Before Trump’s Trade War, the Ambitions of Asia’s Middle-Market Firms Outpaced Global Peers

The EY Growth Barometer 2018 online survey was conducted in the first quarter of 2018, so Trump’s tariff wars, which started in earnest in May, was not captured in the respondents’ reckoning.

But for what it’s worth, according to the new report by EY, middle-market companies in Hong Kong and Singapore, along with those in the rest of the world, “are planning for higher revenues, creating more full-time jobs and racing to embrace disruptive technologies like AI.”

Revenue Growth Projections, Mid-Market Firms 

The accounting firm commissioned Euromoney Institutional Investor Thought Leadership to survey 2,766 C-suite executives in 21 markets who work in companies with annual revenues of US$1 million to US$3 billion. The field work was done from January 15 to March 1, 2018 – meaning that CFOs forecasting and planning should be cautious about using the results given what’s been happening in the world since.

As of the first quarter of 2018, though, “four in 10 companies in China, Southeast Asia and Australia, as well as 39% of Singapore companies, are targeting double-digit growth, significantly outpacing the global average growth rate of 6%,” says EY. In Hong Kong, 31% of respondents were anticipating more than 10% revenue growth.  

The attendant sunny outlook with regard to revenue growth, business expansion and hiring can fade away if the US, China, Europe and other trading partners cannot find a way out of the current tit-for-tat tariff war 

Too sunny outlook?

“We are seeing a rare synchronization of growth across all major global economies that is boosting executive confidence, particularly led by the Asia-Pacific region,” says Annette Kimmitt, EY Global Growth Markets Leader. “For the first time, middle-market company leaders are getting ahead of change and shaping their businesses through investment, expansion and prioritization to ride the wave of opportunity.”

The International Monetary Fund is keeping its forecast for global growth at 3.9% in 2018 and 2019, but warned in July that “the rate of expansion appears to have peaked in some major economies and growth has become less synchronized.”

The recently announced and anticipated tariffs by the US and retaliatory measures by its trading partners have increased the likelihood of escalating and sustainable trade actions that could “derail the recovery and depress medium-growth prospects,” it said.

Reversal on AI

'The survey’s other findings are more long term, however, and may not be affected too much by the riskier medium-term economic outlook.

“Intelligent automation and machine learning have moved center stage as vital enablers to ambitious middle-market growth,” says EY. The survey found that Singapore has the third-highest adoption rate of artificial intelligence at 9%, not far from China and the Netherlands, which tied in first place at 10% each.

Adoption of Artificial Intelligence 

Hong Kong is further behind, with only 6% of firms saying they are already adopting AI for some of their business processes. But that’s a double the 3% who said the same in 2017, and 80% now say they would be adopting AI in the next two years – from 78% in 2017 who said they would never do so.

Hong Kong’s about-face mirrors what’s happening globally. “Last year 74% of global CEOs said they would never adopt robotic process automation (RPA),” notes EY. “This year 73% say they are already adopting or planning to adopt intelligent automation and machine learning (AI) in the near term (two years).”

The new approach, it says, is driven by the “ongoing digitization of everything, the leap-frogging effect of China and India – economies not shackled by legacy business models and infrastructure – and the global need for diverse talent with strong digital skills.”

Adjusting to seismic shifts

“Middle-market companies across the world are re-focusing their strategies to adjust to these seismic shifts and to restructure their organizations to better fit a new paradigm,” EY continues. “This includes exploring how AI can be leveraged to increase organizational agility, speed up decision-making, and eliminate hierarchical models that no longer fit the needs of the fourth industrial revolution.”

Despite readily embracing AI, however, the Singapore market is not a leader in the mature application of new technologies. “Many businesses still identify technologies with the traditional roles of improving process efficiencies (29%) and financial data (25%), before the more innovative roles of improving customer experience and creating new business models,” EY reports.

It’s much the same in Hong Kong, where 37% regard technology as the prime factor for improving productivity, while a far lower 14% plan to use technology to innovate on new business models.

Challenges to growth

But the sunny expectations could easily get cloudy. In Hong Kong, 56% of middle-market companies pointed to slow/flat global growth as their biggest external threat, a reflection of how important global trade is to the city’s open economy.

In Singapore, another open economy, the proportion of executives that consider slow/flat global growth as the biggest external risk is 41%. Globally, however, only 25% of all respondents see slow/flat global growth as the key external risk.

That may be a reflection of the optimism left over from the global economy’s outstanding performance in 2017, when the economic engines of the major nations were firing in unison.

That optimism, and the attendant sunny outlook this survey finds with regards to revenue growth, business expansion and hiring, can fade away if the US, China, Europe and other trading partners cannot find a way out of the current tit-for-tat tariff war in global trade.

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