Coronavirus control keeps APAC mid-market on upward trajectory

Business health in Asia Pacific continues to go from strength to strength, according to Grant Thornton’s Global business pulse. After showing real resilience in the face of the pandemic in H1 2020, the outlook in the region has seen significant improvement in the past six months. But while optimism, revenue and profitability expectations are on the rise, uncertainty about the economy remains high. The index also highlights that businesses will need to focus on bridging an increasingly concerning skills gap to sustain a strong performance in 2021 and beyond.

The new index results provide a valuable snapshot of business health in APAC, a region that has been quick to contain COVID-19, but – despite being further along the lifecycle of the pandemic – is still grappling with new waves of infection, demand constraints, and regulatory challenges. The results are based on interviews with around 5,000 mid-market leaders around the world between October and December 2020.[i]

Though the index dropped 12 points to minus 10.2 in H1 2020, APAC still held up better than many other parts of the world as the region quickly brought the COVID-19 pandemic under control. And mid-market firms have continued on a strong trajectory in the past six months, with the index rising by 3.5 points to minus 6.7 in H2.

Improvements were seen across both developed and emerging APAC, up four points and three points respectively on H1. And while the region remains significantly below pre-pandemic scores, the continued recovery is on par with real GDP, set to grow by a significant 5.9% in the coming year.[ii] And investor confidence has certainly returned to the region, evidenced by China’s stock market reaching its highest level since the financial crisis during the first week of 2021.[iii]

Roger Flynn.pngAs Rodger Flynn, Regional Head of Asia Pacific at Grant Thornton International Ltd explains, there are a number of positive developments behind the recovery in H2, which in turn will support businesses in 2021. “Continued government stimulus packages, positive news on vaccine trials, the macro-level reset – this is what’s been different over the past six months. China’s export growth is back to pre-pandemic levels, and Australia has bounced out of recession.”

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Optimism rises despite growing uncertainty

The ‘outlook’, which tracks growth expectations in the region, has risen significantly, jumping from 36.9 to 44.5 in H2. Mid-market firms are optimistic for the future, with 62% now reporting a positive economic outlook for the year ahead. This is 15 percentage points up from H1, and six percentage points above pre-pandemic levels in 2019.

Robert Hannah.pngRobert Hannah, global head of strategic growth markets at Grant Thornton International explains, “It’s been fascinating to see the progress in the region over the past six months. COVID-19 is under control and hasn’t had the same health impact as it has in Europe.”

The continued recovery in the region is keeping revenue and profitability expectations buoyant. 45% of mid-market businesses expect to boost their revenues in the coming year, a rise of ten percentage points in six months alone, and 41% anticipate a rise in profitability.

Despite the recovery, there is an understanding amongst mid-market businesses that they aren’t out of the woods just yet amid new waves of infection and continued disruption to global business. The ‘restrictions’, which tracks barriers to growth across the mid-market, hasn’t improved in step with the outlook, and has instead dipped further to minus 58. Economic uncertainty has reached a new series high, with two thirds of firms (65%) now identifying this as a major constraint to doing business. This measure is particularly pronounced in emerging APAC, at 68%.

One region – two paths

“The story varies greatly between emerging and developed economies,” Rodger explains. “Larger, developed nations have generally had the resources and infrastructure to weather the pandemic and provide a solid foundation for recovery. Less developed countries, including emerging ASEAN, began the crisis at a disadvantage, and COVID-19 exposed and often heightened their challenges.”

Robert points to the less co-ordinated approach to government support and stimulus in emerging economies, which has continued to fuel uncertainty amid new waves of infection. “Less government support has forced businesses to go out and make things happen. There is a very high proportion of private and family-owned businesses in these economies, particularly in South Korea, India and the Philippines. It really has been a case of survival for some. You can really see how the entrepreneurialism in the region has come to the fore in these past six months.”

Return to internationalisation after lull in exports

While the pandemic appears to have been successfully contained in APAC, the blow to the global economy has had significant repercussions for a region highly dependent on international sales and supply chains. Indeed, export intentions took a hit in H1, and given the supply shock caused by the pandemic, there was an immediate trend towards manufacturing locally. This trend appears to have been temporary.

