‘Opening doors to Asia’

Trade and investment survey

IBEC Strategy, Trade, EU and International Affairs

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IBECAsia Trade Report 2006

A Report by IBEC to the High Level Group Established by Government to Oversee the Implementation of the Asia Strategy

Acknowledgements

Sincere thanks is due to the companies who completed the survey questionnaire and participated in the interviews, without their contributions this report could not have been completed. The detailed base data on Ireland’s merchandise trade provided by Frank Galvin and his colleagues in the CSO and the data on services exports provided by John Fitzpatrick, Stephen Treacy and their colleagues in the CSO were also extremely valuable in helping to understand the development of Ireland’s exports to the Asia region.

The members of the Project Steering Committee, Anne Webster and Gerry Wrynn in the Department of Enterprise, Trade and Employment and Enda McDonnell and Niamh MacDonagh of Enterprise Ireland were very helpful both in designing the survey questionnaire and making constructive comments at the final draft stage of the report.

We also would like to express our thanks to our colleagues in IBEC, Tony Donohoe who gave important advice in the design of the questionnaire, carried out a number of survey interviews and provided useful comments on final draft and Brendan Butler who provided valuable comments on the Key Findings and Recommendations.

Finally, we would like to express special thanks to our IBEC colleague Marie Larby, whose valuable help in the production of the report and indeed endless patience in the process is greatly appreciated.

The sponsorship and support of the Department of Enterprise, Trade and Employment and EnterpriseIreland in carrying out this survey report is acknowledged.

We would also like to acknowledge the University of Texas Libraries for permission to use their map of Asia on the front page.

Any errors or omissions remain the sole responsibility of the authors.

Pat Ivory, Director of Trade Affairs, IBEC

Geraldine Anderson, Senior Research Executive, IBEC

Table of contents

EXECUTIVE SUMMARY ANDKEY FINDINGS...... 1

INTRODUCTION...... 5

CHAPTER 1: IRISH TRADE WITH ASIA......

SECTION 1: MERCHANDISE EXPORTS

Data source and methodology......

The value and composition of Irish Merchandise exports to Asia...... 8

Country destination of Irish exports to Asia......

China (including Hong Kong) and Japan......

Other “priority country” Asian markets......

Irish exports to other Asian countries......

Irish Export of ICT products and other Machinery......

Irish Export of Chemicals and related products (pharmaceuticals)......

Irish Export of Food, Live Animals and Beverages......

Irish Export of Miscellaneous manufactured articles including medical devices......

SECTION 2: SERVICES EXPORTS

Education and e-learning......

CHAPTER 2: SURVEY FINDINGS...... 21

Survey methodology

Profile of participants

Methods of export to Asia

Investment in Asia

Return on investment

Direct investment in Asia in next five years

Future Prospects for Asian Markets

Impact of experience of Asian market

Strategy for expanding/establishing business in Asia

State and other supports......

CHAPTER 3: BARRIERS TO TRADE WITH ASIA

SECTION 1: BARRIERS BY COUNTRY

China

Japan

India

Malaysia

South Korea

Singapore

Vietnam

Indonesia

Hong Kong

SECTION 2: INDIVIDUAL BARRIERS TO TRADE

Bureaucracy/Customs delays

Working visa restrictions

Different technical regulations

Marketing Costs...... 53

Lack of market intelligence...... 54

Language and Cultural Differences

Business Risk

Local Preference for Local Goods

Transportation Costs

Requirement to have a local partner

No local partner in desired location

Lack of intellectual property protection

CHAPTER 4: CONCLUSIONS AND RECOMMENDATIONS...... 62

APPENDICES...... 65

IBECAsia Trade Report 2006

EXECUTIVE SUMMARY AND KEY FINDINGS

Asia market overview:

  • Asia offers enormous potential for trade, with 3.7 billion inhabitants, more than half the world’s population, and combined region gross domestic product (GDP) totalling to over €7,900 billion.
  • Real GDP growth rates in Asia are very high from an international perspective and generally well above European levels. Growth is particularly impressive in China, India, Vietnam, Hong Kong and Singapore e.g. +7-10%.
  • A further welcome development is that the Japanese economy, which is Ireland’s major trading partner in Asia, is showing significant signs of recovery with real GDP growth of around 2.5% in 2004/2005 and the IMF forecasting GDP growth of 2.7% for 2006.
  • Irish exports of goods and services to Asia are now valued at around €8.5 billion per annum. A very positive aspect of Ireland’s recent trade is the growth in services exports to the region to over €2 billionin 2004 and these are growing year on year, (provisional CSO figures estimate services exports in 2005 of over €3 billion). Services exports are now an important addition to our merchandise trade exports of €6.5 billion.

