The Age of Hypercomplexity
Assessing Asia Pacific Business and Legal Macrotrends in today's hypercomplex world.
The Age of Hypercomplexity
Asia Pacific Business and Legal Macrotrends
Our world has never been more connected
Our world has never been more connected – by technology, manufacturing, trade, supply chains, tourism and popular culture – and this unprecedented globalization has created enormous benefits for much of the world's population as a result.
At the same time, there are both public and private forces in Asia Pacific, the US, Europe and elsewhere that are exploiting the clear failings and inequalities of globalization to gain and consolidate power, producing new global divisions in the process.
On the regulatory front, law makers in the Asia Pacific region and globally continue to grapple with both the expected and unintended consequences of rapid globalization; the wave of new regulation that followed the financial crisis has now crashed onto the concrete seawall of enforcement. This is starkly borne out in this research, in which regulation and compliance has shot up to the top of the list of business challenges in every jurisdiction we surveyed.
Meanwhile, the US and China are embroiled in an unprecedented game of macroeconomic chicken, and Brexit is clearly starting to impact long term investment decision making by the UK's key trading partners in this region.
These key events, plus many more that don’t necessarily command headlines, are creating a tsunami of complexity. In fact, two thirds (66%) of the 600 business leaders we surveyed in Asia Pacific see doing business becoming more or far more challenging in the current market, up from 57% two years ago. Meanwhile, only five percent of business leaders actually see these macro trends as net beneficial for their companies, down from 11% in 2017.
In this report, the latest in our Simplifying Business in a Complex World series, we provide a view of how these mega trends are impacting doing business in Asia Pacific, arguably the most complex region of a hypercomplex world. We look at how businesses in China, Japan, Australia, Singapore, Malaysia and India are anticipating key challenges and looking for new opportunities, and where they are set
to invest as a result.
The most interesting contradiction at the heart of this report is that even with this intensifying complexity, massive compliance worries and unprecedented peacetime geopolitical turbulence weighing down companies like never before, these same business leaders appear remarkably bullish about their overall investment intentions.
In fact, 58% of executives across Asia Pacific plan to increase domestic investment levels by more than 10% in the next two years, while an even higher number (61%), plan to increase international investment by at least 10%. Even more are positive on their cross-border M&A ambitions and the ultimate desire to take their businesses global.
feel that doing business is becoming more complex
- Across the region, more businesses are planning to invest in South East Asia than they are domestically
The majority of executives will prioritize international investment and cross-border M&A over spending in their home markets to yield growth
Gaining market share and accessing new markets are the top reasons for pursuing M&A
Japan faces several unique macro-challenges that are forcing its businesses to look abroad for growth
Compliance and regulatory scrutiny will be the top challenge and their greatest source of cost increases
China will most likely shape the economic picture in the
years ahead, but India will have growing influence, and the US is making a comeback in terms of influence since 2017
With various global macrotrends including the US-China trade war impacting businesses in Asia Pacific, what do you expect doing business globally will be like for your company over the next two years?
Assessing the 2020 Agenda
Change is a constant, but perceptions among Asia Pacific’s business leaders on the most pressing complexities they face have changed markedly over the past two years.
Compliance and Regulation: Under the Microscope
In 2017, the focus among respondents was dually centred on pressure to drive innovation within the organization, and adapt to external disruption amid a rising prevalence of transformative technologies. Addressing cost pressures and shrinking margins was also a key concern and continues to be so.
Today, however, compliance and regulatory scrutiny has leapfrogged these concerns to reach the top of the Asia Pacific business agenda. While disruption is still a major factor, how to deal with various regulators as they have moved from creating regulations to enforcing them is today one of the great preoccupations of boardrooms and financiers alike. The other clear concern was a general economic unease, with many respondents in verbatim responses anticipating some sort of macroeconomic shocks on the horizon, but little clarity as to what form these shocks would take. Many sense an impending tipping point.
Businesses clearly face a growing wall of regulatory and compliance requirements, particularly if they operate in multiple markets (discussed in further detail in the section Investment Intentions). But just how much this is driving boardroom discussions in Asia Pacific has been brought into sharp relief, with regulatory scrutiny ranked as the most pressing issue facing Asia Pacific-based business leaders today.
