Just 28% of Asia Pacific CEOs are “very confident” in revenue growth in 2016. What’s on their minds? We surveyed 800 business leaders in the region to learn their concerns, their reasons for optimism, and the direction they are headed.
Doing business in a region with multiple transitions is challenging: Business and factory modernization; the rise of the sharing economy; burgeoning demand for services just as industrial demand from China slows. They’re also aware of the geopolitical risks to the regional economic bonds that drive much opportunity.
Here are the top 10 takeaways from PwC’s 2015 APEC CEO Survey.
1) Topline, bottom line pressures building
As business leaders adjust to macroeconomic disruptions, room to maneuver is shrinking. A third of CEOs (33%) are now less confident in margin improvement from domestic operations than they were a year ago.
2) Geopolitical, disaster risks rising on the radar
From territorial disputes in the South China Sea to unrest in some APEC economies to scattered demonstrations against the Trans-Pacific Partnership (TPP), political as well as market risk calculations are moving to the forefront for CEOs: 14.5% said they would hold back investment to “a great extent” if tensions in the region escalate. The ever-expanding web of Asia Pacific supply chains has put more assets at risk from natural disasters as well. Fragmentation is not expected to stall: Most CEOs (61%) think high-value manufacturing will spread to more APEC economies during the next five years.
China, the US, and Indonesia services growing fastest remain the main draws, but CEOs are allocating new investment across the region. Each of APEC’s 21 member economies is attracting at least one first-time business investor during the next year. Overall, CEOs say 68% of planned new investment will be allocated to APEC economies compared with 32% spread around the rest of the world.
Services are becoming more important to APEC economies as global trade in goods falters. A third of CEOs (34%) see demand for technology design and integration in their organisation growing to “a great extent” during the next 3-5 years. This is where demand is growing the fastest, followed by logistics and supply chain services (29%) and risk reduction (24%).
Consumers and businesses alike are expected to accelerate technology investments: 63% of CEOs foresee a new wave of business spending to modernize operations by 2020. One in five (22%) think it “very likely” that manufacturing in the region will be transformed by the likes of robotics, connected sensors, and 3D printing during the same time. Digital access varies widely among the citizens of APEC’s economies. This translates into tremendous opportunities for growth.
A majority of CEOs (57%) expect innovation leaders will rise from developing economies in the region during the next five years. This includes just under a third of CEOs with oversight for operations in either the US or China, who think it “very likely.” The stage has been set for wider sources of innovation: As multinational corporations globalise R&D, Asia has become the numberone location worldwide for corporate R&D, surpassing both North America and Europe.
7) CEOs think that APEC is on the right track
Free trade across Asia Pacific is more likely than not by 2020 A majority (60%) think that APEC is on the right track and are optimistic about deeper economic integration in the region. In fact, one in four respondents (24%) believe a free trade arena in Asia Pacific is “very likely” to take shape by 2020, despite the fact that, while there has been some progress, this reality is still some ways off. Even today, in a region with over 100 free trade projects (FTAs), there remain gaps between what’s on paper and what happens in practice, resulting in higher costs and uncertainties in international trade.
8) Multiple paths for growth on Asia Pacific connectivity
Free trade alone is not enough for small businesses Respondents are not pinning their hopes for greater access on just one trade arrangement. The ASEAN Economic Community (AEC) offers greater promise at the moment for 35% of CEOs. And 24% say the TPP, if fully implemented, will create more opportunities for their organisations than other regional trade projects. As one technology executive from New Zealand, one of the 12 TPP economies, put it, “the lower the tariffs, the more trade will increase.”
As healthy and expanding middle classes become much more important to APEC economic growth, CEOs recognize that policy prescriptions will adjust to better support small businesses— the engines of local employment and wealth. New approaches are called for. For CEOs in businesses that can be considered mid-sized (annual revenue from $500 million to $2.5 billion ), 50% think lowering barriers to trade and foreign investment does more harm than good.
Most CEOs recognize they have a stake in building the middle class in regions where they do business. And while no single measure can undo the effects of technology advances and global competition on incomes and demand for skills, there are ways to extend the benefits from growth and trade in the region’s economies. Respondents believe expanding access to education at all levels and investing in infrastructure to unclog the region’s congested roads, ports, and airports will enable more people on the margins of society to participate in economic growth. These are ranked one and two, respectively, as the two most effective policy levers at hand to foster inclusive prosperity.
