Catch a tiger by the tail: why isn't Australia chasing after the Asian investment opportunity?
22 May 2015
Address to the American Chamber of Commerce Business Briefing
Managing Director and Chief Executive Officer,
Insurance Australia Group
Thank you to the American Chamber of Commerce for inviting me here today.
I want to start by recognising the Wurundjeri people of the Kulin Nation, the original custodians of the land. I pay my respects to their Elders, past and present.
Today, we’re here to have an honest conversation about why the Australian business and investment community isn’t seizing the Asian opportunity that’s only a few thousand kilometres from where we’re seated.
Why does this inertia about investing in the region exist? At the moment we’ve only grabbed the tail of the opportunities arising out of the Tiger economies, China and India. If that.
And I’ll talk about what we can do to ensure we aren’t left behind, as our Asian neighbours drive forward, redefining the global economy and our own socio-economic standards.
Our conversation today is timely. America has unveiled its Pivot policy for engaging in the Asia Pacific and China’s President Xi has revealed his plan for the Asia Pacific Dream. If you look at any of the media today, the consensus is clear: we’re in the opening phase of the Asian Century.
With Australia sitting in the middle of this growth, it’s vital we’re active participants, with a long-term game plan and more importantly, that we act bravely – but not with bravado. And we do it now.
Before we can begin discussing how we start building the momentum for engaging in the region, I’d like to revisit the opportunities on offer.
I’ll then share with you my perceptions of what’s really happening on the ground in Asia before leaving you with my thoughts as to what we need to do differently as a business and investment community.
THE RISE OF ASIA AND ITS IMPACT ON AUSTRALIA
As I said from the outset: we’re living in the Asian Century.
It’s our geographic neighbours who have taken the mantle from those powers with whom we share a common heritage: the Americans who dominated the 20th Century, and the British, the century before them.
And this century isn’t just about a single entity. Asia is a collective of nations, operating independently, but forever interconnected.
There are a few reasons driving Asia’s emergence.
The first is the region’s sheer number of people – by 2050, the Asian population will grow to more than five billion, while the American and European populations are expected to decline.
And it’s not just the headcount that will sway the winds of the global economies – by 2030 Asia’s growing middle class will reach 3.2 billion people, accounting for almost 60% of global middle-class consumption.
The current and forecast economic growth of the region is nothing short of extraordinary.
In 10 years time – the region will produce half of the world’s total economic output.
In 15, Asia will have a GDP of $67 trillion which will be larger than Europe and the Americas ... combined.
The region’s ageing population and growing wealth will drive demand for our skills, knowledge, products and services.
Already, Asian families are sending their children to be educated in our schools, universities and institutions.
Of our almost 350,000 international students, more than half are from Asia, with a quarter of them from China, while almost 10% are from India.
It follows that, as at June last year, almost 30% [28%] of our population [6.6 million] consisted of those born outside of Australia, with China, India and The Philippines accounting for just over one million of this total.
The figures and analysis all agree – the region’s growth and economic impact are filtering down to us at a household and neighbourhood level.
The recent Intergenerational Report gave us a glimpse into our future in the Asian Century. And can I just add here that as a card-carrying member of the so-called “grey army”, it’s great to see the report promote the value that older – and I use that word loosely – Australians contribute to our society and economy.
While Asia seems to be steaming along an impressive demographic and economic trajectory, we, the “Lucky Country”, are in for a bumpy ride if we don’t adjust our priorities. The report foreshadowed that our own economic strength will slow from the 3.1 % per annum average growth of the past 40 years to 2.8% over the next 40 years.
By 2055, the middle of the Asian Century, we won’t be able to rely on our mineral wealth to continue to pave the way to economic glory. The mining boom is winding down.
However, new opportunities await the Australian business and investment community. And with a huge market opening in Asia’s new middle class, our future prosperity will be in high-quality goods and services. For example, for the first time, the services sector in China accounted for a larger share of its economic activity than manufacturing. That, coupled with the growth of the private sector, presents an enticing opportunity for Australian businesses which pride themselves on these activities.
Asialink recently released its report into the rise of Asia and the immense services opportunity on offer. Here, in Australia, the services sector already employs nine out of 10 employed people and accounts for 75% of our GDP. It also has overtaken our natural resources as measured by ‘value-added’ export earnings.