Exports of merchandise goods to Asia

  • The average annual value of Irish merchandise goods exports to Asia during the three year period 2003 – 2005 was €6.54 billion, this represents a decline of 13.8% on the 2000-2002 level of €7.58 billion. However, recently published CSO figures show Irish merchandise goods exports to Asia up 1% in the January-July period of 2006, following on from growth of over 2% in 2005.
  • The value of Irish exports fell in most key Irish product categories i.e. ICT and software, Pharmaceuticals and Food and Drink for the 2003-2005 period. One notable exception where exports grew by 23% was “miscellaneous manufactured articles”, which includes exports of medical devices and instruments, and “recorded media”.
  • The “priority countries” listed by the Government to be the primary focus of the Asia strategy up to 2009 accounted for 88.3% of the value of average annual exports in the 2003 – 2005 period. Both the size of export values and the potential for growth in a number of other Asian markets suggest that they warrant some attention also e.g. Taiwan and Thailand.
  • Ireland’s principal Asian trading partners in the period 2003 – 2005 were Japan (35%), China and the Hong Kong special administrative region of China (22% - 11% each), Singapore (12%), and Malaysia (8%) and South Korea (8%).
  • Export growth during the period 2003 – 2005, when compared to the previous three years, in markets such as China (+104.1%), Hong Kong (SAR) (+18.6%), and Singapore (+25.6%) was more than offset by declines in other key markets such as Japan (-24.8%), Korea (-31.1%) and Malaysia (-40.1%). The recovery in the Japanese economy mentioned above should help to reverse this trend.
    Exports of services to Asia
  • Statistical data in relation to the export of Services to Asia is more limited than that for merchandise goods, and therefore an analysis of trends in export over a six year period is not yet possible. However, the CSO publication of May 2006 on Services Exports (and Imports) that provides detailed data for 2003 and 2004 is a very welcome development.
  • In 2004 the value of services exports to Asia was €2.2 billion, which was an increase of 35.9% on the previous year. This is a very positive addition to Ireland’s exports of merchandise goods to the region. (Provisional estimates from the CSO indicate that services exports to Asiaincreased to over €3 billion in 2005).
  • The major areas for export of services to Asia include Computer Services (29.9%), Financial Services (10.7%), Insurance (6.3%) and Tourism and Travel (2.9%). It is encouraging to see that with the exception of insurance all of these areas recorded significant levels of growth when 2004 is compared to the previous year.
  • The most significant Asia markets for services are Japan (23.8%), China (3.9%) and Hong Kong (SAR) (4.4%), Singapore (4.3%) and India (2.9%). (CSO figures 2003). Korea is also a substantial market for services exports but here the CSO has to suppress the actual figures for confidentiality reasons. Outside the priority country list identified in the Asia Strategy document, Taiwan (3.8%) is the most significant market for Irish services exports. Again it is encouraging to note that services exports in many of the key Asia markets were up substantially in 2004, including to Japan, China, Hong Kong, and Taiwan. (It is not possible to make a comment in relation to Korea for confidentiality reasons outlined above.)

