Dr. Razeen Sally of the University of Singapore addressed members of the Asia-Pacific Corporate Development Leaders Network in Singapore on 5 February 2015. He discussed three megatrends in the Asia-Pacific region:
- Globalisation of supply chains
- Shift from energy scarcity to energy abundance as a result of the shale revolution in the US
- Urbanisation – the rise of both established and new cities in the region
Globalisation of supply chains
Fundamental changes in supply chains are revolutionising international trade. According to the World Trade Organization, there is a shift from the traditional model based on start-to-finish production in individual countries to a more dynamic and complex environment where production is fragmented across borders and in which services and logistics are much more important – all to serve global markets.
North America, Europe and East Asia are the three main hubs supporting these supply chains, which are concentrated in the information and communications technology (ICT) and manufacturing sectors.
The globalisation of supply chains will likely have the following outcomes:
- Tighter integration between imports and exports
- Altered trade balances around the world
- Increased services content; today services is around 50% of global trade measured in value-added terms
Recentralisation and decentralisation of supply chains will become key issues. Decentralisation will likely prevail – for two reasons.
First, there is potential for geographic expansion to Southeast and South Asia, especially as low-cost production migrates out of China’s coastal regions. With policy changes such as labour market deregulation, India could grab much of the labour-intensive part of manufacturing supply chains. And second, supply chain fragmentation will likely spread from ICT manufacturing to other parts of manufacturing, services and even parts of agriculture.
Currently, there is a disconnect between supply chain realities and trade negotiations with respect to all sorts of non-tariff and regulatory barriers. The WTO and most free trade agreements have weak disciplines on regulatory barriers to trade and investment. There are three initiatives in the Asia-Pacific region – the Trans-Pacific Partnership, led by the US (with 10 other countries involved); the RCEP, led by China (consisting of ASEAN members and six other countries); and the ASEAN Economic Community. If all three were much more ambitious than other trade agreements, the potential to facilitate supply chains would be considerable, but the reality is different. RCEP and AEC in particular will likely be quite shallow agreements once implemented.
Shift from energy scarcity to energy abundance
The rapid growth of US shale oil and gas production has prompted a radically new era of energy abundance and will likely impact commodity prices in the short and long term. Over the next 20 years, more than 50% of all energy consumption will be in Asia, fuelling its industrial development and bringing electricity to rural areas. Asia’s reliance on fossil fuel imports will increase, especially from the Middle East.
One consequence of this will be the need to build new infrastructure to match demand. Developing Asia needs USD$20-30 trillion of new energy infrastructure by 2030. By 2020 the US could overtake Saudi Arabia as the biggest producer of crude – it is already surpassing Russia in natural gas production, is close to energy self-sufficiency and could become a major exporter. The US is a key balancing power in Asia, but there are increasing tensions between a rising China and a relatively weaker US. The worst-case scenario is a US disengagement with Asia, leaving the field clear for more geopolitical competition among China, Japan and India. But the US’s prospects as Asia’s vital balancing power would be much better were it to export oil and gas to the region.
Urbanisation – the rise of cities
Urbanisation is one of the world’s key megatrends, and it is happening above all in Asia. The McKinsey list of top 600 cities notes that by 2025, China will have 250 top cities and India 60, with seven megacities (with a population of over 10 million) in China. About one billion new emerging middle class consumers will be added by 2025, concentrated in mid-tier cities (with populations of between 250,000 and 10 million) in emerging markets.
We should look to cities more than countries for policy innovation. The most effective mayors act as CEOs, establishing the best policies for doing business, to attract trade, foreign investment and foreign talent, and to roll out hard and soft infrastructure. Currently, Hong Kong, Singapore, New York and Dubai are the only truly global cities, but other cities can be categorised in terms of what they do best and be plugged into global supply chains in other ways.
For financial services, the implications of urbanisation are the following (these are reflections from Vishrut Jain):
- Should banking firms consider the top-tier, obvious cities or invest in the next tier? Urbanisation will mean USD30-50 trillion of infrastructure investment that will lead to massive opportunities.
- Will there be an international banking model or will it be restricted to the top few banks by country? An international trade finance model that hooks into trade flows and that leverages connectivity is becoming a reality. This could signal a move away from domestic banking.
- What will be the impact of energy flows? The new energy patterns will have a major impact on currencies and the balance of power in Asia (for example, Japan will be able to access gas for USD4), and there will be more money available to buy assets in the region.
The original article was written by Ernst & Young Global Limited, and was subsequently edited by Dr. Razeen Sally.