It is our country’s best kept secret. By 2030, the report found this sector can help our country wade into Asia, following the paths laid down by the Free Trade Agreements signed with China, Japan and South Korea, and eventually, India. Our service exports could be worth $163 billion, a 135% increase on what they are today.
All of us here in this room need to help spread the word about this opportunity and help change our county’s mindset that exports equal iron ore, coal, wool, cattle and grains. It is our transport, finance, IT and engineering services that are the new future for our country.
AUSTRALIA IN ASIA: WHAT IS THE REALITY?
Yet, despite all this activity and interest, our level of foreign direct investment, or FDI, in Asia can only be described as disturbingly low. While Asia ranks as Australia’s largest export market, just 8.1% of our total FDI in 2013 was in the region.
It’s still the US and the UK that are our two largest FDI destinations. New Zealand, Germany and Canada round out the top five. We also invest more into Switzerland than Singapore, more into The Netherlands than Hong Kong and China and favour Bermuda over Indonesia.
Off the back of these statistics, PricewaterhouseCoopers surveyed 1,000 Australian business leaders to find the extent of our appetite for doing business in Asia.
- Only 9% of Australian businesses are currently operating in Asia and two-thirds are sticking to their game plan over the next two to three years.
- Just 12% of Australian companies have any experience of doing business in Asia at all.
- While 23% of Australia’s large companies are doing business in Asia, only a quarter of these actually have staff on the ground in-market and just 12% have an Asian strategy.
When the American Chamber of Commerce surveyed businesses operating in China about their views on the business climate, it found 30% of respondents had no plans to increase investment in China – the lowest since the global financial crisis in 2009.
THE IAG STORY IN ASIA
Before I go on to give you my view on our experience of operating in Asia, let me give you a sense of our businesses in the region.
I’m proud to say that IAG has been one of the pioneers to expand northwards.
In the 1990s we were predominantly an Australian motor and home insurer, with about 90% of our business, and therefore our risk, concentrated in NSW and the ACT. If we hadn’t diversified, a major event in those areas would have had a crippling effect.
So we looked offshore – to New Zealand, to the UK for a short time – and as you know, to Asia. It’s been over 10 years since IAG entered the Asian market. We had a presence in China and India before their full potential was apparent, and mention of a FTA was met with confusion.
Since then, Asia has been one of our key strategic priorities: We’ve set a target for our collective Asian business to deliver a return on equity, before regional support and development costs, of more than 15% by the end of our 2017 financial year.
We’ve identified six target markets where we see enormous potential – China, India, Thailand, Vietnam, Malaysia, and Indonesia – and to date we’ve invested about $950 million in the region.
Already, we have well-performing businesses in Thailand and Malaysia, developing businesses in India, China and Vietnam, and we’ve recently established a presence in Indonesia.
We have just acquired a licence to operate in Indonesia through the purchase of a small, local insurer. This is the first step in our plan to enter the Indonesian market. With the world’s fourth largest population and a sizeable and growing middle class, we’re excited by the opportunities that Indonesia presents.
We have also previously flagged that we would like to increase our stake in our joint venture with the State Bank of India, SBI General. The recent change in India’s foreign ownership laws means we can increase our share from 26% to 49% and we are working through that now.
Through our experience to date, we’ve witnessed first-hand the growing appetite from our Asian associates for Australian investment and capabilities and we encourage other businesses to understand and act on the regions’ potential.
We remain very excited by Asia, and should further attractive investment opportunities present themselves we would be prepared to expand our presence and investment in the region.
So I can confidently urge you that now is the time to wade in.
But Australian businesses are still not engaging. Not fully. And not to the best of their capabilities.
So again, it begs the question: What’s stopping us?
THE AUSTRALIAN BUSINESS COMMUNITY IS TOO RISK AVERSE
I’m in the business of risk.
Everyday is a balancing act between assessing the risk that our customers – who hold 16 million policies with us – are exposed to, and working to ensure we help make their world a safer place.
Yet, even I can acknowledge that Australian businesses are being too risk averse; and this is what I think is at the heart of our inertia and lack of presence in the region.
We aren’t bold. The Australian spirit, the entrepreneurial drive on which our country was founded, has evaporated only steps from our own front door.
We need to be more innovative and inventive.
