Australia’s Opportunity in Emerging Asia

By Ari Charney • October 9, 2012 • Pacific Digest

With its abundance of natural resources and proximity to key emerging markets in Asia, Australia is a top destination for foreign direct investment (FDI). In fact, according to data compiled by the United Nations Conference on Trade and Development, the land down under currently ranks fourth for total FDI, with USD41.3 billion of inflows in 2011.

Beyond that, it is one of the few major developed-world economies where FDI inflows exceed outflows. Last year, for example, Australia’s total outflows were just under USD20 billion, or less than half the reported inflows.

According to the Organisation for Economic Co-operation and Development (OECD), Australia’s inflows were a substantial 4.4 percent of gross domestic product (GDP) in 2011, which was almost two-and-a-half times the average among the 34 member nations of the OECD. By contrast, its outflows constituted just 1.1 percent of GDP, which was less than half the average among its OECD peers.

While that’s an enviable situation for a country’s internal growth and development, it also means that Australia has yet to fully avail itself of nearby opportunities among Asia’s emerging markets.

Before proceeding further, it should be noted that the calculation for FDI does not include all inflows of foreign capital into a country. Rather, the figure is limited to those inflows that result in a foreign firm holding at least 10 percent voting power in a domestic enterprise or expanding an existing business in which it already has a significant ownership stake.

Since the downturn, Australia’s outflows to key trading partners in Asia are still well below their peak. Its direct investment in nearby Indonesia plunged 52.5 percent in 2009, and though it ramped back up to USD340.3 million in 2010, that’s still roughly USD50 million shy of the peak in 2008. For the sake of context, that amount accounts for just 2.5 percent of Indonesia’s total inflows for that year.

Meanwhile, other Asian countries that are transforming themselves into low-cost manufacturing centers, such as Cambodia, Vietnam and Bangladesh, have received scant attention from Australia. There were no reported outflows toward Cambodia and Bangladesh in 2010, while outflows to Vietnam were just USD35.8 million. Direct investment in Malaysia, however, is at USD266.9 million, just 9 percent below the high in 2009, though that level still only constituted 2.9 percent of Malaysia’s total inflows.

Overall, Australian companies’ investments overseas have yet to recover to the heady days of 2008, when outflows peaked at USD33.6 billion.

Given the recent downturn in the global commodities market, it’s unlikely that this situation will change in the near term since so much of the Australian economy is heavily dependent upon its resources sector. But over the long term, it’s in the nation’s best interest to diversify its economy beyond merely being one of the world’s key suppliers of raw materials.

Should China enter into a protracted slowdown, the resulting regional vacuum could afford Australian firms the opportunity to expand their investments among their growing neighbors in Southeast Asia. In 2011, China’s outflows dipped 5.4 percent to USD65.1 billion. Additionally, European firms have slowed their pace of investments or withdrawn from the region due to the sovereign-debt crisis.

At the same time, Japan has increased its role as a significant investor in the region, particularly in some of the aforementioned Southeast Asian countries that offer low-cost manufacturing. In 2010, Japan’s outflows to Malaysia jumped 67.1 percent from the prior year to USD1 billion. And outflows to Thailand rose 38.8 percent to USD2.3 billion. In 2011, Japan’s merger and acquisition activity in the region climbed 42 percent from the prior year and is on track to sustain that torrid pace.

As far as outflows to Australia are concerned, Japan has hardly been a slouch there either, with USD52.3 billion in direct investment in 2011. While Australia has understandably been focused on China the past few years, the Middle Kingdom’s direct investment in Australia is still dwarfed by Japan’s stake.

And now, Japanese companies are anxious to extend that ownership bond toward Asia’s emerging markets. Indeed, some Japanese management teams believe Australian firms would make natural partners in establishing an enduring presence in emerging Asia. The question is whether Australian firms possess the strategic vision as well as the wherewithal to explore such joint ventures. Should they do so, then the Australian growth story could eventually become about more than just resources.

The Roundup

For the latest information on our Portfolio Holdings, please see the forthcoming issue of Australian Edge, which should be posted to the website on the evening of Fri., Oct. 12.

Following are links to our discussion and analysis of the most recently announced financial and operating results for Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

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