says Lars Rasmussen, the
frms CEO for the Asia Pacifc region. Our operations in India
this year have been hurt by the falling rupee. (From January
to July 2013 the rupee fell by more than 11% against the US
dollar.)
Just as important is the protection of intellectual property
(IP). We are in a position where we dont want to share our IP
with anybody, stresses Mr Rasmussen. Thats part of the
reason why we havent invested in manufacturing in China.
Digging up the playing feld and shifting the goal
posts
At Continental, a German automotive and tyre group, the
companys truck tyre division has also avoided China, but for
different reasons. When we look for places to invest, we have
to feel we can be competitive, explains Benoit Henry, Asia
Pacifc CEO of the truck tyre business. We look for a level
playing feld for competition.
In China, Mr Henry feels the playing feld does not allow his
frm to compete effectively. In part, this is because many of his
competitors are state-owned enterprises (SOEs), and as such
they operate with different goals and priorities. For SOEs,
their primary goal is to create employment, and tyre
manufacturing is very labour-intensive, explains Mr Henry.
Making profts for them is a secondary consideration, so they
charge prices that are hard to compete with, while we are a
company that is focused on earning reasonable profts.
The issue of free and fair competition is not limited only to
China. CEOs report that many parts of Asia operate with
conditions where local companies have considerable
advantages over foreign investors, through both offcial
regulations and unoffcial arrangements of patronage,
cronyism and discrimination. While such conditions support
local companies in the short run, they are likely to harm a
country and its economic development in the long run by
promoting ineffciency.
In some cases, the lack of a level playing feld takes on a
different character, whereby companies are forced to invest if
they want to do business. Some countries in Asia are creating
conditionality around market access based on locating
investment in those countries, notes Mr Slater at Intel. This
is not sensible. Its not good policy to force companies to
invest. Its much better to attract them to invest.
Ruing rules and bemoaning bureaucracy
Gripes around bureaucracy and regulation are also
commonplace among CEOs. If business rules are too onerous
or unclear, if paying taxes is too complicated, and if
governments create unnecessary licensing procedures and
paperwork, then businesses are less likely to invest.
One frustrating form of bureaucracy for many companies
comes from restrictions around what activities they are able to
engage in. Companies that sell industrial equipment, for
example, often want to provide fnancial services to their
clients but are prevented from doing so because these
activities are considered the preserve of banks.
DHL Supply Chain, a German-owned logistics business, has
encountered these issues in Indonesia with some of its
pharmaceutical clients. As well as shipping drugs into the
country for these customers, and storing them in its
warehouses, DHL wants to provide other services such as
repackaging the drugs with local labels and distributing them
to pharmacies. However, activities such as these are
considered the domain of drug manufacturers, which requires
a different set of operating licenses and requirements for DHL.
The authorities have very rigid defnitions of what sectors
companies can operate in and sometimes that prevents us
from providing some of the services that we would like to
offer, says Paul Graham, CEO for the Asia Pacifc, Middle East
and Africa at DHL Supply Chain.
4. Infrastructure
frustrations
Of all the different types of business investment, arguably the
most important is money that goes into infrastructure. Power,
transport, communications, water and sanitation are the
foundations upon which an economy grows. Unless these
crucial elements are in place, countries are unlikely to attract
any other types of investment there is no point building a
factory in a country that has no electricity to power the
machines or no roads to transport the goods.
And yet, despite the self-evident importance of infrastructure,
the Asia-Pacifc region has been seriously under-investing in
these assets. Economic growth has been running at a faster
speed than new investment in infrastructure, and many parts
of emerging Asia now struggle with gridlocked roads, clogged
ports, unreliable power, and unsafe water. Comparing levels of
infrastructure across the region shows how far behind many
countries are. (See charts 8, 9, 10, and 11, below.)