We need to face down the investment market when it balks and downgrades us at the mention of Asian expansion plans in our business strategies; we need to push it to think beyond the short-term game.
Because the simple fact is: we can’t afford not to be in the region.
We need to stride forward and engage with Asia; forge relationships with Asia; and educate ourselves about Asia.
We are, after-all, part of the Asian region, supremely placed to take full advantage of all that is on offer.
I also think that we are being scared off by the perception that cultural differences, corruption, uneven playing fields, and legal and trade barriers are too challenging and difficult to deal with. And this is the reason why I’m speaking to you today – to demystify this perception and to share with you my experiences in the hope that more of us will take those first few steps due-north.
There are a few recommendations, or rather, learnings, that I’ll cover with you today.
RE-ORIENTATE YOUR STRATEGY AND MODEL TO INCLUDE ASIA
The first is to weave Asia into your strategy. It shouldn’t be a “nice to have”, or an “add on”. It’s a “must have”.Find out how Asia can impact your business in the next five to 10 years in terms of customers, suppliers, value propositions and competitors.
Map out the indirect impacts and benefits as well – how the Asian-born households in Australia can open up new markets here, a new talent pool and new ways of working.
Learn from our experience, and from others such as Telstra’s new CEO Andy Penn, who in his first interviews since being named heir-apparent, pledged that the region remained key to Telstra’s future. And find the right model for you.
For us, we went down the route of a joint-venture model given that most Asian markets are only partially deregulated from a financial services ownership perspective. This has allowed us to be complementary and create partnerships based on mutual benefit and from which real economic value is created.
We bring to the table something that our partners need, whether it’s capabilities or capital, and in return, we receive the opportunity to operate in new markets. We also recognised the need to be present, to be closer to the action. To this end, we opened a hub in Singapore, from which we service our Asian markets.
By posting senior management to our Asian hub, and sourcing and mentoring the best talent, we also go further towards establishing trust and providing proof of our commitment to, and investment in, the region. This also reflects a concept that underpins our strategy and model: reciprocal giving.
Don’t force or push your solutions onto your partner – let your partner pull what they need from you – as the best Asian capabilities are developed when resources are shared in a reciprocal way.
ASIAN LITERACY: BE BRAVE, BUT DON’T ENTER WITH BRAVADO
As I’ve said, Australian businesses need to be brave – but don’t enter the region with bravado.
And that’s the second insight I’m sharing with you today.
It’s no secret to anyone here in this room that operating in Asia goes hand-in-hand with different cultural sensitivities and the need for what has been described as Asian Capabilities or Literacy.
I’ve been privileged to work with Asialink in developing a national Centre for Asia Capabilities to help the Australian workforce realise and capitalise on the Asian opportunity. I urge everyone here today to visit their platform if you haven’t already done so.
What we found is that you should look to be someone with knowledge of the broader political, regulatory, historical, religious, economic and cultural contexts of Asia: to ensure you and your people possess sophisticated cross-cultural communication skills, the ability to have new ways of working and, more importantly, an open and empathetic mindset.
Having someone who has Asian capabilities also means that sometimes, the best person for the job may not be the right person for the job.
Some years ago, we were recruiting for a senior position in Asia. The front-runner was extremely impressive on paper: they had the right experience, the right credentials, and the hunger to succeed. But ultimately, they weren’t successful.
That’s because when we ran the candidate through some further scrutiny, it revealed to us that they didn’t have the core Asian capabilities that we knew were needed.
In short, they may have been the best person for the job on paper, but they lacked the flexibility, empathy and open-mindedness that is needed when working in different cultures.
If securing Asian capabilities sounds too difficult, then think of it this way: adopt a customer-centric approach. Put your Asian partners at the core of your business and make sure your business understands the key role they play in your future success.
Understand and capture what Asian businesses want, and share these learnings across your organisation. Use these insights to transform your offerings and operations.
IAG has begun this journey, and we still have a long way to go.
As I shared earlier, our demographic trends point to a process of assimilation that is happening at our schools and our households. This should also naturally extend into our offices. Yet, a bamboo ceiling exists, restricting the number of Asian executives in ASX 200 companies to 1.9%.
IAG is working to redress this:
We’ve rolled out unconscious bias training and have Asian talent development and retention programs. We share Asian expertise across managers, place senior people on the ground in Singapore and in our other operations.