But firms are again starting to look to international markets in 2021, with a third now intending to increase exports in the year ahead. In China, exports have surged to record levels, growing by 21% in 12 months as factories continue to capitalise on lockdowns in other parts of the world.[iv]

Improvements in the overarching trade environment give reason for optimism in the region. The signing late last year of the Regional Comprehensive Economic Partnership (RCEP), bringing 15 APAC economies including China, Japan and South Korea into closer integration, is reckoned to add $200 bn to the global economy by the end of the decade.[v] The recent US election result is also a major factor, with the expected improvement of the US-China trade relationship of particular consequence for Asian and Latin American economies.

“There are still geo-political issues tempering internationalisation,” Rodger explains. “But businesses are also realising that they can’t continue to manufacture things domestically for such a high cost. It’s cheaper to go international.” This is a factor which will aid growth in emerging APAC economies where labour costs remain lower.

Furthermore, the conditions are becoming more favourable for businesses to start looking overseas. “Many of our current assumptions about the global economy are encouraging. There’ll likely be no increase in inflation and interest rates are set to stay at zero or negative”.

And as companies look to international markets, they are also planning to invest for the future. In H1 2020, investment intentions followed business conditions on a downward trajectory. But over the past six months, investment intentions have risen across the board, particularly in plant and machinery (up 7 percentage points) and new buildings (up 5 percentage points). This trend is observable across the global mid-market, particularly in the EU, and highlights an optimistic shift in leaders’ attitudes towards the future.

Rodger isn’t surprised by this finding. “In the hospitality sector, a lot of businesses have taken the opportunity to carry out refurbishments and renovations, particularly in Hong Kong. We’ve also seen the retooling of factories in China. In Singapore and Malaysia, government projects are continuing. And you’ve still got the Belt and Road initiative. There is a continued focus on these sorts of long-term programmes.”

Building worker skills is key to APAC’s recovery in a price-sensitive market

Demand was ailing in H1 2020, with around two thirds (61%) of mid-market businesses expecting a shortage of orders to constrain growth – a significant jump from pre-pandemic levels, which sat at 46%. Over the past six months, this number has remained elevated, with 58% of firms concerned about demand, and only a third expect selling prices to increase this year.

And in this challenging climate, another major challenge on mid-market leaders’ radar is access to talent. Our data points to a skills shortage across the board, with 57% of APAC firms reporting this as a constraint. The problem is particularly pronounced in emerging economies, reported by nearly two thirds (61%) of firms, a series record and a jump of 13 percentage points in just six months.

The issue, Rodger explains, can be seen in all corners of the economy. In the construction and manufacturing industries, “everything was put on pause” in light of the pandemic, and workforces have yet to be fully replenished. There is also a pronounced shortage of skilled workers in the technology and cyber industries, with Asia Pacific estimated to be grappling with a two million person skills gap in cybersecurity alone.[vi]

“A major point here is the lack of mobility and availability of visas,” he explains. “If governments aren’t renewing visas, people are returning home. International students are stuck in their home countries. In Japan, there has always been a pronounced shortage of skilled workers. So in sectors where businesses already depend on net migration, border disruptions and lack of mobility have really magnified the existing problem.”

But what types of skills are in demand in view of the new world order? “Service businesses and others are starting to bring more medical or science-based advice to their boards, and I think we’ll see more medical officers in place in the near future. The risk function in many organizations is expanding. And there is even greater emphasis on technology, with some airlines already looking to use vaccine passports. This is where the advisors are going to be.”

Other regional and country highlights

India

India mid-market survey: Insights and outlook for 2021

Read more India

European Union (EU)

Mid-market’s mood remains low across Europe, but new year offers new hope

Read more European Union (EU)

Latin America

Latin American business health rebounds to pre-pandemic levels

Read more Latin America

North America

North America stages the strongest comeback of all our profiled regions

Read more North America

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i. Visit our methodology section for more.
ii. oecdecoscope.blog - Asia & Pacific economies are projected to rebound from COVID-19 - 1 December 2020
iii. www.bloomberg.com - China Stock Index Tops 2015 Bubble Peak, Closes at 13-Year High - 5 January 2021
iv. www.scmp.com - China trade: exports surge to record levels, as coronavirus lockdowns return to the West - 7 December 2020
v. www.ft.com - Asia-Pacific countries sign one of the largest free trade deals in history - 15 November 2020
vi. www.cpomagazine.com - International Cybersecurity Workforce Needs to Grow by 89% to Close Skills Gap - 24 November 2020



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