Areas of compliance that are taking up an ever increasing amount of time, and impacting decision making on an almost daily basis, include cybersecurity and data privacy; IP protection; employment and environmental regulations; a patchwork of competition laws across the region; and the necessity to address and conform to bribery and corruption best practices.
These areas have grown markedly in importance since 2017, according to commentary from executives, and are likely to continue rising in consequence well beyond 2019; something mirrored by the rising boardroom status of General Counsel, Chief Risk Officers and Heads of Compliance.
Given the increase in and convergence of these issues, respondents also highlighted the financial impact of this area on their organizations.
Indeed, spending on compliance and regulatory matters is now far and away the greatest cost concern for Asia Pacific-based execs, with a full 73% of respondents singling it out as the number one driver of cost increases in their business.
Please rank the biggest macroeconomic challenges in terms of your business?
Complying with international laws is a top challenge. Some governments in key markets have been building stronger operational frameworks to favour their domestic businesses, which makes it difficult for us to penetrate these markets, even in just establishing partnerships with local organizations.
Director of Strategy and Marketing at a Malaysia-based telecom company
Which areas will provide the greatest cost increases in your industry over the next two years (select up to three):
Trade: Disputes, Uncertainties and the Impact on Supply Chains
Even in the midst of the US-China trade war and the impact a protracted dispute creates for regional trade partners, trade disputes and uncertainty ranked in the lower half of immediate concerns and complexities. This could be because respondents feel the US-China trade spat will fizzle out rather than continue to escalate.
However, as the previous two years have shown, the level of unpredictability in geopolitics, particularly those emanating from the US, has meant companies must maintain a much higher degree of vigilance in how they operate – and with whom they trade and conduct business – than in previous years.
Indeed, the majority of respondents (82%) across the Asia Pacific region are in some way making changes to their existing operations in response to the trade war. Of this, 49% say these changes will be major and a further 12% say it will result in a complete transformation of production and supply chains. That alone equates to enormous changes for businesses in this region.
Unsurprisingly, respondents based in Hong Kong and China will make the most deep-rooted changes. In China, a full 93% of executives are making changes to their business, including 18% now focused on a complete transformation of their production and supply chains.
What is surprising is how much Japan is being caught in the middle of the trade conflict. Japanese respondents are feeling the pain in equal measure to their Hong Kong/China-based counterparts. In total, 94% are reconsidering their existing production and supply chains.
Shedding light on these sentiments, the Chief Risk and Compliance Officer at a Japanese consumer goods company says, the "trade war is causing delays in our supply chain that is affecting the quality of our products, and we are incurring additional losses in our logistics." Others noted that in order to remain neutral in the feud, they are exploring alternative, emerging markets for their goods and services.
Enter South East Asia.
What impact is the ongoing trade war between the United States and China having on how you manage your production and supply chain?
Shaky Economics: Questioning Growth
Economic uncertainty was the second greatest complexity facing respondents. It is also one of the big issues that is basically out of the control of business leaders. As many respondents mention, it is difficult to see beyond the haze of geopolitical tensions or the impact of technological disruption on their primary industries or domestic economies. As such, many find themselves contemplating deeply whether the future will be bright, gloomy, or a comfortable middle ground.
“The economic environment at the domestic and global level has really grabbed out attention lately. It’s difficult to make predictions today, and particularly here [in India], we have an impending election that could create imbalances over the next 24 months,” says the Head of Legal at a major Indian consumer goods company.
The Director of Strategy at a Chinese technology company notes that the trade war is calling growth prospects in China into question and challenging the flexibility the overall economy and his organization once had. This economic uncertainty “is becoming a major challenge, particularly amidst increasing volatility and competition in the markets we operate in,” he says.
Even in more developed markets, shaky economics are proving challenging, and the Director of Finance at a fast growing Australian biotech firm sums up these issues by saying that the unpredictable nature of regional economies and “speed at which changes in the market are happening has made it difficult for us to strategize and react to this volatility".
Compliance is the number one challenge for businesses in Asia Pacific, however many companies are spending too much time, money and resources on papering the surface. What is required to support a credible compliance program is understanding the local business model, checking whether risks are properly recognized by personnel and ensuring that compliance standards and controls are fully operationalized rather than regularly circumvented. In these times of increased complexity, simple requirements are often the most effective. For example, conducting a targeted risk assessment at the same time as doing face to face training in the highest risk countries/business functions is a sensible and cost effective approach, which will be considered well by enforcement bodies if issues arise.