Chart 8: Electricity production per capital (in kilowatt hours)
Data is for latest available year
Source: Economist Intelligence Unit & CIA World Factbook
USA
Australia
Taiwan
New Zealand
South Korea
Japan
Malaysia
China
Thailand
Vietnam
Indonesia
India
Philippines
Sri Lanka
Pakistan
Bangladesh
Nepal
Myanmar
Cambodia
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Kilowatt hours
Economy
Chart 9: Road per capita (in metres)
Chart 10: Metres of railway per capita
Australia
New Zealand
USA
Japan
Sri Lanka
Malaysia
China
India
Thailand
Cambodia
South Korea
Philippines
Vietnam
Taiwan
Indonesia
Pakistan
Myanmar
Nepal
Bangladesh
0
0
5
0.2
10
0.4
15
0.6
20
0.8
Metres
Metres
25
1
30
1.2
35
1.4
40
2 1.6 1.8
Economy
Australia
New Zealand
USA
Japan
Burma
South Korea
Taiwan
Sri Lanka
China
Malaysia
Thailand
India
Cambodia
Pakistan
Vietnam
Indonesia
Bangladesh
Philippines
Nepal
Economy
Chart 11: Population per airport with a paved runway
While these issues are most serious in the emerging economies
of Asia, the developed economies have their own issues too. In
Japan, for example, rebuilding infrastructure after the
Fukushima earthquake and tsunami in 2011 will cost around
US$200bn. And given the countrys reluctance to rely so heavily
on nuclear power in the aftermath of the disaster, even more
investment will be needed in building new sources of
electricity. More generally, Japan built much of its
infrastructure during the 1960s and 70s, and these assets are
starting to age and need upgrading.
The Asia Development Bank estimates that the region needs to
invest between US$8trn and US$9trn in infrastructure between
2010 and 2020. This is the amount of investment needed to
keep the regions economies growing at current rates. If this
investment doesnt materialise, the region will not be able to
grow so quickly, thereby slowing the rate at which incomes rise.
Infrastructure is the elephant in the room in Asia, says Francis
Yeoh, group MD of YTL, a Malaysian conglomerate with interests
ranging from cement and construction to power, water and
hotels. In Asia, we need infrastructure to drive our economic
growth, but governments are not doing anything to create the
conditions that will encourage the investment we need.
Indeed, looking at the level of investment going into
infrastructure, its clear that many parts of Asia are seriously
under-investing. At a global level, investment in infrastructure
is equal to 3.8% of GDP.
4
Some countries in Asia are investing at
a higher rate than this, for example Vietnam, where
infrastructure investment is equal to 10% of GDP
5
, and China,
where it comes to 8.5% of GDP.
6
However, many other parts of
the region are investing at a much lower rate than the global
average. In Indonesia, infrastructure investment is equal to just
3.2% of GDP.
7
In the Philippines it comes to 2.7% of GDP.
8
Given
that these are emerging economies with giant infrastructure
needs, these rates of investment are much too low.
4
McKinsey Global Institute
5
World Bank
6
McKinsey Global Institute
7
World Bank
8
World Bank
USA
Economy
Australia
New Zealand
Taiwan
South Korea
Malaysia
Japan
Thailand
Philippines
Indonesia
Myanmar
Sri Lanka
Pakistan
Vietnam
Cambodia
Nepal
China
India
Bangladesh
Population (000)
1,000 0 2,000 5,000 8,000 3,000 6,000 9,000 4,000 7,000 10,000 11,000
City capital
So why are Asian economies under-investing in infrastructure?
Might it be a lack of capital? Typically, governments are the
largest contributors to infrastructure investment around the
world. In Asia, some governments do face fscal constraints and
lack the money to invest in infrastructure, notably the lower-
income countries such as Indonesia, India, the Philippines,
Cambodia, Myanmar, and Laos. However, while public-sector
capital may be limited in some places, private-sector capital is
certainly not constrained.
There is a huge amount of capital in the market, observes
Johan Bastin, CEO of CapAsia, a Singapore-based fund
manager looking to invest in infrastructure projects in Asia.
As well as funds such as Mr Bastins, private sector sources of
capital also include pension funds, private equity groups and
banks, as well as operators and constructors of infrastructure
themselves. In some markets there are issues on debt
fnancing for infrastructure because you cant get long-enough
maturities, adds Mr Bastin, but this is improving.
Clearly, while public capital may be constrained in certain
countries in Asia, private capital is readily available. So what
is holding back private investors? Why is business so hesitant
to get involved in Asias infrastructure opportunities?
One of the primary concerns among investors is a lack of trust in
the regulatory and legal regimes in many countries. At present,
the frameworks that govern infrastructure are obscure,
unreliable, diffcult to navigate and constantly changing. As such,
investors do not have confdence that their investments will be
safe and well-governed over long time horizons.
There is nothing more local than infrastructure, observes Mr
Bastin. Because everything is local, you need to have trust in the
government and trust in the economy and the market that things
wont go wrong. Whereas a manufacturer might be able to
unplug its machines and move to a new country with relative
ease, the owner of a port or a railway has no such option.
In addition to weak regulatory and legal environments,
investors cite many other barriers to investment.
