Pages Menu

Free trade agreements no guarantee of business success

Posted on Oct 19, 2015

All attention is on the China-Australia free trade agreement this week in the hope that the government accepts Labor’s amendments and the FTA is pushed through parliament. Last week, the focus was on the Trans-Pacific Partnership trade deal between Australia, Canada, US, Japan, Malaysia, Mexico, Peru, Brunei, Chile, New Zealand, Singapore and Vietnam. Despite years of protracted negotiations, the fact is the TPP may still not pass as each country needs to legislate in its favour.

No matter how well constructed or negotiated, these bilateral economic agreements and trade deals (and there have been a number of them) are no guarantee of success in doing business in Asia.

Cross-border business is far more about building trusted relationships, having a keen sense of your own value proposition, finding a niche addressable market for it internationally and devising investment strategies to ensure an equity participation in the longer term.

The fact that TPP tackles much more than trade in goods is a step in the right direction. It aims to liberalise government procurement and create a level playing field for investment and trade between the 12 participating countries. Investment considerations such as minimum standards regarding labour laws, intellectual property protection, environmental standards and competition laws, ambitious and challenging as they may seem, have been dealt with. The devil will always lie in the detail, however.

In 1996, US software company SAS Institute invested into the Indian market ahead of its competitors. They established a local subsidiary, relocated me, a senior executive from the SAS Australia operation at the time, to build a team on the ground. The ability to work with politicians and regulators, backed by strong local knowledge and deep, trusted relationships were at the core of business success for SAS in India.

The decision to invest in India saw SAS treble their investment in the first year, followed by a 10-fold investment after five years, and today the company’s Indian office houses the largest R & D centre outside the US.

The SAS example shows that long-term returns come from investment, and not trade alone.

In fact, Australian businesses will be better served with the understanding that there is no “export market”, there is only someone else’s domestic market.

Shipping home market Australian products to a vast Asian population without addressing the nuances of affordability, market accessibility and centuries old culturally prevalent preferences, for example as they relate to taste, is not the best route to sustained returns.

The trade play, as with the TPP, is only a small, perhaps starting leg of the long-term investment opportunity being presented by Asia’s growth.

Businesses need to transform themselves and maintain knowledge of international trade agreements to see how it affects their business.

More importantly, they need to invest in finding and executing the subtle nuances in strategy that will help them win against tough local competition across borders.

No trade agreement will shield against strategic mishaps such as executing an ill thought out strategy, being a late entrant in the market, making insufficient capital and resource investments, under-preparedness on the competitive landscape, misreading the price signals, culturally inappropriate engagement, picking the wrong business partner or hiring a CEO with little or no local connections.

The list goes on.

More focus must be invested on the opportunity that is passing us by each day because of under investment in Asia by Australian businesses. There is more at stake by not considering the outsized returns we are foregoing by not taking some risk. This means taking an equity position by making a direct investment and working (as other Asian business leaders do each day) with balancing the risks and volatilities that are part of the terrain in any economic value capture opportunity.

In 10 years’ time, this region will be responsible for half the world’s economic output. Boards of Australian companies must fully understand the consequences of not participating more directly in the region’s growth.

While this will play out in the next two decades, we are already seeing declining prosperity levels in Australia. The big question that every Australian business and political leader should ask now: how much longer can we afford to be complacent about the quality of life we have come to enjoy in this great country?

Many Australian companies are missing the boat by not truly engaging with Asia.

This is highlighted in PWC’s recent Passing us By report, which states only 9 per cent of Australian businesses are operating in Asia, with only 23 per cent having staff on the ground in-market.

For those large companies that did have an Asian strategy, the total contribution of it to their bottom line was only 12 per cent.

Trade deals can be bittersweet as transactions involved are complex and mix short-term export improvement in goods trade with long-term cost exposures across the economy.

Far better to capture real economic value in Asia by taking an equity position in collaboration with local businesses. The return on investment for those who adopt a 15-20 year lens will far outweigh any trade deal.

Rohini Kappadath is director of Cross Border Business at Pitcher Partners. This article first appeared in The Australian business opinion pages.