ASEAN and Asian Emerging Markets: From Exporting to Innovating

Transcription

1 ASEAN and Asian Emerging Markets: From Exporting to Innovating George Abonyi Visiting Professor Department of Public Administration and Executive Education Program Maxwell School, Syracuse University 24 July

2 Overview of the story Challenge Thailand s manufactured exports stalled (macro, micro) New normal of global and regional growth China market is not (yet) the answer Opportunity Asian emerging markets: ASEAN, China, India (ACI) But these markets and consumers are different Response From exporting to innovating for Asian emerging markets But innovation with a difference 2

3 MACRO CONTEXT 3

4 Thailand: sustained development success Thailand has achieved a remarkable combination of sustained rapid growth, macroeconomic stability, economic diversification, declining poverty, until the Asian Crisis of Asian Crisis eroded but did not erase gains from growth and development; and the economy generally recovered Since the Asian Crisis, economic performance has been moderate; and there are concerns that Thailand has fallen into the middle-income trap Source: Pasuk (2014) 4

5 Export-driven growth Source: NESDB, 2015 Critical role of exports Import intensity of exports, e.g. hard disk drive (HDD) Note: Significant drop in investment since Asian Crisis (1997/8); particularly private investment Key reason for infrastructure investment need, e.g. logistics 5

6 Manufactures dominate exports (% share of exports) Source: Ministry of Commerce, NESDB 2015 Dominated by Electronics and Electrical (E&E): 30% of manufactured exports (2014) Automotive (parts, assembly): around to 10% Compare with rubber products: under 3% of manufactured exports Yet Thailand is the world s largest producer/exporter of natural rubber But close to 90% of rubber exports is not manufactures little value added 6

7 From sustained development success to Middle Income Trap Source: Ohno (2011) Income growth stalled Manufactured exports stalled Trap: between low-wage manufacturers and high-wage innovators 7

8 CHALLENGE Manufactured exports, key driver of growth, have stalled Product/production challenge Market challenge 8

9 Product Challenge: What/How Manufactured exports diversified and increased in sophistication, e.g. hard disk drive (HDD) Thailand is losing comparative advantage in low-wage sectors (+ demography, e.g. migrant workers) Most Thai firms, unlike in Korea or Taiwan, have not used low-cost labour advantage to create knowledgebased capabilities to compete: upgrade (innovate), e.g. HDD 9

10 Example: Thailand s position in the Hard Disk Drive (HDD) Global Value Chain (GVC) Source: Hiratsuka (2006) 10

11 Stuck in the middle of the GVC smile curve with lagging productivity: challenge of process and product innovation Stuck in the middle? Value Added per Worker in 1990, 2000, 2010: USA figure = 100 Source: Suehiro (2015) 11

12 Market challenge: New normal in the global economy Source: IMF WEO, July 2015; October 2008 Slow-growth global economy esp. developed economies (e.g. EU,, US); slowing but relatively faster growth in Asian emerging economies Especially ASEAN, China, India (ACI) Source: IMF WEO, July 2015, October 2008 Note: IMF has continually overestimated growth since

13 East Asia s export-driven growth is dependent on external developed economies, particularly within framework of global value chains, e.g. electronics (e.g. Intra-ASEAN trade is less than 25% of region s total trade) Source: Lim and Lim (2012) 13

14 Thailand s changing export markets (%) and the role of China Source: Suehiro (2015), NESDB China is now the largest single market for Thai exports but misleading 14

15 China: key global and regional role limits on the role of the China market Role in the global growth Contribution (China) vs. driving (US) Source: IMF, 2014 Role in the region China major importer of East/SE Asia s exports of parts and components 50% of all intra-regional intermediate imports; for final export to developed economies, e.g. iphones to US and EU (Source: ADB, 2011) But not yet major market for region s final manufactures 15

