When we look at the global economy today, a fundamental shift is taking place with a very clear move from West to East. Asia and the Middle East are undoubtedly asserting themselves as the brightest prospects on the global landscape, and the implications for the business community in Europe are considerable. Europe is at risk if it doesn't keep up.
This changing global economic landscape fascinates me. Who would have thought that today in India two-thirds of exports would go to markets other than the U.S. and Europe? Or that China would have become the largest importer of Brazilian goods? Indeed, according to the IMF, in 20 years' time Asia's economy as a whole will be larger than that of the G-7 and half the size of the entire G-20.
Here at HSBC (HBC), we talk to lots of businesses in Europe that are already creating opportunities in and with the East. For instance, U.K.-based Romax Technology, a technical solutions provider for the transportation and wind energy industries, is working with universities and car manufacturers in China to develop new software and the next generation of vehicles.
For many more Europe-domiciled businesses, though, the impressive statistics highlighting the growth of the East remain just that: statistics. To lots of companies, it can seem unattainable to access the East, let alone keep up with its fast-paced development.
For this reason, we commissioned The Futures Company to develop a report drawing on Eastern economies' political, social, financial, and consumer climate to identify the key considerations that should influence the strategic decision-making of any European business leader looking at the region.The report, Looking East: The Changing Face of World Business, uses these considerations to map practical steps for European businesses to turn these factors to their advantage and make trade with the East a reality. The report touches on a host of critical factors from fluctuating oil prices and consumption to changing consumer behavior, but here I've chosen to focus on the practical considerations for business that result.
The successful European business of the future will:
Maximize human capital. This involves looking beyond domestic borders to recruit, capitalizing on Asia's investment in training and up-skilling as it moves beyond its image as a source of low-cost labor. According to the European Commission report The World in 2025, China and India could account for approximately 20 percent of the world's research and development (R&D) by 2025—more than twice their current share.
Create an "innovation supply chain." Innovative businesses will turn the traditional model of Western innovation and Eastern delivery on its head to take advantage of Asia's increasing share of R&D spending and the skills base outlined above to deliver it. For instance, some of the biggest names in Western technology are spreading innovation centers around the world. Cisco (CSCO) has "Cisco East," a second global headquarters in Bangalore; Microsoft's (MSFT) R&D facility in Beijing is its biggest outside America.
Invest in consumer insight. Booming Eastern populations and growing consumer wealth will create unprecedented market opportunities for European businesses. Sales of Rolls-Royce cars in China, for instance, will outstrip those in the U.K. this year, making China the second-largest market for luxury vehicles after the U.S.
However, companies must understand that Eastern consumers are not just replicas of their Western counterparts. Insight must be tailored to take into consideration regional differences. The success of Nokia's (NOK) 1100 mobile phone in India, which provides a flashlight and is dust-resistant, is an example of a company tailoring its approach.
Employ a global mindset. Successful businesses will dedicate time to understanding how Asia has redrawn the world business map—overturning preconceptions about "the East"—and must foster a culture in their organizations that accommodates different business models and rule books. The free-market, liberal principles on which the West was built are often in direct contrast with methods of rule in the East.
Mitigate risk effectively. Thriving businesses will accurately research, understand, and weigh risks vs. the significant rewards of engaging with the East. For example, political instability in parts of Asia could mean economic instability for everyone, as well as higher commodity prices and lower investment inflows and outflows. But for European businesses this shouldn't be a reason not to interact with the East. Being aware of the tensions is sensible, but with the right partners on the ground, "thinking businesses" can overcome this potential issue and the other perceived challenges pervading the old Western mindset.
Rethink consumption and distribution. As Asia suffers from energy shortages in years to come, distribution and export models may need to change. An individual business's role in tackling global sustainability issues, particularly the East's energy consumption, should be acknowledged. Being aware of this factor in future scenario planning and considering risks vs. opportunities to capitalize on Asian investment in new energy sources is therefore key.
Create an advisory-led business. Acknowledging the role of external experts to provide local market insight will prove to be a great advantage for European businesses.
To many businesses in the distant markets of the West, Asia is an unknown and sometimes intimidating territory. However, the risks of engagement must always be seen in the context of the potential rewards. Asia offers a virtuous circle of economic growth and investment. It is crucial that European businesspeople do not close their minds to the possibilities offered by the rise of Asia. Europe can do no less if it hopes to remain at the forefront of global business.