Asia’s rise, British business and Mrs Duffy

HSBC commissioned the Futures Company to report on the key considerations for European business of Asia’s rise. The final product,  Looking East: The Changing Face of World Business, tells a daunting story. Globalisation has entered a new stage and the sooner its lessons are absorbed by European businesses, politicians and policy-makers the better.

Globalisation brings opportunities and threats. While this observation has become cliché, it remains true. But the nature of these opportunities and threats is rapidly changing. Failing to keep pace with these changes threatens the health not just of European business but also European society. Mrs Duffy confronted Gordon Brown with some of the insecurities generated by globalisation. These insecurities may become more visceral if the next stage of globalisation is not properly responded to.

Asia’s role in this next stage is, to use a vogue word, unavoidable. Indeed, Asia’s continued rise is far more so than George Osborne’s budget; much of which was ideological choice, not unavoidable necessity. As we fret about whether these choices will reduce us to a double-dip recession, China grew at a rate of 11.9 per cent in the first three months of 2010 and India is expected to grow at 8 per cent this year and next. European growth rates may crawl from the wreckage of the credit crunch, but China and India, along with much of the rest of Asia, have rapidly returned to a gallop.

A key plank of the last government’s response to the credit crunch – the promotion of new industries and new jobs -  was a variant on a well-trodden European reaction to globalisation: stressing high skills, R&D and the fruits to be reaped by British industry on the innovation frontier. But what if Asia is reaching this frontier before Europe? While low value production may have shifted from places like Mrs Duffy’s Rochdale to Asia, Europeans have tended to seek reassurance in the view that cutting edge skills and technologies would save their bacon (even if ever less of it is consumed in places like Rochdale).

This view now seems, at best, a simplification. “Globalisation and the integration of the world economy isn’t turning out the way many people expected”, claims Joe Ballantyne of the Futures Company. Take some of the supposedly new industries proclaimed during Peter Mandelson’s tenure at the Department of Business: electric cars, nanotechnology, wind technology. No doubt these industries will continue to be eulogised by the coalition. But the HSBC report flags up examples of new technologies in each of these fields being pioneered in Asia.

These developments expose as outdated a view of globalisation that sees the West as the innovators and Asia as the producers. The outsourcing of production jobs caused the CBI to declare six years ago that by 2014 there would be no jobs for unskilled workers in this country. Asia’s growing innovative capacity places the skilled workers of Europe under the kinds of competitive pressures that the unskilled have known for a generation or more. 75,000 people graduate from Chinese universities each year with higher degrees in engineering or computer sciences; 60,000 in India. Given the ascent of a highly-skilled, entrepreneurial and innovative Asian middle-class, the extension of the CBI’s logic may be that in ten years time no jobs for unskilled or skilled people will exist in this country. But this zero-sum thinking wasn’t right six years ago and certainly isn’t right now.

Instead of fearing Asia, British firms should seize its opportunities. These exist both in terms of demand and supply. Sluggish growth in Europe and America means that if the low value of the pound is to fire an export-led recovery it will be via satiation of Asian demand. The HSBC report notes that half of Unilever’s sales come from developing markets and the company’s Indian branch – Hindustan Unilever – is one of India’s biggest consumer-goods companies and its biggest advertiser. Mumbai wants its champagne chilled. And rightly so.

But what else does it want? British firms, whether established global players like Unilever or much smaller concerns, should be asking this question. Markets have always been conversations. Our firms must now listen to and engage with new consumers. “Successful businesses will need”, according to Ballantyne, “to understand how the dynamics of cultural change play out across different markets”.

As well as servicing Asian markets, British firms should consider what impact Asia’s rise will have on their supply chains. It will be no surprise if demand for raw materials continues to rise. It may be more of a surprise to observe, as the HSBC report does, that Microsoft’s biggest R&D facility outside America is in Beijing. This facility continues an infusion of Asian and American knowledge heralded by an influx of Asian science and technology graduates to Silicon Valley. British firms that fail to structure themselves in ways that leave them open to the best new Asian thinking risk falling behind. “Innovation will need to become more global in focus”, says Ballantyne. This means seeking new kinds of partnership with Asian businesses and universities, as well as, pace Theresa May’s immigration policy, always being able to recruit the best Asian talent.

The HSBC report is not the only sign recently that globalisation is changing shape. Strikes have swept China. The low wages and poor conditions that gave Chinese production facilities an edge over facilities in places like Rochdale seem increasingly unacceptable to Chinese workers. This may limit future outsourcing to China. Equally, the HSBC report leaves a sense of China, like the rest of Asia, increasingly being less a repository for outsourcing and more a generator of new ideas, techniques and products.

This doesn’t mean that British business can no longer generate such things. But to do so they shall increasingly need to be abreast of Asian developments. The role of government is to support and incentivise firms to do so. For example, the competitiveness guru Michael Porter has recently argued that a carbon tax would drive innovation in the green economy. This drive is likely to build upon ideas pioneered in Asia. Smart government – not big government or small government – should unlock this potential. If David Cameron doesn’t deliver this, he’ll discover his own Mrs Duffy soon enough.