Infrastructure projects in Asia are often poorly prepared, with
insuffcient feasibility studies, which in turn leads to unviable
commercial terms being offered to investors. Often the risk
allocation between the public sector and the private sector is
inequitable. For example, governments sometimes expect the
private sector to acquire the land needed for an infrastructure
project, when this is almost always best done by governments,
especially for investments in roads and railways.
It would be simple enough to address this issue if governments
were to look at what is best practice for allocating risk in other
markets and then structure their own projects along similar
lines. However, certain adjustments would still be needed in
terms of the risk/reward profle of these projects. The weaker
regulatory and legal environment in many emerging markets
makes them inherently more risky than similar opportunities
in more developed markets. As such, governments must
recognise the need to shoulder a higher level of risk, and
perhaps also recognise the need to boost potential returns
through subsidies, in order to attract global capital.
Building bridges to investors so investors can
build bridges
What we need in Asia is coherence and transparency. We
need a coherent regulatory regime for infrastructure and
transparent processes, says Dr Yeoh at YTL. Countries like
the UK, Australia and Singapore have world-class regulatory
regimes. Everyone competes on a level playing feld, with
guaranteed prices and fair returns for owners and operators of
infrastructure, and guaranteed service levels for consumers
and users of infrastructure. The regulations are perfectly
transparent. There is certainty and clarity, which is what
investors are looking for.
In contrast, notes Dr Yeoh, some countries in Asia are plagued
with cronyism, corruption and nepotism. Infrastructure does
get built, but the process is slow and ineffcient, there is little
competition, and the costs [of building infrastructure] are
much higher, he says.
Dr Yeoh, and other investors like him, have a wishlist of things
they would like to see improved. For a start, they believe
regulators of infrastructure must be truly independent of
politics. At present, they argue, regulators often come and go
whenever there is a new election, which means the regulators
cant be relied upon.
Investors call for a deepening of the capabilities of
government departments to procure infrastructure. At
present, projects are put in front of investors with little or no
preparation, such as commissioning feasibility studies or
analysing what sort of prices users will pay to use the
infrastructure, and whether or not government subsidies are
needed to make the projects viable.
Investors want to see more transparency around bidding for
infrastructure projects, with clear processes and well-defned
steps. They want more certainty around how infrastructure
projects will be governed, such as the frequency and character
of pricing reviews by the regulator. An important part of this
certainty is the use of standardised legal contracts, which is
common practice in mature infrastructure markets, but not
yet the case in much of Asia. Investors also want a level
playing feld, where local and foreign capital are treated
equally and the opportunities for corruption are removed.
Many investors also believe that governments must be
prepared to offer longer concessions for infrastructure
projects. Because incomes in many parts of Asia are low the
prices charged to users are also low, which means it can take a
long time to earn a proper return on an investment. At
present, the length of infrastructure concessions is often too
short to earn a decent return.
5. Noodle bowl
indigestion
Cross-border investment is tightly linked with
cross-border trade of goods and services. Over the
past fve decades the value of cross-border trade
around the world has risen sharply, fuelled by
progress in reducing barriers to international
business. Between 1950 and 2010 the volume of
global trade grew by an average of 6% a year,
nearly twice the rate of GDP growth.
9
Patterns of Free Trade Areas in Asia,
Masahiro Kawai and Ganeshan Wignaraja,
East-West Center, 2013
Chart 12: Number of concluded free trade agreements in Asia,
1976 to 2012
Source: East-West Center
Much of this progress was achieved on a multilateral basis under the
General Agreement on Tariffs & Trade (GATT), which ran from 1947 to
1994, and then from 1995 under the World Trade Organisation (WTO),
which replaced GATT. However, while these multilateral agreements
achieved a great deal at frst, progress more recently has ground to a halt.
With 159 member countries in the WTO, all with their own vested
interests, countries have found trying to negotiate a new trading
landscape to be cumbersome, unwieldy and increasingly impossible.
And yet, countries recognise the benefts that come from pursuing free
trade and the opportunities it creates for attracting foreign investment.
As such, many nations have turned away from multilateral trade
negotiations and have focused instead on arrangements that are easier to
set up, notably bilateral trade deals between two countries, or else
regional deals between a handful of neighbours.
Asia has responded eagerly to this new trade landscape. In 2001 the
region had set up only fve free trade agreements (FTAs), including the
ASEAN Free Trade Area, which was established in 1991. However, by
2012 that number had risen to 71. (See chart 12, below.) A further 84
FTAs are in negotiation by Asian nations.