General survey findings

  • The most popular method used by Irish companies to export to Asia is Direct Sales (45%); other popular methods are independent sales agents (29%), indigenous distributors (27%) and in-country branch offices (23%). Internet sales, franchises and licensing systems accounted for 5% or less of sales by Irish companies.
  • Companies already exporting to Asia hold quite a positive view of future prospects for exports; over half are encouraged by their experience to expand sales to elsewhere in the region. This is supported by the high GDP growth being recorded in Asia and in particular the recent economic recovery in Japan.
  • A substantial majority of companies expect to increase sales in the Asian markets they are currently exporting to and to establish sales in other markets in the region. Few companies expect exports to decrease to any Asian country. Japan, China, South Korea, Singapore, Malaysia and Taiwan were the markets were most companies expect exports to increase. While China, India, Malaysia, Vietnam and the Philippines were viewed as the most popular markets where companies, who are not currently exporting, will establish sales in the near future.
  • Few companies (less than 5%) who currently do not export to Asia at all, have plans to establish exports to the region in the near future. This suggests that exporting to Asia may remain focused on a limited number of companies in the near future.
    Education
  • The government has set a target of trebling the number of incoming third level students from “priority Asian countries” between 2004 and 2009. The promotion of Ireland as a destination for Asian students is also established as an important issue in implementing the recommendations of the 2004 report on the Internationalisation ofIrish Education Services.
  • There are basically two components / sub-sectors of the international market for Irish Education Services, Irish third level institutions and English as a foreign language (EFL) schools. In addition to the growing number of Asian students attending Irish universities, Ireland has secured an important element of EFL school business with 200,000 people coming to Ireland in 2003 to learn English and the sector is estimated to contribute €300m to the Irish economy annually.
  • Survey respondents expressed serious concerns in relation to (i) the increasing length of time being taken in processing visa, communications with visa and immigration administration, and (ii) inconsistent procedures and high refusal rates for applications in Ireland. In particular, these factors have contributed to the slowdown in business growth in the EFLSchool sector and the loss of students to competitor schools in the UK.
    Investment in Asia
  • In terms of investment decisions the report mainly reflects the views of Irish companies as investment decisions on Asia in the case of foreign multinationals are made at the parent company headquarters rather than by management in Ireland.
  • The majority of companies investing in Asia expect a return on investment in five years or less (56%) with little variation across different sectors. Sixty percent of companies exporting to Asia expect direct investment to increase over the next five years. Among those Irish companies who made major direct investments in Asia, wholly-owned production facilities or wholly-owned subsidiaries appear to be more popular than joint ventures.

State supports

  • Two-thirds or more companies exporting to Asia felt that general market intelligence, business introductions, trade leads and trade fairs were important supports provided by Government and State agencies.
    Over half of the companies exporting to Asia felt that Trade Missions and the support provided by Diplomatic and State Agency offices were important. These supports were also relatively more important to companies exporting to Asia than to companies exporting generally.
    One third or fewer companies viewed general agreements on trade or memoranda of understanding as important forms of support.
    Barriers to trade with Asia
  • The Asian markets where companies felt they faced the most significant barriers to trade are China and India. Barriers were lower but still present in the more developed markets in the region, such as Japan, Malaysia, South Korea and Singapore. Different barriers to trade were experienced in different Asian markets.
  • The lack of intellectual property protection (IPR) continues to be viewed as a significant barrier to trade in Chinaand also, to a lesser extent,in some other Asian markets such as India and South Korea.
    In most of the more developed markets in the region IPR was not viewed as significant problem. Interviews also highlighted that even in markets where lack of IPR was generally identified as a problem the risk reduced substantially depending on the type of product being sold and the client in the market. For example if a company was selling institutional type software to large government or private organizations e.g. banks, insurance or telecom companies, who had themselves strong IPR policies then the risk was effectively eliminated.
    On the other hand in some Asian markets even simple things such as company business cards could be subject to IPR abuse, with one company in the interview process recalling the experience of visiting a major client only to find out that general agents in the market had counterfeited business cards and were passing themselves off as company employees.
  • Bureaucracy and customs delays were viewed as significant barriers in China,India, South Korea, Malaysia, Thailand and Indonesia. Even in some more developed markets in the region such as Singapore and Japan, companies expressed concerns in relation to bureaucracy and customs delays.
  • Lack of market intelligence in effectively all Asian markets is seen by companies as a barrier to trade. Additionally during the interview stage of the study, market intelligence was seen as one of the keys to succeeding in business in the region.
  • Language differences and to a lesser extent cultural differences are also viewed by companies as barriers to trade across the Asian region. A number of companies interviewed cited difficulties in grasping the subtleties of the various markets without the benefit of speaking the local language.
  • Marketing costs associated with doing business in Asian countries which are geographically far away and culturally different are seen as significant challenges by Irish companies, but very important given the preference for local goods in a number of key markets. Transportation costs are also seen as a challenge by many companies exporting to Asia.
  • Different technical regulations are viewed as significant barriers to trade in China, Japan, India, South Korea and a number of other Asian markets. This issue was also raised as a concern during the interview process, in both the medical devices and computer software sectors. It is important that companies receive adequate advance notice of changes in regulations and that different technical regulations do not simply replace tariff barriers that have been reduced.
  • Difficulties in obtaining working visas can also create problems in trading in Asian countries from time to time, e.g. Vietnam, Indonesia, China, Taiwan, and India.
  • Business risk, or perception of risk, was seen as a significant barrier to trade in the less developed markets of the region e.g. China, South Korea, and India. It was not seen as an issue in developed markets like Hong Kong, Japan etc.
  • The requirement to have a local partner is viewed as a barrier to trade by companies in exporting to China, South Korea, Japan, Thailand and India. In addition, the inability to find a suitable local partner can also present difficulties. On the other hand, companies who manage to link up with good local partners may find it a substantial asset in developing business.

