The exporting services to Asia opportunity
That Australia's services sector is the largest contributor to the Australian economy is old news by now. However, did you know that when direct service exports and the value added by services to other export industries are taken into account, Australia's biggest export is neither mining nor agriculture, but services? The
ANZ PwC Asialink Business Services Report 2015 (http://www.pwc.com.au/asia-practice/assets/ANZ-PwC-Asialink-Apr15.pdf) highlights that $112 billion was generated in 2013 through earnings from direct service exports and the value added services embodied in Australian exportsi.
The report further projects that Australia's annual services exports to Asia could be worth as much as $163 billion by 2030. That's more than a 135 per cent increase from 2013i. Asia's economic growth will drive the region's need for services, while the desire to buy 'services-intensive' products will contribute to the value of product embedded services exported to Asiaii.
While wholesale and retail trade, followed by mining and manufacturing, are the largest sectors for SME exporters, the Efic SME Exporter Index March 2015 survey outlines strong growth in Professional, Scientific and Technical Services as well as Health Care and Social Assistanceiii.
Of companies in Efic's survey currently exporting, organisations with total annual revenues between $100,000 and $1 million were generating on average 8.1 per cent of annual revenues from overseas. Exporting companies with higher annual revenues also had higher percentages of annual revenue from exporting activities, ranging from 14.3 per cent for $1-10 million companies to 21.1 per cent for $20-100 million companies. The Efic report suggests the difference may be due to an 'economies of scale' barrieriv.
Organisations of all sizes - including small businesses - predict these percentages of annual revenues attributable to exporting to increase moderately over the coming 12 monthsv. For SMEs that currently don't export:13.8% anticipate selling services overseas in the coming 12 monthsvi.
According to the survey the most important market for SME exporters is China, followed by Oceania (including New Zealand), with India and the rest of Asia equal third in importance. Drops in the Australian dollar against the US dollar have also bolstered confidence in exporting to the USAvii.
Nearly 39 per cent of exporters anticipate sales increases over the next 12 monthsviii. In addition to the falling Australian dollar, important drivers for sales increases include greater demand in existing markets, better sales strategies and new productsix.
The report highlights that for profitability "there is a distinct shift in SME outlook from 'stay the same' to 'increasing' as SMEs become more growth focused."x Only 3 per cent of SMEs anticipate profitability of international operations to decrease in the next 12 months, with 28.1% expecting increases and the remainder remaining stablexi.
The middle class in Asia is expected to grow six-fold by 2030 to 3.2 billion peoplexii. In addition, 34 per cent of exports from Australia to Asia were services, against 54 per cent to the rest of the worldxiii. This represents a huge opportunity for Australian exporters with the expectation that as Asian economies mature, economic growth will come from services sector growthxiv.
30.1 per cent of surveyed SMEs highlighted the combination of strong in-market contacts and easier market entry as the reason for selecting their most important overseas market. Also important was the existing high growth rate of the market for the company and having existing customers in the marketxv.
Australia's international reputation in many sectors is a significant benefit to exporters. Only 6 per cent of respondents to The 2014 Australian International Business Survey indicated Australia's reputation hindered their international operations, compared to 60 per cent who claimed it was helpful. Not surprisingly there is particularly positive recognition overseas for Australia's processed food and beverage as well as agricultural sectors, with 78 per cent and 73 per cent of survey respondents respectively indicating the international reputation was helpful. Australia's reputation as a service provider also received positive reports: it was helpful to 60 per cent of respondents for technical services and 53 per cent for professional servicesxvi.
However, the ability for Australian companies to export to Asia is impacted by the Asia-readiness of the country's workforcexvii. This includes the difficulty for Australian businesses with both language and Asian business culturexviii.
Another hurdle may be access to finance. Of the businesses with $100,000 to $1 million annual revenue businesses in the Efic survey, nearly all anticipated access to finance for overseas business activity to become more difficult in the coming 12 monthsxix. In Australia, 41 per cent of small businesses seek external finance for business growthxx. Other factors that can impact on export success may include stagnation of certain markets and regulatory barriers to entryxxi.
Online is an increasingly important platform for both sales and to reach customers in international markets. Online sales are increasing, representing 12.8% of export volumes in the Efic reportxxii. CPA Australia however cautions against relying on online sales channels alone in markets including China, Indonesia and Vietnamxxiii. When considering how to market to customers, Facebook is the leading social media platform in Asia except in China, where WeChat and Weibo hold prominancexxiv.