9
While these smaller-scale trade deals undoubtedly
reduce the barriers to cross-border investment, they
also create headaches. One of the biggest issues is
complexity. When countries operate with one global
set of trade rules, understanding them is relatively
easy. But when a picture emerges like that in Asia,
often dubbed a noodle bowl, then many frms,
especially smaller ones, struggle to understand what is
allowed and how they should respond.
The proliferation of trade deals makes it diffcult
for companies to keep up with what is going on,
says Mr Graham at DHL Supply Chain. We need a
real commitment to harmonise trade agreements at
an APAC level, but progress doesnt seem to be
happening fast enough.
Given that costs are rising rapidly in Asia,
especially those for labour, Mr Graham believes
that reducing the friction of cross-border trade is
one way that Asia can stay competitive against
emerging centres of manufacturing in other places
such as Africa. Friction comes not only from trade
barriers and the complexity of trade agreements,
but also from ineffcient customs.
Customs procedures are still challenging in much of
Asia and are hampering regional connectivity, notes
Mr Graham. Even shipping goods from Malaysia to
Singapore can take 14 hours to clear customs for a
20-minute drive. Elsewhere in the region, Mr Graham
notes that customs documentation is still highly
bureaucratic and paper-based. The processes
involved in shipping goods across borders open up
opportunities for middle men to get involved, which
adds cost and complexity.
Cross-border? Furious-border?
The proliferation of trade deals isnt the only issue that CEOs fnd
frustrating. Just as signifcant is the fact that many of the FTAs being
negotiated today are backward-looking and designed for an obsolete
model of business. In particular, they fail to recognise the dramatic
fragmentation of supply chains in recent decades.
In the past, manufacturing of a particular product was largely done from
start to fnish in just one country, with the fnished products then shipped
across borders. Free-trade deals were designed around this view of
manufacturing and concentrated on the treatment of fnished goods.
But these days, thanks to improvements in information and
communications technologies, manufacturing processes have been
broken up into ever smaller, more discrete parts, with each individual
process in the manufacturing chain located in the country where it can
be done most cost-effectively. The result is that the share of fnished
goods in cross-border trade has fallen markedly, whereas the share of
parts and components has risen sharply. (See chart 13, below.)
Chart 13: The import content of exports (%)
Source: World Economic Forum
1995
USA
India
Brazil
Indonesia
Chile
France
Turkey
9%
11%
11.5%
15.5%
19%
19.5%
14%
13%
13.5%
14%
18%
22%
26%
22.5%
20%
16%
23%
27%
30%
47%
27%
28%
29%
34%
38%
56%
Germany
China
Italy
Spain
S Korea
Hungary
2005
The old generation of FTAs is not equipped to deal with this
new situation. For a start, components might fow across
multiple borders during the manufacturing chain before they
reach their fnal market. While tariffs have come down
sharply over the past few years, they still add up if incurred
every time a part crosses a border during the production
process. Another issue concerns so-called rules of origin
(ROO). These are the regulations that govern where a product
was made, and thereby whether it is subject to tariffs, quotas
and the like. Given that products these days are made from
parts sourced from all over the globe, understanding and
interpreting ROO has become extremely challenging.
Losing the service game
Another issue that needs addressing with FTAs is the cross-
border provision of services. Most trade deals today are
heavily focused on products and tend to ignore services. Yet
services make up an ever growing piece of the global
economy. In high-income countries, services account for 73%
of GDP; in middle-income countries, they make up 53% of the
economy; and in low-income countries they represent 45% of
economic activity.
10
As countries in Asia get richer, they will
fnd the need to liberalise services ever more pressing.
This is especially true given that services are increasingly
tradeable across borders. Thanks to new IT and communication
technologies, companies can increasingly set up global value
chains in services industries. Product design, logistics services,
fnance, telecommunications, business process outsourcing, IT
system management and many other types of activity are being
organised on an international basis. Unless countries start to open
their borders to cross-border service provision, they risk losing out
on a growing fow of investment dollars that is building these
global service industries.
10
Investing across Borders 2010, World Bank
One of the barriers standing in the way of cross-border
services (and hence blocking cross-border business
investment) are rules around data fows, and what sort of
information is permitted to be sent from one country to
another. Most FTAs today do not have robust e-commerce
provisions, notes Mr Slater at Intel.
His company, for example, has 10,000 suppliers and hundreds
of customers all over the globe, not to mention countless
internal divisions within Intel itself. All these various entities
need to communicate with each other, sending contracts,
orders and information that are the lifeblood of the company.