16 China market challenge (1) Challenge: investment and export driven growth; and lagging consumption Investment-driven economy; primarily by State-Owned Enterprises (SOEs), local governments, financed by State-Linked Banks But investment increasingly unproductive; e.g. excess capacity -- particularly in real estate, increase in unproductive debt (i.e. decreasing capacity to service debt) Exports also key driver of growth ( export excess savings ) to now slowing developed economies Share of household consumption in GDP falling since 1990s from over 55% to less than 35% in 2014 Rebalancing involves: Shift in economic power, e.g. away from State-Owned Enterprises (SOEs) to households higher wages; and to SMEs Reducing (SOE) unproductive investment and (bad) debt higher interest rates Implementing reforms = challenge of political economy Rebalancing to consumption-driven growth will involve significantly slower growth but more stable and sustainable over medium/longer term 16

17 China s investment-driven growth: increasing debt, declining efficiency China s increasing debt and composition mostly SOEs and local government Nearly 50% related to real estate Source: MGI (2015) Growing non-productive overinvestment: i.e. declining efficiency of investment (Marginal Product of Capital) Source: Ha Jiming, Goldman Sachs China (2015) S 17

18 China market challenge (2) China s rebalancing from investment to consumption-driven growth does not automatically translate into increased imports of final manufactures China as market for final goods is shaped not by size or growth of GDP, but capacity to generate net demand for import of final manufactures China is major importer of Thailand s/region s exports of parts and components for its final exports to developed economies, e.g. iphones to US and EU; domestic value added less than 4% Not yet major market for final manufactures: around 60% of imports used, directly and indirectly, for exports; 20-25% for investment; less than 15% for domestic consumption (Akyuz 2012) To become a growth locomotive for manufactures of Thailand and region China would need to raise not only its domestic consumption as a share of GDP, but also its imports of final goods from the region But average accounts receivable for consumer electronics retailers and manufacturers:123 days But average days of inventory for clothing companies: 174 days (Bloomberg 2015) 18

19 OPPORTUNITY Over the longer term, Asian emerging markets particularly ASEAN, China, and India (ACI); but different from developed economies, Thailand s traditional final markets. 19

20 Future of Asia is bright By % of global consumer spending from Asia, especially ACI Source: Australian Government White Paper (2012): Note: assumes China will grow on average by 7% p.a Asia s rising share of global GDP Asia s rising incomes (Bubble area reflects size of GDP; income per person in PPP) 20

21 ASEAN consumer expenditure is increasing but unevenly Source: Euromonitor (2015) ASEAN s Real GDP Growth and Total Consumer Expenditure: By 2030 ASEAN to be the 3 rd largest economy in the world, after US and China, worth $3.1 trillion in constant 2014 dollars ASEAN Economic Community: Integration with Diversity 21

22 Asian emerging markets and consumers are different But significantly lower disposable incomes in AEC in coming years as compared with developed economies, region s traditional final markets (source: Lawrence, ADBI (2013)) Fragmented markets, growing income inequality, and high proportion of rural population will condition consumer spending Per Capita Real Annual Gross Income in China and USA ( ) Reflects consumers purchasing power In 2030: narrower, but US still 4.6 x China Source: Euromonitor (2014) 22

23 ASEAN market composition Source: Euromonitor (2015) Household Income Distribution in ASEAN: 2014 Households by Annual Disposable Income Band in ASEAN: 2014 and

24 The consumer is at the centre of understanding market growth Consumer Expenditure per Household in ASEAN: 2014 and 2030 Note: growth vs. size (e.g. Lao, Cambodia) Source: Euromonitor (2015) Growth for Lower Income Groups Outpaces Middle Class Source: AllianceBernstein (2015) 24

25 RESPONSE From exporting to innovating for Asian emerging market consumers but with a difference 25

26 The not-so-good news: Thailand is lagging on traditional measures of innovation such as R&D Source: NESDB, ADB R&D as % share of GDP Thai private sector's share of investment in total R&D is around 35-45%, vs. 77% for Korea, 76% for Taiwan, 66% for Singapore 26