Our Board also rotates its sittings through Asia to improve its Asian literacy. And this isn’t just about learning to say hello in various languages.
It’s to ensure they learn and appreciate the various cultures that make up the region. That in India, they play cricket, but in Thailand, crickets are a great snack.
We also actively looked for someone from the region to sit on our Board. In 2012, we were fortunate to secure Raymond Lim. Raymond has been a member of the Singapore Parliament since 2011 and is on several boards, as well as being the Chair of APS Asset Management and a senior advisor to the Swire Group. His impressive experience has added intimate knowledge of navigating different Asian and global markets combined with the inner workings of Asian governments. His value and insights are immense.
And – as with a customer-centric approach – it’s all about building relationships, about creating and keeping a “loyal customer”.
RELATIONSHIPS IN ASIA: A DISPROPORTIONATE EFFORT
And this brings me to what I think is my most valuable insight.
I’ve read that when it comes to building relationships in Asia, our former Ambassador to China and respected economist, Geoff Raby, called for a disproportionate effort. Business in China, he says, is not about the black letter of the law, or the contract you think you have signed. It's about trust and relationships, and that takes a very, very long time to build.
Geoff recommends Australian businesses not only invest capital, but disproportionate time, attention and effort into building these relationships. He also says it’s not about whether we like it or not – because it’s in our best interests to do so.
That’s why I leave my family every month and board a flight to the region to visit our partners. And it’s why Andy Penn said it took him 27 visits to Indonesia before an MOU was even signed.
Patience is key. There is an old Confucian saying: It does not matter how slowly you go, so long as you do not stop. We were shuttling back and forth to China for many years before our labours began to bear fruit. And as someone who invested all of that time, I can only say Confucius was wise indeed.
I’d also like to add that you have to be prepared for failures. The trick is not to see them as such – they are a valuable opportunity to refine your approach and understanding so the next time, you are stronger, and wiser.
Yet it’s not only businesses that should be committing a disproportionate effort.
GOVERNMENT’S ROLE IN PROMOTING ASIA
Government also has a role to play and there have been a number of attempts at capturing what the value of Asia means for Australia.
In 1989 Garnaut released his report on Australia and the North-East Asian ascendancy. In the early 90s Keating unveiled his government’s approach to Asian engagement, while in 2012 Gillard released the Australia in the Asian Century White Paper.
The Asian Century White Paper set out 25 objectives for Australia to take advantage of the Asian opportunities on offer, including Asian literacy for schools, building an Asian capable workforce and the need for nurturing innovation. But if you Google the paper’s title today, you’ll have to exercise Confucian patience to find it outside of academia or professional services citations because it has been archived.
Irrespective of politics, and criticisms surrounding it being short on the “how” to engage with Asia, the White Paper was a platform on which dialogue could occur. It was flawed, but it was a starting point. Today, we are still waiting for a strategic vision, one that conveys how we can harness the contributions from not only government, but universities, business and the community.
Until another national and unified platform is created, I urge other business leaders to continue to share their experience of operating in Asia: the good, the bad and the lessons that should be passed on to guarantee our future success.
As I stated from the outset: the time for talking about entering the Asian Century has passed.
With growing in-country capabilities, increasing cost barriers for Foreign Direct Investment and competing interests from the US and the Asian super economies of China and India, we are in danger of being barricaded from our own neighbourhood.
So to conclude: my aim today was to share with you the lessons gleaned from our years on the frontline – about the opportunities, and how we manoeuvred ourselves to be an active participant in the region with a bright future.
Central to this is my call for Australian business leaders and boards to be less risk adverse, to act with bravery, but not bravado, and to embrace the unfamiliar.
You need to also ensure your business strategy and model is orientated towards Asia, and take advantage of the changes that are occurring not only within the region, but in the very fabric of our society. Visit Asialink and become familiar with its resources.
I’ll also stress to you again something that is oft repeated: you need to invest a disproportionate amount of effort into building relationships if you want to succeed.
I also call on business to continue to share our insights and learnings about operating in Asia as well as the growing needs and demands of our Asian customers. We should commit to do this until a national discourse is entrenched.
We are front and centre of a global juggernaut: it’s the fastest growing part of the world and our future demands that we act now to ensure that we not only grab the tiger by the tail, but are empowered to run along-side it.