Cross-border data fows are critical to any global company
these days. We want to be able to run our company on a truly
global basis without having to incur taxes on the goods and
services that make up our value chain, or having to put certain
functions in certain places, says Mr Slater. We need trade
deals that address issues such as trade-secret protection,
encryption and cross-border data fows. We need trade deals
that keep pace with the changing character of globalisation
and the changing character of technology.
One ray of light, he adds, could be the Trans Pacifc
Partnership, a trade deal being negotiated between 12
countries around the Pacifc Ocean, including the United
States. The TPP, argues Mr Slater, is a truly forward-looking
trade deal that promises to address many of the shortcomings
of current FTAs. Thats good news for business. But unless and
until other governments can adopt a similar approach they
will be restricting the ability of companies to invest in the best
way possible.
6. Conclusion
No country has the perfect investment conditions. Companies will always
fnd something that could be improved. But when it comes to attracting
business investment, many countries in Asia are still not getting even the
basics right, like providing reliable electricity, let alone tackling harder
issues such as crafting trade rules for cross-border e-commerce.
Perhaps some parts of the region feel that they do not need to try. After
all, Asia is the fastest-growing part of the global economy. Global
businesses want to be in the region to position themselves for rising
wealth and opportunity. Perhaps some countries feel that businesses will
invest come what may.
But such a view would be mistaken, for Asias future will certainly be
more challenging than its recent past. Regional growth in the 2000s was
driven by strong demand for Asias exports in Europe and the US, where
consumer spending was fuelled by rising debt. Following the fnancial
crisis, that debt-engine in the West has stalled and Asia has relied much
more on domestic demand for its growth. And yet, much of the domestic
demand within Asia has also been fuelled by debt. Some of the debt has
grown up on the back of hot capital infows from the West where central
banks have been fooding their economies with cheap money. But more
signifcantly, Asia itself has been running loose monetary policy,
especially in China.
These ultra-supportive conditions are unlikely to last either in the West
or in Asia and the region will have to work harder for its growth in
future. The competition to attract business investment will increase
both regionally and globally. Those countries that can compete most
effectively in attracting investment will have the greatest protection
against an uncertain future.
11
Adapted from ADB/ADBI (2009) and Bhattacharyay (2010)
The PwC Perspective:
The governments of emerging economies across Asia need to recognise that each is competing with the other for necessary
capital (fnancial and human) from the private sector. This capital will fow to the projects and markets that are most attractive
to the investor risk profle, return, ease of doing business, security of investment.
The graphic below illustrates the extent of infrastructure needs across Asia. It also highlights the sources of potential capital
available for investment and the barriers inhibiting this investment from fowing into critical infrastructure.
As a starting point, regional governments need to address the
basic barriers to investment that are highlighted within this
paper. Spending more time and attention affecting pragmatic
change to legal and regulatory frameworks, preparing
implementable projects and recognising the need to structure
commercially viable opportunities will allow an easier fow of
much needed capital into Asias weak infrastructure stock.
In parallel, governments should seek to implement broader
policy initiatives that will improve the attractiveness of an
economy to investors:
Harmonisation of free trade agreements with a shift
towards multilateral agreements and away from bilateral
agreements. In conjunction with this, existing agreements
should be updated to better refect the contribution of
services to GDP growth;
Incentivise and prioritise the development of foundational
infrastructure (roads, railways, utilities, airports, etc) which
will unlock and spur growth in other sectors of the
economy; and
Strengthen efforts to unlock private sector capital and
channel this towards the development of critical economic
infrastructure. Governments can do this by working to
develop and facilitate fnancial products that are suited to
investment in long-term infrastructure assets.
The actions required by governments in Asia to tackle the
infrastructure defcits that they face can seem insurmountable
and indeed are, without doubt, signifcant. However, with
clear and committed policymaking, governments will be able
to develop a track record of successful project implementation.
These efforts can only help to build traction among private
sector fnanciers, and create the conditions necessary to
reducing critical infrastructure defcits and spur faster growth
in the wider economy.
