South East Asia offers huge investment and trade opportunities for Australian businesses, but many are failing to capitalise on the moment.
Australia’s direct investment into South East Asia has stagnated in recent years and the proportion of our trade with the fast-growing region has been stuck at 14 per cent for the past two decades. The government is attempting to stimulate economic engagement with the region with its Invested: Australia’s Southeast Asia Economic Strategy to 2040 report, developed by former Macquarie Group CEO Nicholas Moore AO, Special Envoy for South East Asia leading the development of a national strategy for greater trade and investment between Australia and South East Asia.
“This represents the initial phase of the government’s actions,” says Moore. “Currently, there’s a collaborative effort across various government departments to examine the other recommendations and determine the government’s role in enhancing trade and investment between the region and Australia. Considering Australia’s substantial savings — with $3.5 trillion in superannuation, and the scale of our well- capitalised corporate sector — it’s surprising and noteworthy that our actual investment level in the region is declining.”
Moore says SE Asian economies’ growth strategies follow a pattern previously observed in other parts of Asia. “This model, characterised by industrialisation, export-driven growth, savings and education, was seen in Japan post-WWII, then in South Korea and China. Now, it’s emerging across the region. Broadly, the region views itself as the next ‘high-flying geese’ — aspiring to follow the paths of Japan, Korea, Taiwan and China, which is a significant point of consideration in understanding the region’s ambitions and self- perception.”
The report makes 75 recommendations to the government, grouped into four broad categories.
Raise awareness to address a lack of knowledge of markets, sectors and declining regional literacy
Remove blockages to address tariff and non-tariff barriers, including through mutual recognition of qualifications and standards harmonisation, managing risks and enhancing mobility
Build capability to ensure Australia and the region have the skills and capability to pursue opportunities and address economic challenges
Deepen investment to promote economic growth and prosperity.
In his Invested report, Moore identifies 10 priority sectors that currently offer the most potential for growth: Agriculture and food; resources; green energy transition; infrastructure; education and skills; visitor economy; healthcare; digital economy, professional and financial services; and creative industries.
Payoff vs risk
The potential payoff is sizeable, according to Moore’s strategy. If two-way trade continues to grow at around the 20-year compound average growth rate of 5.5 per cent, total trade would be around $465b in 2040, up from $178b in 2022, the report states. But if trade growth could be boosted to 6.3 per cent, total trade would triple to $534b by 2040.
Nicola Yeomans, who co-leads law firm King & Wood Mallesons’ global private capital practice from Singapore, says that while Australian sovereign and superannuation funds have successfully invested in North America and Europe, among other jurisdictions, they remain concerned about the risk of direct investment or co-investment in South East Asia.
Investing in the region usually requires partnering with a local entity. These are often state- owned and come with the risks of regulatory change and the possibility of falling out of favour after a change of government. These investments also often need to be facilitated by a fund manager with deep experience in the region, but the resulting fees are a factor, making investment less attractive because of the way super funds are benchmarked against each other.
Yeomans says Australian investors can gain a better understanding of the risk-return ratio by focusing on just one or two target markets. Callington Group is an Australian industrial chemicals manufacturer. Its largest operations are based in Thailand, where it has supplied the local market since 1971. “Thailand has been key to the company’s success because of its connections to major regional markets, infrastructure project opportunities and almost tariff-free trade between Australia and the Association of Southeast Asian Nations (ASEAN),” says Thailand MD Geoff Everett.
Yeomans says a key way of managing risk is through a deep relationship with a local partner. “You can’t just turn up, do all your meetings at Changi Airport and not go deep into the country, not really spend time with people. This is not a transactional culture.”
Investors need to consider whether their partner is focused on risk, and is educating their team on bribery and corruption risks. Other important questions include whether their partner is thinking about what happens if the government changes? And how closely the partner is focusing on the agreement or glossing over the legal terms?
“The focus on legal and political risk is a top- level commercial issue,” says Yeomans, who was also a member of the reference group on the Invested report. “That’s why lawyers are very relevant. That’s why you have to do deep due diligence, more so than you do in very advanced markets like Australia. You cannot afford to be fast in these markets. You have to go deep.”
All of this takes time and is expensive, so potential investors need to find a balance between the cost and the ultimate return. This is where investing alongside a fund manager or another investor is a useful strategy.
While the agreement between Australian investors and their South East Asian partners is important, there is no substitute for the additional risk protection from forming personal relationships in Asia, says Yeomans. This can reveal the culture of an organisation and who’s really in charge, and mean the partner is more likely to raise a problem with the investment or the relationship should there be one. Another risk management tool could be political risk insurance, and the Invested report recommends the government consider whether it could provide this.