27 Other constraints on innovation Limited innovation-related knowledge transfer from multinational enterprises (MNEs) to domestic suppliers, particularly SMEs Education system, including training institutions, has not responded effectively to market demands for innovation- related skills Lack of clear and coherent policy priority and direction by the government in support for innovation, constrained by fragmentation and limited cooperation among key agencies and with the private sector Many private sector associations have not placed innovation as priority Gaps in innovation-related infrastructure, such as technology and innovation parks of the type that have been particularly successful for example in East Asia Significant shortage of appropriate financing mechanisms for innovation, particularly for entrepreneurial SMEs Conceptual constraint : relatively narrow concept of innovation driving policies, programs, and corporate strategy 27

28 The good news: wider concept of innovation for Asian emerging markets Consumers in Asian emerging markets have high aspirations, relatively low incomes, and a variety of constraints Innovation not only from investment in high-level R&D and science and technology (S&T): many entry points exist for Thai firms to add value along the value chain Challenge to is to strengthen innovation suited to consumers and conditions of Asian emerging markets, e.g. frugal innovation Investments in marketing, and product-related interactions with consumers may be as or more important to a firm in commercializing new ideas Interaction with consumers at early stages of product development is especially important in shaping innovation for emerging markets: innovation as (low cost) experimentation Provides insights on the use of the product and required adaptations for successful commercialization. Breakthrough customer insights vs. (primarily) breakthrough technology Disposable income distribution: from value for money to (also) value for many 28

29 Wider concept of innovation: frugal and reverse innovation Sources: e.g. Zechsky et al (2014); Radjou and Prabhu (2014); The Economist (2014) Frugal innovation Cost Innovation: Same Functionality at a Lower Cost Responds to constraints such as income, e.g. purchase price, servicing costs Example: Huawei (China) smart phone; Hindustan Unilever (India) detergent powder Good-Enough Innovation: Tailored Functionality at a Lower Cost Responds to specific customer needs and constraints Example: Mettler Toledo scale (China); Wireless computer mouse (Rapoo, Logitech) Frugal Innovation: New Functionality at a Lower Cost Responds to specific needs of emerging markets/consumers Example: MittiCool clay refrigerator (India); GE ECG (electrocardiogram) MAC 400 and 800 Reverse innovation Innovation for emerging market consumers finds market in developed economies Example Haier refrigerator; Logitec M215 wireless mouse; GE ECG MAC

30 Source: adapted from Stassopoulos (2013) Know the consumer Forecast shape, size, and timing of opportunity Segment income groups e.g. rural, lower, middle, high; age Redefining the market and consumer: Meet the consumers up close and personal Understand their aspirations, constraints Understand their environment Understand through low cost experimentation" How does a business: Succeed in this market Access this opportunity e.g. product innovation, process innovation, business model innovation (e.g. marketing and distribution) Identify and understand companies: Succeeding today in this market; how; why Likely to succeed in the future 30

31 Examples of Frugal and Reverse Innovation Product innovation: Rapoo Mouse (China) [and Logitech] Product & Business Model innovation;: First Energy s Oorja Stove (India) Reverse innovation: GE ECG MAC 400, 600, 800 (India & China ) 31

32 Conventional vs. Frugal and Reverse Innovation: Different paths to emerging regional and global opportunities (e.g. GE Healthymagination) Conventional Innovation Needs and conditions in developed markets R&D/innovation and commercialization for developed market consumers & conditions Products modified ( stripped down ) for emerging market consumers Frugal and Reverse Innovation Applications in developed markets (Reverse innovation) Innovation for emerging market consumers and conditions: translate voice of consumer into products/services (Frugal innovation) Aspirations and needs in emerging markets 32

33 Thailand: Toward innovation-led growth Thailand has enormous potential for innovation, reflected in the inherent capacity for design, and globally admired crafts, products and services Moving from potential to performance requires strengthening national innovation system : government + business + education + NGOs Starts from broad concept of innovation, not just high level R&D/S&T Includes investments in early stage product-related interactions with consumers on the why and what of a product or service; production process improvements; technology adaptation; and new types of business systems -- including key services (e.g. product design, marketing, distribution) For SMEs: adapting existing technology to local (regional) user needs is a practical way to commercially viable products and services Widens greatly scope for innovation and exports for Asian emerging markets 33

34 THANK YOU 34