From SME to ‘SGE’: Asean holds opportunities for Singapore’s global enterprises

CHANGES in international economic conditions have led to a new era of rising costs, underscoring the need for Singapore and its local enterprises to become more competitive.

The global growth outlook has softened considerably over the course of 2022. In July, the International Monetary Fund (IMF) characterised the global economic outlook as “gloomy and more uncertain”, with global gross domestic product (GDP) growth projected to decelerate from 6.1 per cent in 2021 to 3.2 per cent in 2022, and 2.9 per cent in 2023.

The 2022 and 2023 forecasts were revised downward by 1.2 percentage points and 0.9 percentage point respectively from January 2022, amid tighter financial conditions, elevated global inflation, a sharper global economic slowdown and rising geopolitical tensions. The IMF cautioned that the risks in relation to the outlook are leaning to the downside, with risks of a recession in 2023.

Despite the cloudy forecast, the picture looks somewhat different for Asean economies and for innovative Singapore global enterprises, or SGEs.

Asean stands out as a bright spot amid heightened global economic uncertainty. The IMF projects the Asean-5’s GDP growth to pick up from 3.4 per cent in 2021 to 5.3 per cent in 2022, before edging down just slightly to 5.1 per cent in 2023. These forecasts remain close to pre-pandemic trends, with growth supported by the resilience of manufacturing and the rebound in tourism.

These numbers stand in stark contrast to those for other major economies, which are expected to stay or fall below pre-pandemic trends. For instance, growth rates for the United States and European economies are seen to soften from around 4 per cent in 2021 to 2 to 3 per cent in 2022, and 1 to 1.2 per cent in 2023, below their 2015 to 2019 average, according to the IMF.

Meanwhile, China’s growth is similarly slowing from 8.1 per cent in 2021 to 3.3 per cent in 2022 and 4.6 per cent in 2023, below 2015 to 2019’s average of 6.7 per cent. As such, SGEs with exposure to Asean have the potential to outperform amid the uncertain outlook.

Stronger growth drivers for Asean, post-Covid and beyond

First, the continued rise of Asean’s middle class will bolster consumption growth. Between 2019 and 2030, the World Economic Forum (WEF) projects Asean’s total consumption to more than double to US$2.2 trillion, supported by the rise in the middle class. Within the region, the number of high and upper-income households is expected to increase by 38 million to 86 million by 2030. This continued growth in affluence could potentially expand the total market for SGEs.

Second, the pandemic has prompted a massive digital adoption spurt across Asean, in turn presenting huge opportunities. Since the pandemic began, around 60 million users have taken up consumer digital services, with the Asean-6’s Internet economy projected to reach US$1 trillion in gross merchandise value by 2030, up from just US$174 million in 2021, based on a study by Google, Temasek, and Bain & Company.

PwC’s June 2022 Global Consumer Insights Pulse Survey also found that more than 80 per cent of respondents shopped across at least 3 online channels over the last 6 months, suggesting the rise of a new demand, rather than a substitution from offline to online channels. This also presents new supply-related opportunities for SGEs to capitalise on the changing landscape. Here, the new strategic discourse is all about how digital platforms can synergistically integrate with artificial intelligence systems to optimise supply chain activity.

Third, Asean’s status as a manufacturing hub has further strengthened post-Covid. Prior to Covid, companies had already intensified their supply chain diversification into Asean as they sought to mitigate the effects of the US-China trade tensions. Disruptions arising during the pandemic have further underscored the need for companies to diversify and build more resilient supply chains. These trends are clearly reflected in foreign direct investment and trade data.

For SGEs, those that are involved in electronics manufacturing such as semiconductors, as well as merchanting and other trade-related services, could see the greatest benefits from opportunities in the region.

Fourth, the implementation of the Regional Comprehensive Economic Partnership (RCEP) could accelerate economic integration across Asia-Pacific, with Asean being a natural beneficiary. RCEP serves to deepen Asean’s engagement with Australia, China, Japan, New Zealand and South Korea. Combined, these economies account for around 30 per cent of global GDP as well as global population, based on World Bank data.

Some of RCEP’s key features include the reduction of import tariffs, harmonised rules of origin (ROO) and an attempt to simplify non-tariff measures. The reduction in trade barriers and improvement in market accessibility will facilitate the expansion of investment and trade in RCEP signatory parties. The Asian Development Bank in October 2021 estimated that Asean’s exports and income would respectively be lifted by US$78 billion or 3 percentage points, and US$28 billion or 0.5 percentage points by 2030, when the incremental effects of RCEP are factored in.

SGEs that trade in goods will directly benefit from reduced trade tariffs for regional go-to-market strategies by saving costs and therefore becoming more competitive. Additionally, RCEP’s harmonised ROO feature will benefit SGEs in sectors such as processed food as well as chemicals and plastics by enabling them to take advantage of regional supply chains. SGEs in professional services, technology, business services, logistics and distribution will enjoy greatly improved market access for the services they provide.

Asean’s positive growth momentum can be the tide that lifts all boats, giving rise to new opportunities and imperatives for forward-thinking SGEs. A new management discourse towards an unconventional business model evolution cannot be ignored. Part two of this commentary will discuss approaches to capitalise on new types of growth opportunities across Asean, requiring a renewed thinking towards competitiveness.

The writer is partner for entrepreneurial and private business (strategy) at PwC Singapore.