ANALYSIS: The Asia opportunity is knocking on Brisbane’s door
By Dennis Lin, National Leader International Business – China, BDO Brisbane
Australia is traditionally a net importer of capital. To that end, China continues to gain the majority of attention when discussions take place regarding Asian investment into Australian businesses.
While China is deservedly a top priority, it is worth noting there are other countries in the region exhibiting similar trends in rising consumer demands and also the ability to invest. Countries such as Indonesia and the Philippines are such examples, where they also have a growing middle-class market, each with unique demands that are not always satisfied by their respective domestic supplies. Like the flying geese formation, as China moves into a services economy, the other forms of economy are likely to be picked up by neighbouring economies as they experience the next phases of growth.
For Australia, this represents a significant opportunity. Our products and services have strong brand integrity and value in these markets, and are often associated with quality and safety. These are some of the many reasons that Australian businesses remain attractive to Asian investors.
However, it remains critical for business owners to understand all the other criteria they'll be judged against when their investment potential is under review. The bottom line of any transaction is the ability to turn a concept and opportunity into reality to the mutual sustainable benefit of parties concerned.
“Business owners need to be cognisant of the current investment and consumables market and how it is shared between various countries across the Asia-Pacific region.”
China's dominance isn't the only story
The food and agriculture sector has been benefiting from China due to the high demand for food products by a rising middle class and increase in consumption, particularly in higher-protein and health wholefoods. While it is a trend so often associated with China, the overall sentiment is equally applicable to a range of other countries as well, particularly in South East Asian nations such as Indonesia, Vietnam and Malaysia.
When a business owner is looking for strategic capital to help expand their business, China will continue to remain an important partner of Queensland businesses, but there are other opportunities in Asia that should remain part of the equation.
The positive characteristics in our market that make our products attractive to Chinese investors also apply to investors and consumers from other markets in the region. Throughout Asia, Australian businesses and their products are perceived as clean, green and of a high quality. While the finer details of doing business with each culture will require some attention, the products and services themselves will still hold the same appeal.
What does a successful partnership look like?
There are examples of successful investment partnerships between Asian and Queensland businesses. Take Buderim Ginger as an example, it is an iconic Queensland listed company that sells ginger-based food products, and has been operating for more than 75 years. It had been losing market share as demand for traditional products decreased. During the past several years, it expanded its product to include macadamia and also began a rejuvenated ginger product line.
Buderim Ginger successfully negotiated about $20 million investment from one of the largest snack food companies in China. Not only does this help the business achieve financial objectives, the relationship opens up access to more than 450,000 retail outlets in China.
Consequently, the business now has capital, deep understanding of the new markets and relationships to realise its potential. This is, in many cases, superior to investment by a financial investor, whether from Australia or overseas.
That link back into China is arguably the most attractive feature of these relationships for Queensland businesses, purely due to the scale of the market to which they grant access.
To put it in perspective, Coles has about 750 stores, so businesses that only sell domestically have a smaller threshold for expansion than those that find these links to bigger markets. Along with the link back to their home market, the investor can also offer essential information and guidance that can help Australian businesses develop in these markets, instead of leaving them to fend for themselves.
“China is a large economy with different idiosyncrasies across regions, and having a strategic partner whose interests are aligned is critical to the success.”
What is motivating the current demand?
Demand for new products - and Australian ones specifically - is born out of a range of motivations. While food safety and security is important, some of the motivation also stems from a desire for more variety in terms of diet and the aspiration for a healthier lifestyle.
Chinese people have a particular diet, but along with a rising middle class and new generation, palates are also changing. This trend means that large traditional food producers in China are also having to react to a changing market, subsequently increasing their appetite for foreign investment deals. When structured correctly, these investment arrangements can be win-win scenarios, with both sides having something to gain.
Business leaders need to be aware of the value that lies in building relationships with prospective investment partners. While the cultural specifics will differ between each unique Asian country, the practice of relationship building before settling on any deals is relatively consistent across the region.
Local knowledge, understanding of business and social customs will shape the success of these investment discussions. The differences in business custom and cultures should not make people scared or hesitant. It is a condition to keep in mind and a motivation to take care and do appropriate research before starting out.
How to be attractive to investors
Businesses have to put in a lot of work to be investor ready – it is not a passive process they can sit and wait for. Taking a proactive approach while understanding there's a significant relationship-building process is important. Expecting a quick sale and trying to rush a transaction along could upset interested investors and damage reputation for all concerned.
There is a perception that Chinese organisations will likely be the highest bidder. That is increasingly not the case, and experiences would indicate Asia as a whole is becoming a strong source of strategic capital. Businesses should not be judging a deal solely based on price, as there are many other factors that will influence a successful transaction. Often, these qualitative factors require work and diligence done by the vendors together with the proposed investors.
Scalability is the key
While food production businesses receive much attention, those in other industries can embody the traits that foreign investors seek as well. Other industries growing in the region include education, tourism and healthcare. There have also been several recent transactions in the childcare services sector.
The financial aspects of those transactions are only part of the picture. For the investors, an alliance provides them with an opportunity to understand and be exposed to the business models, which can then be subsequently translated for the Asian market.
One of the most attractive things about childcare services from an investment perspective is that the model is scalable. True scalability allows for expansion and revenue growth while minimising increases in operational costs. A prospective investor can potentially take what an aggregated childcare services provider has achieved and adapt the model for use in other, much larger markets. Large-scale childcare services away from residence is a relatively new development in Asian markets, which makes the knowledge transfer particularly interesting.
Scalability is a benefit for businesses in two ways:
- It marks them as a worthy avenue for investment by showing how they intend to grow and scale.
- It can lead to expansion into other markets, as there's a defined method for how that original business can be replicated and rolled out in new locations.
Outside of investments based around knowledge transfer, Australia's status as a AAA-rating country marks it as a safe place to put money to work. Industries where investments are directed by these motivations include property and infrastructure.
Another key attribute that investors look for is sustainability. A business has to be able to prove that its historical and present performance indicates an ongoing trend, one that will continue and grow further in the coming months and years.
Get it right onshore before heading offshore
Teasing out these elements of a business and its investment potential takes time, which is why the relationship-building phase of the initial discussions is so important. Gaining a greater understanding of an organisation's potential here - as well as an investor's motives - provides important context for the future.
Expanding overseas is a complex exercise – unfamiliar cultures, business landscapes, taxation structures and regulatory regimes can present daunting obstacles. Having an experienced team who can navigate you through this new environment is vital.
Attracting international investment to Brisbane is an important part of the River City’s New World City status and our businesses are among some of the most attractive in the country. With the right strategy, a proactive mindset and an open mind about what lies outside of China, the opportunities available for Brisbane businesses in the Asia Pacific should not be underestimated – or missed.
More from the May edition of The Brisbane Report