INTRODUCTION

From the point of view of a small trading country like Ireland, the potential of the vast Asia market is enormous. Asia covers a land mass of some 18 million square kilometers, with around 3.7 billion inhabitants or more than half the world’s population (6.5 billion). Over 1.3 billion people live in China and another 1.1 billion people live in India. The combined gross domestic product (GDP) of the region is over €7,900 billion, with Japan accounting for €3,674 billion or nearly half of Asia GDP and China accounting for €1,788 billion or nearly one quarter of Asia GDP. The level of economic development of the different countries within Asia varies substantially. The group with the highest GDP per capita includesJapan, Singapore and Hong Kong, followed by South Korea and Taiwan. After these countries GDP per capita drops dramatically in the region (see table below). Of the fourteen Asian countries covered in this report five have GDP per capita of less €1,000, with India recording GDP per capita of €574 in 2005. In China strong economic growth in recent years has seen GDP per capita rise to €1,369 in 2005.

Table 1: Asia – Vital Statistics - 2005

Year
2005 / Population
Millions
inhabitants / Area
1000 qkm / GDP
€billion / GDP
per capita €
China / 1,306.5 / 9,572.0 / 1,788.0 / 1,369.0
Hong Kong / 7.0 / 1.0 / 143.0 / 20,452.0
Japan / 127.7 / 378.0 / 3,674.0 / 28,765.0
Korea / 48.3 / 99.0 / 637.0 / 13,200.0
Singapore / 4.4 / 618.0 / 95.0 / 21,570.0
India / 1,086.5 / 3,287.0 / 623.0 / 574.0
Malaysia / 26.0 / 330.0 / 105.0 / 4,051.0
Indonesia / 219.2 / 1,904.0 / 222.0 / 1,012.0
Vietnam / 83.2 / 332.0 / 41.0 / 492.0
Priority Countries / 2,908.8 / 16,521.0 / 7,328.0
Other
Taiwan / 22.9 / 36.0 / 278.0 / 12,153.0
Thailand / 65.5 / 513.0 / 136.0 / 2,071.0
Philippines / 84.2 / 300.0 / 78.0 / 932.0
Pakistan / 154.0 / 796.0 / 95.0 / 618.0
Sri Lanka / 19.6 / 66.0 / 19.0 / 963.0
Sub-total / 346.2 / 1,711.0 / 606.0
Other other / n.a. / n.a. / n.a.
Total / 3,700.0 / 18,232.0 / 7,934.0

Source: EUROSTAT

The potential for increasing exports to Asia is further enhanced by the fact that real GDP growth rates in the recent years have been strong right across the Asia region as the graph below illustrates. Growth is particularly impressive in China, India, Vietnam, Hong Kong and Singapore who are recording average real GDP growth rates of between 7% and 10%. GDP growth also remains well above European averages in Sri Lanka, Indonesia, Malaysia and the Philippines, with growth rates of plus 5% and above European averages in Thailand, Taiwan and Korea e.g. 4 – 4.5%. In the market that currently takes the highest value of Irish exports, Japan, the economy has shown welcome signs of recovery with real GDP growth of around 2.5% recorded in both 2004 and 2005, and the IMF forecasting growth of 2.7% for 2006, after a number of years of very low economic growth