Asia: ripe for investment
While many Asian countries are described as emerging markets, countries like Thailand and Malaysia are already investment grade, while others, like Indonesia and the Philippines, are moving towards investment grade ratings. Improvements in credit ratings indicate greater levels of political stability and sustained economic growth, as well as conservative debt/GDP ratios. These developments highlight a region ripe for investment.
“Asia is a diverse region,” explains Piter de Jong, branch manager at ING’s Shanghai branch. “It is crucial for companies considering investing in the region to do their homework. While it’s correct that the region as a whole has performed better than much of the global economy since 2008 – and consequently Asia is a greater priority for European companies than in the past – each country has a different growth outlook.”
De Jong says that it is especially important for prospective investors to understand how the region’s largest economy – China – is changing. “In the past, growth was driven by investment and exports,” he notes. “While fixed investment is ongoing, export growth is slowing as the economy shifts towards a consumption focus. China is moving away from being the workshop of the world as labour costs rise and pollution rules become stricter.”
For many multinational companies, the huge business potential of Asia means it is their most important region. The ASEAN countries and Australia have a combined population of 600 million (compared to 500 million in Europe) while China and India each have over one billion people. Moreover, Asian economic growth is higher than in most developed markets, so the ongoing demand for goods, services and infrastructure is likely to be higher as GDP increases.
As a consequence, manufacturing opportunities are emerging in other Asian countries such as Vietnam and Bangladesh where labour costs are lower. However, for many European companies the sheer size of China means it is the principal target for investment. “Around 50% of Chinese citizens already live in cities but a further 20%, or 260 million people, will move to cities and become consumers – and Chinese consumers love European brands.”
Challenges to doing business
While many markets in Asia have become markedly more open in recent years, it is important to note that restrictions still exist. For example, in China local companies may still have legal monopolies in some products or services. Equally, as regulations are constantly changing transparency can be a problem: it can be difficult to understand what an international company is permitted to do.
A further consideration for European firms seeking opportunities in China, for example, is that success is by no means guaranteed. In almost every sector (with the possible exception of branded luxury and fashion goods), China has successful companies that can compete effectively with the world’s best. Moreover, unlike new entrants to China these companies understand the intricacies and preferences of the Chinese market.
Despite these challenges, there are plenty of European companies performing well in Asia. For example, in China, which is the world’s largest auto market, many European manufacturers (and their supply chain partners) now generate more revenue than they do in Europe. European companies have also proven successful in areas such as environmental technology and agricultural technology.
While the Chinese economy may be increasingly focusing on consumption, infrastructure remains a major investment opportunity for European companies. “While infrastructure investment in many Asian countries has accelerated dramatically in the past decade, the region’s rapid urbanisation means demand is still growing fast,” explains Erwin Maspolim, head of utilities and infrastructure finance, Asia at ING.
From an infrastructure investment perspective, Asia’s rating upgrades highlight a more attractive environment for power, water, waste management, port and other infrastructure development. Asia is also an attractive investment destination because many countries recognise that without infrastructure development, economic growth will be constrained. Consequently, laws and regulations have been issued to support investment.
“It is important to differentiate between countries in Asia. Each country necessarily has different regulations, ways of doing business, government structure and levels of economic development,” says Maspolim. “Many countries use public private partnerships (PPP), for example, but PPP specifics vary. For multinational infrastructure companies, Indonesia, the Philippines, Thailand and Australia are currently the most favoured investment destinations.”
After an initial period following the global financial crisis when project finance activity slowed in Asia, activity grew rapidly in 2012 and 2013. A number of European banks re-entered the market (having left during the crisis) helping to put downward pressure on pricing. However, it is important to note that while some banks may have turned away from Asia, infrastructure companies did not.
Export credit agencies (ECAs) from Europe, Japan and Korea continue to play an important role in supporting infrastructure project financing. ECAs provide a significant comfort to banks and their involvement makes a project easier to finance. It is therefore important for banks working on a transaction to have existing strong relationships with relevant ECAs.
Working with ING in Asia
European companies’ banking requirements in Asia vary significantly depending on their size, industry and stage of development in the region. The largest multinationals, which may have been active in the region for decades, will have established relationships with both international and domestic banks given their fundraising requirements and local supply chains.
For smaller firms beginning their journey in the region, the primary requirement is for information from a trusted source. ING has been active in Asia for many decades – it opened in China in 1886 – and has a footprint across 14 countries in the region (the most recent addition being Vietnam), with a significant presence in Hong Kong, Singapore and Shanghai where European companies most frequently base their operations. Its on-the-ground presence means it can offer detailed information that can benefit clients as they establish operations. Moreover, ING frequently sends its experts from Asia to Europe to brief companies considering expanding in Asia.
Once companies make the move to Asia it is clearly important to work with a local bank for local cash management, payments and collections. However, it is also essential to retain an international bank such as ING to ensure access to lending (domestic banks are unlikely to lend in the early stages of a bank relationship). Furthermore, ING has additional capabilities, such as foreign exchange (FX), interest rate or commodity hedging, corporate finance, and debt capital markets that local banks will be unable to offer. ING also provides M&A advisory: the bank has recently worked with a leading European company to acquire a number of beverage assets in China, for example, and was awarded Best M&A House of the Philippines by the Asset for the fourth consecutive year
ING is well positioned to help companies to access Asia’s infrastructure opportunities because it understands the dynamics of project financing. The bank’s knowledge means that it can proactively identify and discuss opportunities with clients. ING is also active in identifying potential acquisition targets for its infrastructure clients. With an experienced team in Singapore and Australia, ING serves the needs of clients across the region. However, ING carefully targets its resources at the countries where it can add value for its clients. ING also has strong relationships with ECAs and can engage its teams worldwide to structure deals involved ECAs from countries where equipment is sourced for Asian projects.
ING is committed to the markets where it operates. It has been involved in project finance in Indonesia since the early 1990s and, as a result, has witnessed a series of market cycles, as well as the Asian crisis in 1997/1998 and the global financial crisis. ING's commitment to the market has borne results during that time. For example, following the Asian crisis, there was a decade long hiatus in the financing of power projects in Indonesia. ING advised Cirebon Electric Power over four years as it developed a deal and successfully completed a transaction in 2010 (as well as lead-managing a project financing loan for the expansion of the Paiton power station in Indonesia).
The growth of Asia and its companies means that the flow of companies between Europe and Asia is no longer one way: an increasing number of Asian companies are now growing in Europe. In addition to working with European multinational clients accessing Asia’s markets – for products, services or infrastructure – ING also opens up opportunities for Asian clients in Europe. For example, some Chinese electronics manufacturers are rapidly developing global brands while there is increasing investment by Asian firms in European renewable power. ING can act as a bridge between Asia and Europe: the bank is ready to help Asian companies achieve their strategic goals in Europe and the rest of the world.