Baker McKenzie Insight - Mini vandePol, Hong Kong
The demand to expand
In this Age of Hypercomplexity, and as issues such as the trade war and Brexit cloud the future, it is somewhat surprising that so few respondents expect these issues to negatively impact their overall investment strategies.
Indeed, the majority of senior executives across Asia Pacific anticipate increasingly investment levels by more than 10%, particularly regarding international spend and cross-border deals.
Only a fraction of those surveyed expect to decrease their investment spend. For the time being, it seems, reports of an expected retreat from globalization are largely exaggerated.
The Demand to Expand
While most respondents plan to increase their domestic spend (with the clear exception of Japan), even more executives envision seeking and investing in growth opportunities outside their home markets over the course of the next two years. For many, this international expansion is becoming less a desire and more of a need, as domestic revenue pressures force companies to explore foreign markets for growth.
Explaining the rationale for a more than 10% increase in international investment, the Chief Marketing Officer at an Indian pharmaceutical company says that having created a global brand for its products, his organization is making additional investments abroad to "create infrastructure that will help us branch out in terms of product delivery and supply, which will then lead to increased sales."
The Chief Marketing Officer at a China-based consumer goods company says simply "there is a need to enter new markets and carve out a space in those markets from competitors. This won’t be easy, nor will it be cheap given the marketing and advertising costs to promote our products in these new markets, in addition to the cost of setting up retail stores."
Other respondents mentioned outsourcing as a primary reason to expand their reach, albeit while trying to avoid the ongoing trade war between the US and China. In that vein, those focused on domestic spending over international investment mentioned that high levels of volatility in foreign markets will keep them focused on local growth rather then ventures abroad, although these are clearly in the minority.
Notably, in this survey, Australia appeared the most reticent about investing internationally, with investment intentions still heavily weighted to domestic spend.
How would you describe your company’s predicted domestic and international investment spend over the next two years?
Historically, Australian companies have had mixed success when expanding internationally. In various sectors, ranging from brewing to banking, Australian companies have found it challenging to operate abroad. This prior experience guides current investment decisions. Australian companies tend to review overseas expansion thoroughly and with rigorous due diligence, before pressing the “go” button. When Australian investors are looking at opportunities abroad, they should consider success factors such as: a target business which is closely aligned to the existing core business and has been well-run with a strong management team; completion of thorough due diligence to reduce the risk of unpleasant surprises down the track; and the ability to extend head office controls and methodology to the foreign target business.
Baker McKenzie Insight - Ben McLaughlin, Sydney
How would you describe your company’s predicted domestic investment spend over the next two years?
How would you describe your company’s predicted international investment spend over the next two years?
In line with intentions to increase international spending, 88% of respondents are also showing interest in cross-border M&A. Globally, M&A has been on an uptrend in recent years, with various Asian buyer groups – led by Japan, China and increasingly India – contributing to deal volumes as they explore opportunities beyond their own borders. As Asian businesses continue to go global, respondents highlight several drivers for this deal making. Gaining market share (20%) would be the main reason behind cross-border M&A, as companies become more established in the markets where they already have a foothold.
Another 19% said accessing new markets would drive deal making, followed by 17% who mentioned acquiring new technology and expertise as they buy rather than build (via R&D) innovation to maintain a competitive edge.
However, a word of caution. In the recent Global Transaction Forecast report by Baker McKenzie and Oxford Economics, 2019 is predicted to be the peak of the deal making cycle in Asia Pacific, with the second half of the year seeing a drop off, and a more pronounced slowdown in 2020.
What would be your number one reason for making acquisitions?
Compared with the previous two years, how interested will your organization be in cross-border investments/listings/acquisitions in the next two years?
Where is your company likely to look for in Mergers and Acquisitions and other investment opportunities? Please select your top 3 choices.
Where is your company likely to look for Mergers and Acquisitions and other investment opportunities? Please select your top 3 choices. (Percentages according to respondent domicile geography)
Key Market: South East Asia
In terms of their preferred investment destinations, South East Asia stands apart as a regional acquisition target hotspot, with 69% of respondents saying their company will likely look for M&A and other investments opportunities in the sub-region.
