The Asian opportunity for Australian SMEs

| February 2, 2018

Numbering over 50,000 companies, Australia’s medium-sized enterprises are one of the most important, yet underappreciated, economic sectors in the nation.  Mid-sized firms employ almost 2.5 million people and, according to ABS figures, generated over $717.3 billion in 2016.  Above and beyond its importance to the domestic economy, mid-sized firms are increasingly extending their reach towards international markets

While ties to Britain, the USA and Europe remain strong, Asian economies represent the largest source of potential revenue, with growth in the region averaging 5% in recent years, despite a number of temporary setbacks and fluctuations.  While Australia’s population continues to grow, ambitious Australian mid-sized firms be looking to tap into Asia’ vast and fast-expanding middle class.

Despite the tremendous revenue potential the Asian market possesses, many Australian firms remain wary of venturing abroad and considerable cultural differences still remain.  Many Australian firms struggle to understand the Confucian aspect of Chinese corporate culture, for example, which requires the creation of long-term relationships with all partners throughout the value chain, leading to the establishment of what the Chinese term ‘Guanxi’.

Guanxi means “networks” or “connections” and comprises the web of personal relationships which offer support and foster trust and cooperation among parties doing business together. Organizations can minimize the risks, frustrations, and disappointments which some experience when doing business in China by creating the right ‘guanxi’.  Sometimes in Asia, as in other countries, it’s not what you know, but who you know matters.

While the creation of strong networks and personal connections is a fundamental part of successful trade in Asia in general, and China in particular, Australian mid-sized firms can struggle to achieve it alone.  Constrained by their modest size and limited resources, and perhaps hamstrung by their ‘foreignness’ if they lack employees abroad, they can fall short in their attempts to achieve the recognition and legitimacy they need to establish trade links in Asian countries.

In an effort to help Australian firms create trading relationships with their counterparts in Asia, the Australian government offers a range of support. The Australia-ASEAN Council, launched by Foreign Minister Julie Bishop in 2015, for example, generates opportunities for domestic businesses, education providers and research bodies to work with partners in South-East Asia.

A number of Free Trade Agreements negotiated in recent years have improved the access mid-sized firms enjoy to foreign markets.  The establishment of Austrade has also helped mid-sized business owners to understand and implement cross-border operations by offering user-friendly guidelines and information to help them navigate the maze of foreign trade.

The need to expand and extend foreign trade in Asia and beyond is a pressing national priority as well as offering commercial opportunities for particular sectors and firms.  Australia’s quarter century of uninterrupted growth has been driven in large part by the insatiable demand from fast growing Asian countries for our nation’s rich natural resources, from iron ores and concentrates to  coal and natural gas.

However as China uses its considerable economic clout to secure a wider range of mineral sources around the globe, and the spectre of climate change hastens the eclipse of fossil fuels, Australia must diversify its exports towards more sustainable, value added industries and boost the service sector as primary mineral exports decline.

Australia’s service sector has grown by up to 10% per annum in recent years, boosted by rapid expansion in the number of foreign students and tourists attracted to these shores.  However, while services play an increasingly important part in maintaining the nation’s balance of payments as mining exports decline,  Australia’s more advanced service providers in the realms of IT, health, finance and legal services still struggle to penetrate international markets in a similarly significant manner.

The Commonwealth has therefore invested in a range of measures to boost high value service exports and encourage Australian providers to satisfy the growing demand of Asian middle classes for Australian based education and personal and professional services.

Asia is expected to generate nearly two-thirds of global growth over the next decade, with China, India, Japan and Indonesia offering four of the largest five markets in the world in terms of purchasing power.

Australian MSEs are well placed to expand and flourish in such markets. The 2017 foreign policy white paper outlined the need for closer economic ties with our largest Asian neighbours and firms with an eye to the future will be making the most of the opportunities on offer in 2018.