“De-risking mechanisms such as political risk insurance (PRI) allow investors to share risks — partly or fully — with public agencies whose objectives, experiences and diplomatic leverage enable them to provide PRI cover for countries and projects with higher political risks,” the report states. “If done right [sic] and with the right Australian government agencies involved, this could help reduce risks for Australian investors into South East Asia and encourage further investment.”
Awareness of opportunity
Mukund Narayanamurti, general manager South East Asia at the Australian Trade and Investment Commission, believes greater awareness of regional opportunities coupled with engagement will help better calibrate risks. “It is hard to measure and manage risks, and assess risk-adjusted returns, without commercial experience in these markets,” says the Jakarta-based Narayanamurti. “In other words, it would be easy to overestimate risks with low levels of awareness and capabilities.”
Drawing from the Invested report, he notes that companies including Macquarie, Cochlear, Aurecon, NEXTDC and SunRice have assessed opportunities in the region and invested profitably there. “Those who have successfully invested in the region have adopted a long-term orientation, recruited the right local talent and partnered to understand the local market and its risks,” the report states. “This, in turn, has opened up further opportunities for them.”
The government has so far committed to supporting three of the report’s recommendations following its release in September — investment deal teams; South East Asia Business Exchange to support two-way trade; and a placements and an internships pilot program for young professionals.
Narayanamurti says Australian companies should be taking proactive steps to engage with the region as the government implements the three initiatives. They should read the Invested report to understand the opportunities in their sectors and the breadth of Australia’s diplomatic presence in their markets of interest and engage with Austrade, the Department of Foreign Affairs and Trade and state government representatives on the opportunities and risks in target markets. They should also evaluate the needs for their products in the target markets and assess their board’s and executives’ experience in that market.
Targeted investment
The report states that in order to influence a material growth in Australian investment in the region, Australia needs to implement a targeted outward investment approach. It recommends the government form “deal teams” for South East Asia, blending private sector and government capabilities — initially in Jakarta, Singapore and Ho Chi Minh City. The report envisages the deal teams identifying assets that Australian entities could invest in and appropriate structuring so the opportunities are investor-ready.
The government should also form a strategic investment facility for regional infrastructure with a focus on the green economy transition. “It would make available a valuable source of funding for these investments and also send an important signal of confidence that the Australian government was willing to invest, helping crowd in private investors,” the report states.
The government should also expand its Partnerships for Infrastructure program — a four- year Australian government initiative assisting ASEAN governments to address critical infrastructure needs through improved policy and regulation, project preparation and procurement. It provides expert technical advice and capacity- building support, including through partnerships between Australian agencies and their South East Asian counterparts.
Mark Johnson AO, a former chair of AGL and the Macquarie Infrastructure Group, highlights the potential of Australia’s services sector. The nation’s professional services in architecture, healthcare, engineering and law, among others, are the equal of any nation’s and its financial services sector operates on a scale transferable to many Asian markets, says Johnson, the author of a government-commissioned 2010 report into establishing Australia as a leading financial services exporter. He believes the trends of nations looking at their supply chains through a political and security lens and of responding to climate change will play in Australia’s favour.
“There is a prospect of many more joint ventures between Australian organisations with relevant skills, and access to relevant raw materials, to collaborate with the South East and Northern Asian economies,” he says.
Break down the barriers
The Invested report recommends the government use review mechanisms in Australia’s existing free trade agreements with South East Asian countries to remove barriers affecting professional and financial services, such as foreign equity caps and restrictions on the composition of boards and residency of board members. Johnson backs that approach, saying, “Negotiating free trade agreements to get access for cheaper beef or lamb to a market, that’s well and good and all time- honoured stuff, but it’s not where the future is.”
According to a study by the Business Council of Australia and the Asia Society’s Asia Taskforce (What Successful Companies Do Well) Australian companies that succeed in Asia take a long-term vision rather than making opportunistic moves to capitalise on a short-term opening.
Lendlease, for instance, has staged its growth in Asia since 1973, establishing its presence in Singapore, building up its trust and reputation before expanding into other markets in the region. In contrast, Lynas Rare Earths had a bumpier path in SE Asia. The miner faced delays with its Malaysian plant. After near financial collapse, it has become a profitable ASX 100-listed company.
The report also highlights understanding local business practice — how negotiations proceed, what role local culture plays in behaviour and the hierarchy of laws, regulations and market practice. Online recruitment company Seek did this by becoming a minority investor in local recruiting website businesses in order to gain a detailed understanding of the relevant market and business operation, then moving to take a controlling stake.
Successful companies have combined Asia- capable homegrown talent with strong local talent. “High levels of trust for local management is critical given the speed of change in markets and the importance of relationships,” the report says. Oversight from the core leadership is also needed so risks, performance and progress are visible.
This article first appeared under the headline 'South East Asia Strategy’ in the February 2024 issue of Company Director magazine.
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