5 November 2019

Is now the right time for S’pore companies to expand abroad?

As an island, you can drive the entire circumference of Singapore in a few hours and, arguably, it’s this smallness of Singapore as a market that explains why so many companies quickly seek expansion abroad.

Yet as one of the world’s most trade-open economies, Singapore businesses are feeling the effects of economic headwinds and increasing global protectionism more acutely than regional counterparts.

HSBC’s latest Navigator survey revealed that 65% of Singapore businesses expect their sales to grow in the next 12 months, considerably below their global and APAC counterparts, at 79% and 77% respectively.

So with all the recent bearish economic data and ongoing geopolitical headwinds, is now the right time for Singapore-based companies to seek international growth?

HSBC Navigator revealed changing sentiment towards existing trade partners, with Singapore’s businesses looking elsewhere to bridge the growth gap.

There are some key things to consider before expanding, and a general place to start is understanding where the growth is.

Fortunately, Singapore sits in one of the few regions in the world where there has consistently been 5% growth for the past decade, and we do not see that abating, particularly for major markets like Thailand, Vietnam and Indonesia.

For Thailand, the focus is on its flagship Eastern Economic Corridor, developing its three eastern provinces and the building of its electronics, automotive and food processing industries. Already, we’ve seen more than USD 2.6bn in investment applications for the bloc in 2019 alone. That’s a 107% increase from the same period last year.

Vietnam has been featured in the news mostly as a China diversification story. This ‘China + 1’ strategy pre-dates the recent trade tensions and the existing strengths in textiles and garments have been supplemented by growth in electronics manufacturing, thanks to Samsung and LG moving production there. Moving forward, we see Vietnam making a concerted push for high-tech and other higher-end manufacturing.

Indonesia offers scale and variety that is unique in ASEAN. With the Presidential elections behind us, business sentiment has improved. Obviously, Indonesia’s natural resources have always featured strongly with Singapore as the region’s commodities trading hub. Looking further afield, the government has allocated USD29bn for infrastructure spending across more than 200 projects and the rapid uptake of digital services across its 270 million young population explains why it is an E-Commerce platform battleground right now. We see opportunities around infrastructure, commodities, digital and consumer.

This is also the trade bloc with the most bullish outlook globally. The survey shows 81% of ASEAN firms projecting growth in the next year; clearly at odds with the sentiment of Singapore firms.

But the opportunities across Southeast Asia are not restricted to these markets or sectors. In fact, there are four macro themes that we think will be the drivers of opportunity.

They are:

  1. The ongoing supply chain diversification into SEA
  2. Increased urbanization, with Southeast Asia passing the inflection point where urban populations will outnumber the rural ones this year
  3. The rapid rise of the digital economy and its impact on consumers and consumer behaviour
  4. Changing climate patterns and a greater focus on sustainability, whether home grown or globally demanded

These macro trends are presenting opportunities across a myriad of sectors including services, manufacturing, CRE development, logistics, transport, and renewable energy.

Clearly, all this shows that the “what and the where” for Southeast Asian expansion is a moving feast, but so too is ‘how’ companies are entering these markets.

Conventional modes of entry, including joint ventures or using local sales agents, still apply but increasingly we’re also seeing technology and the region’s growing digital economy being used to enable foreign companies to enter into a market without too much physical presence.

More specifically, technology is allowing smaller companies to grow market share and scale without really having to grow their footprint. The growing number of digital platforms across Southeast Asia also provides an agile way to test a product or solution in a local market and to learn whether it is likely to have the traction to warrant further investment.

ASEAN’s demographics and size certainly present a glittering prize for Singapore-based companies but it’s never been a walk in the park and this is particularly the case in a slowing global economy.

Non-tariff barriers and other barriers like legal and cultural fragmentation, and skilled labour shortages continue to confound businesses. And new barriers and constraints are emerging too, such as cybersecurity, data and the threat of rising protectionism.

Needless to say, cross-border expansion of any kind requires careful consideration.

So what does this mean for an individual company?

Regardless of your strategy, international expansion requires well-considered risk management strategies. These include:

  • Connecting with the right people and network so that you get some real insight into how to do business in the markets you’re looking to enter.
  • Having a clear understanding of your costs and exposure to currency fluctuations.
  • Forging closer relationships along the supply chain, both buyers and suppliers, to understand their commercial drivers and cash flow positions.
  • Leveraging existing trade pacts. For example, accumulation measures in the Singapore/European FTA.
  • Optimising working capital and explore receivable financing as an alternative risk and liquidity management tool. It provides earlier access to funds up to an agreed percentage of the invoice value, while also protecting against buyer default or insolvency.

There is much to consider when entering a new country. Cycles come and go, so the key is to know yourself and your business and not get too caught up in some of the prevailing macro-economic headwinds or trends. While international expansion is exciting, it can be daunting, so perhaps the best advice is to ask for some.

A contribution piece by Alan Turner, Head of Commercial Banking, HSBC Singapore. A version of this piece was first published in The Business Times on 5th November 2019.