Such is the enthusiasm for South East Asia that it even outshines sentiment toward investing in home markets: only 59% said they would be investing domestically in the next two years. This is not heavily weighted to a small number of jurisdictions, in every geography, business leaders are proving very interested in South East Asia.
Indeed, South East Asia is home to a number of economic, demographic and financial advantages. Growth within the patchwork of economies that make up the sub-region has been promising in recent years. A strong and growing middle class provides an educated and increasingly sophisticated workforce and expanding consumer base, while cultural differences between China and much of South East Asia are fewer than those in other prominent investment destinations like the US, UK and Europe. "Targets in South East Asia will guarantee suitable negotiations and a decent customer base. We will target smaller businesses here that will hold lower risk and greater opportunities for growth," says the Director of Finance at a Hong Kong-based financial institution.
Equally, respondents say that asset valuations tend to be more reasonable than those in advanced markets or China. “South East Asia will be our desired target region for investment. All other regions are either too expensive or volatile for our requirements,” says the Director of Business Strategy and Development at a Japanese consumer goods company. South Asia, notably India, also received a significant percentage of respondent interest at 39%, with many citing India as a prime destination given the country’s growth prospects and demographics. A little further down the list, advanced economies such as the US and Europe (excluding the UK) remain target destinations for buyers in most major Asian economies.
The UK, on the other hand, has very much fallen out of favour. With Brexit creating the greatest uncertainty in the UK since the Second World War, investors in China, India, Japan and Australia are turning away from the once global trading powerhouse in droves. From these sentiments, the key observation is that despite ambitions of global expansion, most respondents are now looking to invest primarily in neighbouring economies. This is true of respondents across the board, even those from executives based in Japan and Singapore which may be more familiar with the complexities of operating in markets on the other side of the world. South East Asia is again the natural winner in this situation.
The world is finally waking up to the vast potential of South East Asian markets given its significant demographic advantages over other regions. Trade and investment continue to grow at an unprecedented pace and the business environment is becoming increasingly competitive as transnational corporations deepen their foothold in a market which is expected to become the fourth largest economy in the world by 2030. The pace of change is accelerating and businesses and governments are realising the need to be more agile, innovative and resilient in the face of transformational changes. Historically paternalistic practices are giving way to greater openness and more creative approaches that place consumers at the heart of business strategy.
Baker McKenzie Insight - Munir Abdul Aziz, Kuala Lumpur
Historically, Japan has stood out in Asia as a leader in international investment, particularly in terms of cross-border M&A. This deal making has trended up over the past five years, with several high-profile and record-breaking deals coming to market as Japanese corporations become more ambitious in the markets and regions where they seek growth.
The results in our research are no less noteworthy. Japanese respondents clearly ranked highest in their international investment intentions, with a full 98% planning increases, including 92% saying their global investment spend would increase by at least 10% on current levels. Equally, 88% said they were far more interested in cross-border M&A in the future, compared to 57% for India, which was the second highest respondent segment. Sentiment was the complete reverse for domestic investment. Only 36% of Japanese respondents predict their investment at home will increase, and most of that by less than 10%. Another 20% actually expect their domestic investment spend to fall.
In terms of where Japanese executives will look for M&A and other investment opportunities, just 1% say they will look at the local market for these targets, the lowest percentage among all respondent groups in our research.
As many respondents have highlighted, the outbound trend is being driven by a number of concerning factors. Conditions in the home market are becoming more and more challenging, with fewer and fewer prospects for growth amid shifting fundamentals.
Aside from lacklustre economic growth, a spectre that has loomed over the country for the better part of two decades, Japan faces a demographic shift as its population ages and begins to decline. With a smaller and shrinking consumer base, Japanese corporations are being forced to search abroad not just for growth, but for long-term survival.
As such, Japanese corporations are using M&A to gain market share, according to 24% of Japanese respondents. They are also using cross-border acquisitions to add to existing technological advances to maintain a competitive edge as competitors from China increasingly challenge their market shares regionally and globally (24%), while acquiring international brands (14%) and intellectual property (12%).