Infrastructure Decit of
US$8 trillion (2010-2020)
11
Amt
(US$ trn)
Total: 8.0
Investment Barrier
Poor project preparation
Legal & regulatory framework
Poorly dened and unstructured
procurement processes
Haphazard pipeline management
Risk allocation and commercial
structure
Lack of institutional capacity
Imbalance between risk and reward
Election cycles
Planning and investment horizons
FTA frameworks
Lack of effective co-ordination
across government ministries/
agencies
Lack of investment subsidy in
certain jurisdictions
Supply of Capital
Government
Multi-laterals
Commercial banks
Private sector
Infrastructure funds
Pension funds
Strategic investors
Constructors
Operators
Others (eg export
credit agencies)
Contacts
Mark Rathbone
Asia Pacifc Leader,
Capital Projects & Infrastructure, PwC
Tel: +65 6236 4190
Email: mark.rathbone@sg.pwc.com
Yumiko Noda
PwC Japan, Head of PPP,
Infrastructure and Government
Tel: +81 3 3546 8512
Email: yumiko.y.noda@jp.pwc.com
Rizal Satar
PwC Indonesia,
Infrastructure Leader
Tel: +62 21 528 90350
Email: rizal.satar@id.pwc.com
Telecom
Power
Water &
Sanitation 1.1
4.1 0.4
Transport
Rail
0.04
Road
2.3
Others
0.09
2.5
www.pwc.com
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors.
2013 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the China
member rm, and may sometimes refer to the PwC network. Each member rm is a
HK-20130801-3
26 | PwC
This is the PwC 2013 APEC CEO Survey.
2013 APEC CEOSurvey
Research methodology
Towards res|||ence and growth | 27
Acknowledgements
Juan Franc|sco Raffo
Honorary Chairman
Raffo Group
Hasnu| Suha|m|
CEO
PT XL Axiata Tbk
Eduard Potapov
Management Company
METALLOlNvEST LLC
H|romasa Yonekura
Chairman
Keidanren
Chairman
Sumitomo Chemical Co.,
Ltd.
Ed Rapp
Group President,
Construction lndustries
Caterpillar lnc.
Dr. Zhang X|aogang
General Manager
Angang Group
Karen Agust|awan
President Director and
CEO
PT Pertamina (Perseroj
Erw|n Aksa
CEO
Bosowa Corporation
John S|osar
Chief Executive
Ltd.
W|shnu Wardhana
President Director
and Group CEO
PT lndika Energy Tbk
Chair
ABAC 2013
Chair
APEC CEO Summit 2013
Anthony N|ght|nga|e
Director
Jardine Matheson
Holdings Limited
Tony Nowe|| CNZM
Chairman
Wellington Drive
Technologies
Chairman
New Zealand Forest
Research
J|n Roy Ryu
Chairman & CEO
Poongsan Group
Chan|n Vongkuso|k|t
CEO
Banpu Public Company
Limited
Dr. J|h-Chu Lee
Chairperson
Taiwan Financial Holdings
Co., Ltd.
Chairperson
Bank of Taiwan Co., Ltd.
C|a|re Ch|ang
Senior vice
President
Banyan Tree Holdings
Ltd.
Dr. V|jaya Rajendram
Founder &
Managing Director
Neptune
Bio-lnnovations
Scott M|||er
Senior Advisor and Scholl
Chair in lnternational
Business,
Center for Strategic and
lnternational Studies
(CSlSj
Shane D. F|em|ng
Chairman, President and
CEO
Cytec lndustries lnc.
Cra|g Mund|e
Senior Advisor to the
CEO
Microsoft Corporation
28 | PwC
Acknowledgements
Advisory group
Wishnu Wardhana
Christopher Albani
Rodger G. Howell
Frank Lyn
Craig Mundie
Eduardo Pedrosa
Yu Ping
Mark Rathbone
Irhoan Tanudiredja
Greg Unsworth
Monica Hardy Whaley
Core editorial team
Project management
Representing APEC CEO Summit 2013
Ricky Sugiarto
Amin Subekti
David Parsons
Allen Lai
Lucien Ong
Design
Cover image
30 | PwC
For further information
For media enquiries, please
contact:
For enquiries about the research
methodology, please contact:
For further information on
PwC 2013 APEC CEO Survey
content, please contact:
Cristina Ampil
Cynara Tan
Mike Davies Frances McVeigh
Wed like to thank the following organisations
for their generous logistical support in making
PwC 2013 APEC CEO Survey a success:
www.pwc.com
see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.
validated, or audited the data to verify the accuracy or completeness of the information. PricewaterhouseCoopers gives no express or implied warranties,
document, or have any liability with respect to this document.

PWC APEC CEO Survey Towards Resilience & Growth2013

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

PWC APEC CEO Survey Towards Resilience & Growth2013

Uploaded by

Copyright:

Available Formats

www.pwc.

- 2013: 478; 2012: 356

- 478 (excludes 'not applicable,'

You might also like