The balance of world trade is shifting to the Far East and firms must take advantage, writes JOHN COLLINS

A WORKFORCE that is rapidly improving its skills, massive investments in research and education and emerging consumer markets mean that Irish businesses will ignore Asia at their peril.

Potential energy shortages, social and political unrest, geopolitical change and the state role in business are among the challenges highlighted in a recent report commissioned by HSBC on the rise of Asia and its implications for European business.

“There is a lot of interest in China in Ireland but there’s no massive flow of business yet,” says Alan Duffy, head of corporate banking with HSBC Ireland. “Ireland is missing a trick on opening up the market.”

According to Duffy, the report by The Futures Company, and which included interviews with six Irish firms, “validates [HSBC’s] perspective on the region”.

While some have characterised the increasing importance of the Chinese and Indian economies as the “emergence” of these countries, it is in fact simply the “re-emergence” of Asia as the dominant force in the global economy. It is easy to forget that from the 16th-18th centuries India and China were centres of world trade and economics.

The HSBC report also notes that the financial crisis of the last two years is “not really global at all” with China growing at 11.9 per cent in the first three months of this year and Indian economic growth expected to hit 8 per cent this year and next.

Demographic changes are going to see Europe’s importance decline further. UN forecasts suggest the world population will increase to eight billion by 2025 with the majority living in Asia and Africa; Europe will account for just 6.5 per cent of the population. The rise of Asia in some ways parallels Ireland’s economic turnaround which began in the 1980s in that it is being fuelled by an investment in education and skills.

The Times Higher Education Supplement list of the top 200 universities in 2009 includes six from China, four from Korea and two from India. China is producing 75,000 postgrads in engineering and computer science a year, while India produces 60,000.

The days when Asia provided a large, flexible labour pool that could mass produce goods at low cost is over. A European Commission report says that if current trends continue the US, Europe and Japan will have lost their scientific and technological supremacy by 2025 with China and India having caught up or possibly even out in front.

HSBC advises European firms to tap into this source of skills by developing relationships with academic institutes in the region and adopting recruitment policies to attract Asian graduates, but cautions that “restrictive EU immigration policies” may limit the ability to recruit directly from China and India. French aircraft manufacturer Airbus has formed a joint venture with China’s Aviation Industry Corp. By sharing technology with Chinese engineers it hopes to begin manufacturing A320 jets in northern China by 2016 at a much lower cost.

But Asia is not going to be content to have innovations from the West passed on and will increasingly innovate itself. The HSBC report highlights changes in the car industry such as Land Rover and Jaguar being owned by India’s Tata Group, while last year Chinese company BYD, backed by Warren Buffett, launched a four-door electric car at the Detroit auto show – an example of cutting-edge Chinese technology being launched in the West. Businesses will have to consider outsourcing “frugal innovation” to Asia, which is made possible by the region’s lower costs.

Renewable and alternative energy is one industry where Asia has stolen the lead. Conrad Burke, the Irish chief executive of Silicon Valley solar energy firm Innovalight, has seen his sector change completely in the last three years. German and Scandinavian firms dominated the production of solar panels but Burke says the Chinese now have 80 per cent of the market.

China has also developed coal “gasifiers” that turn coal dust into a gas that produces less waste. It has plans to develop wind power over the next 10 years equivalent to five times the power of the Three Gorges Dam – the largest electricity plant in the world.

The interest in alternative energy is a selfish one – the Asian demand for oil outstrips supply. Chinese oil demand increased 28 per cent last year and Saudi Arabia now ships more oil to China than to the US.

One of the challenges facing European businesses is the role of governments in business in Asia with the result, as the HSBC report notes, “that the competitive playing field is not necessarily level”.

India’s federal government owns 246 different enterprises and accounts for 8.3 per cent of GDP. The report notes that state-owned firms may be less likely to share knowledge with western firms – a theory borne out by the experiences of Irish engineering services firm LotusWorks. It spent three years and a considerable cash outlay before walking away from a joint venture with a former Chinese state firm, according to LotusWork director Conor Flanagan.

The upside of tighter state control is that Asia’s banks were relatively untouched by the financial crisis of 2008/09.

HSBC’s report concludes “the rebalancing of economic power towards Asia presents a more challenging, more competitive, more threatening business environment”. Irish firms serious about playing on the global stage will have to figure out how they can fit into that new world order.

CASE STUDY: PM GROUP

EXECUTIVES AT PM Group spent a year researching the Asian market before getting board approval in December 2006 to open a Singapore branch.

PM Group built its business by project managing the construction of plants for pharmaceutical and food companies in Ireland. These companies were expanding most rapidly in Asia so it made sense to “follow our clients” according to Ayre Tennant, director of development with PM Group.

An alliance was formed with MW Zander, a local firm with capability in building biopharma plants which needed PM Group’s process engineering skills. The partnership quickly delivered work in China and Singapore, but at the end of 2008 the Irish firm began to look at the Indian market.

Although MW had an office in India, PM Group had bigger ambitions and has just concluded the formation of a 50/50 joint venture with VA Architects. PM Group is involved in 15 projects in India, which Tennant says is experiencing a “biotech boom” as local firms look to move into the manufacturing of generic drugs. Tennant says PM Group now has 90 people working across Asia and balances the use of expats with local skills. While acknowledging the support of Enterprise Ireland he says it has been essential for the company to get its own staff on the ground to get a feel for the market. The Irish group has established its own board and executive team for its Asian operations even though Tennant visits every six weeks.

Within five years Tennant says PM Group expects to have a profitable Asian business employing about 200 staff.

“The expertise we have in Europe is being transferred, which gives us the differentiation,” says Tennant. “In 10 years’ time we won’t have the same unique selling point so you have to take advantage of it now.”