And it is clear that Japan Inc. is also fully prepared to invest in infrastructure across target markets to ensure that these countries remain sustainable buyers of Japanese goods and services.
Statistics show the volume of M&A by Japanese companies has been increasing since 2011 on domestic, outbound and inbound fronts, although in terms of value, outbound M&A has definitely been the main contributor over the last decade. The current trade dispute between the US and China, uncertainties in Europe and the downturn of the Chinese economy may slow Japanese companies down a little in their M&A activities, but only temporarily, if at all. Japanese companies are generally very risk averse, particularly if the risks are likely to affect their reputation. Jurisdictions where corporate formalities or financial reporting are not taken seriously or where bribery or tax evasion is commonplace are not popular Japanese investment destinations.
Baker McKenzie Insight - Hideo Norikoshi, Tokyo
Shifting Geopolitical Influence
Asia Pacific major economies
Over the past two years, there has been a shift in perceptions regarding the impact and influence that various major economies will have in Asia Pacific. China's influence is expected to grow most significantly over the next five years, a position that was held by India in our previous survey. Another notable theme has been the 'US bounce back', with the US now expected to play a much greater role in economic affairs within the region in the years ahead, something that respondents were far more sceptical about two years ago.
China’s inexorable rise in influence in this region, at least in terms of respondent expectations, is notable given recent questions on the country’s sustainable economic growth, negative impact of the trade war and some unfavourable coverage around the Belt and Road Initiative (BRI).
Even so, 81% of respondents say China will have a far greater influence in the region over the next five years. This was a significant increase from the 21% who said the same in 2017, when most respondents thought India would see the greatest increase in influence.
Speaking to China’s strengths, the Director of Strategy and Corporate Development at a China-based manufacturer says that the country’s top place is due mostly to its status as a major manufacturing base. Equally, China’s place in the global supply chain hasn’t shifted dramatically enough to see its position challenged by competing economies.
Even outside China, respondents held China in a largely positive light. The Managing Director at a Japanese pharmaceutical company says, “There are few nations that don’t depend on China in some way or another for business.”
A respondent from Singapore follows these remarks by saying “almost every product that we use right now has something to do with [China], so the importance of China is paramount not just the Asia Pacific, but the entire world.”
It’s place in the global supply chain aside, China’s outbound influence is
also worth mentioning. Indeed, the past five years have seen Chinese investment abroad multiply rapidly, in part driven by BRI, its colossal infrastructure project to link Asia with Europe.
While the BRI has mostly included investment into emerging markets
along the initiative’s land and sea routes, few respondents in China and Hong Kong in particular can deny the impact it is having on their businesses and overall strategy. More than 80% of respondents in HK/China now see BRI as either hugely important or fundamental to their business.
At the other end of the scale, almost half of Indian respondents say BRI doesn’t even feature in their thinking. Most markets across Asia Pacific sit somewhere in the middle.
Chinese companies are still very active in making BRI investments. South East Asia remains a key region for BRI investments, with infrastructure and power investments leading the way, followed by manufacturing, financial services and e-commerce. BRI investment is expected to be active over the next 1-2 years, covering more jurisdictions and more industries. In the mid-term (3-5 years’ time), we may start to see Chinese companies exiting from some of their BRI investments.
Baker McKenzie Insight - Bee Chun Boo, Beijing
Compared with today, how much economic influence do you expect the following countries/regions will have in the Asia Pacific region in five years time?
How important is China's Belt and Road Initiative to your organization's strategy?
While India’s influence ranking has dropped behind China since our 2017 survey, the percentage of respondents who said the country would have far greater influence in Asia Pacific has actually risen. In our 2019 research, 57% said India’s influence would be far greater, compared to only 33% in 2017.
Equally, respondents are still positive on the country’s ability to maintain economic growth and development and ultimately become a more prominent investment destination, possibly for foreign investors seeking China alternatives. As the Director of Finance at an India-based pharmaceutical company says, “as the trade disputes persist with China, India is becoming more popular for investments, and with a greater skilled workforce, India will begin to compete with China for market presence.”
Adding to this, the Head of Finance at a Singapore-based pharmaceutical company says that competing with China may seem unrealistic, however, as India receives further investment and structural development, it will very quickly begin to punch above its weight class and become a globally competitive market.
There are stark contrasts in sentiment from our recent and past research regarding US influence in the region. In 2017, only 16% of respondents said the US would have greater influence in Asia Pacific, with 47% saying it would have less influence. Those numbers have flipped, replaced by overwhelming positive opinions – 68% who say the US will have greater influence, including 31% saying this influence will be far greater over the next five years – showing far more confidence towards the US continuing its traditional role as global superpower.
Unsurprisingly, much of the verbatim sentiment expressed during the
research of this report the US role in its era-defining economic rivalry China. Some respondents, particularly those in developed markets, note US economic strength and stability.
The CFO of a Singapore-based industrial company says "China's progress is slow at the moment, while the US has regained its economic strength, causing renewed confidence among economies around the world."
Following this point, the Head of Strategy at an Australia-based telecom company says the "US will have greater influence in Asia as there are countries that have declined partnerships with China and will look to the US for growth opportunities."
While other Western economies are expected to increase their influence in Asia Pacific, respondent sentiment does not paint a very promising picture for the United Kingdom. Indeed, out of all major historical and current economic powers in the region, the UK fares worst in terms of expectations of economic influence. Only, 27% anticipate this influence to be greater going forward and 21% think it will decrease.
Despite historical ties, Indian respondents are most pessimistic about the UK’s relevance. In terms of M&A intentions, the UK is also the least popular destination for deal making among Asia Pacific corporate buyers,
due in no small part to Brexit and the impact this will have on access to Europe.
As the trade disputes persist with China, India is becoming more popular for investments, and with a greater skilled workforce, India will begin to compete with China for market presence.
Director of Finance at an India-based pharmaceutical company
Focus on international spending and cross-border M&A
As the Age of Hypercomplexity unfolds, regulatory enforcement ramps up and economic alliances shift and buckle, investment is also set to continue apace. Indeed, as our findings show, many respondents are determined not to be side-tracked by complexity, and see international spending and cross-border M&A as a key solution to securing their futures and achieving growth. The question is: will it work?
For companies - like those in Japan - that are struggling with limited prospects in their home territories, international expansion is a must and cross border deals can help unlock opportunities in high-growth economies. For others, a well-executed acquisition can provide access to new markets, revenue streams and innovative technologies and IP, giving them an edge over industry rivals.
Yet while many respondents seem to subscribe to the idea that international expansion is the path to pursue - with large percentages of respondents reporting their intentions to increase this spend in the year ahead - many may not be considering the full spectrum of risks they will likely face. For instance, while most respondents are aware that compliance will be both a challenge and cost pressure, few acknowledge political risks or infrastructure issues as potential pain points for their businesses going forward. With various geopolitical events shaping and upending the status quo, are these respondents so confident in their own experience and expertise that these risks and others are not an issue?
Perhaps this is the case, but as history has shown, the road to growth via international acquisitions can be hugely rewarding, but is never easy. Those pursuing cross-border M&A without a fully formed strategy or consideration for the potential risks may not only compromise growth, but the very integrity and future of their businesses.
As part of best practice, those that do pursue these investments need a clear and dispassionate view of the landscape, a decent roadmap and proper guidance. This will help navigate the various layers of legal, political and economic complexity that exist at the global, regional and national levels in the territories where they currently operate, or wish to.
As Hypercomplexity is now the norm, businesses should always looking for partners that can simplify their world. Baker McKenzie is one such partner.
To assess the key challenges affecting Asian corporations and uncover which issues are keeping executive leadership and boards of directors up at night, we surveyed 600 respondents to capture the opinions of CEOs and other C-suite executives and director level managers of their respective organizations. Respondents were leaders of multinationals in the countries in question, or those headquartered in these countries. Survey respondents were split across key industries and Asia Pacific jurisdictions including: China, Hong Kong, Singapore, India, Australia, Japan, Malaysia.
Helping clients overcome the challenges of competing in the global economy
Partner, Hong Kong, China
Munir Abdul Aziz
Partner, Kuala Lumpur, Malaysia
Bee Chun Boo
Partner, Beijing, China
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Partner, Tokyo, Japan
Technology in Focus
In the next Age of Hypercomplexity report, we take a deep dive into the business and legal ramifications of rapid technological advancement, and how companies and regulators across the Asia Pacific region are responding.