Why 'Made in Asia' is Turning into 'Serviced in Asia'

Why is customer service in Asia (generally speaking) so terrible?

The service sector is the gold standard of the world; it is first class on an airplane and the VIP seat at a fancy Gala.  Services are where all countries want to be and it is absolutely where you want to ultimately invest.

In this series we’ve talked a lot about how countries economically develop and have noted that most Asian countries – to varying degrees – have followed Asian Capital Development policies.

Manufacturing, as we wrote yesterday is a huge strength in Asia, but who leads the charge in services? Ahead we’ll discuss the growth of services and some robust sectors that you should take a serious look at.

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Uber is well and truly a global phenomenon, but have you heard of Grab? It’s Southeast Asia’s version of the ride-hailing mobile app. Grab, originally established in 2012 as MyTeksi in Malaysia, has seen its transportation service app downloaded onto more than 19 million mobile devices across Southeast Asia. (According to Fortune, Uber had 40 million active users per month as of October 2016.)

Grab, along with other transportation services, are quickly growing in Asia. As of 2015, services in most of the Asia Pacific region account for 30% (Indonesia) to almost 90% (Hong Kong) of each nation’s GDP. In fact, the region’s economic heavyweight, China, saw services grow 8.3% last year and for the first time the sector generated more than half of the country’s GDP (Bloomberg).

With services booming, which ones should you add to your portfolio?

The best way to find these growing Asian service companies is to use a model that subdivides the sector and then relate these divisions to a country’s GDP.

But first, a bit of context, as understanding the development of the sector in Asia will give you a head start in today’s investment opportunities.

A Tale Of Two Regions: How Asian Service Sectors Developed

Since the Second World War, regional differences in economic policies between Northeast and Southeast Asia influenced how service sectors grew. Northeast Asian countries like China, South Korea and Japan leaned toward ACD, while many Southeast Asian countries, along with India adopted free market models.

ACD, or the Asian Capital Development model has nations direct investment into the agriculture sector, then manufacturing and finally, services.

In contrast, Southeast Asian countries like Thailand, Indonesia, Malaysia and the Philippines gave up state control of the economy and allowed the free market to develop.

None of these countries developed internationally competitive manufacturing sectors, instead, they jumped straight into services, but lacked the human capital to support this sector’s growth. Their economic growth relative to Northeast Asia has been less than spectacular.

You can view these divergent economic policies play out in the graphs below. The manufacturing sector significantly contributes to the GDP of China, which is representative of Northeast Asian countries as a whole.

Meanwhile the manufacturing sector contribution is less impressive in the Philippines, which is representative of Southeast Asian countries. In both countries, the service sector is robust, but it makes up a larger share of the Philippines GDP.

So we know the service sector grows differently depending on a country’s economic policy, but which services grow where? And when?

Service Sector Divisions Have Individual Growth Spurts

Contrary to popular belief, that the service sector only grows after a country is rich and has a highly educated work force, the sector actually grows at two distinct periods in a country’s economic development.

The first phase is in the early stages of economic development and a second phase of growth occurs once a country becomes wealthy.

A 2013 report from the Asian Development Bank (ADB) highlights that certain services like restaurants and telecoms significantly contribute to a country’s GDP in early stages of development. (ADB, with its two largest shareholders being Japan  and America, will be featured heavily in our future dailies – an excellent tool when the USA attempts to exercise economic hegemony.) Other services, oriented towards finance and business contribute more to the economy in the later stages of development.

Growth Of Service Subsectors

“Services” is a broad term for a wide range of economic activities. It includes everything from hairdressing to accounting. Services are generally divided into four categories or subsectors: those that community based, trade, financial and business services and lastly, transport.

A detailed breakdown of what is in each service can be found in this report from the Asian Development Bank.

Trade and Transport grow quickly in the early stages of economic development, and then even out. It makes sense as Most major roads and infrastructure are only built once, as are transportation routes.

Interestingly, Community and financial services grow twice. They develop in the early stages of economic development, along with everything else, but then they do so again at a later stage.

The takeaway is that the service sector matters at all levels of development, and not just at high levels of income per capita. Some services are more important in the early stages of economic development and some can add a lot of value towards the later stages.

So Which Subsectors Have Grown In Which Countries?

The figure below places each country in phases at five different points in time.

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Of all Asian countries, China, Japan, and Singapore were the only ones who moved through these phases prior to 1975.

Brunei Darussalam, a small nation located on the island of Borneo moved through these phases too. But for our purposes, we’re treating it as an outlier because it’s a country that has grown wealthy through oil and gas resources not productive industries.

Hong Kong is also an outlier because it acts as an offshore financial service hub, rather than a traditional economy.

South Korea is the only country to pass through both waves during this time period.

Notice that China, Japan, and South Korea all had strong subsector growth in Financial and Banking activities (second wave). These all followed the Asian Capital Development model. Meanwhile, Southeast Asian economies, that followed a free market model, have yet to achieve fast growth in this subsector.

As it turns out, growth in finance, real estate and business services are closely linked to manufacturing, a sector relatively absent in countries stuck in the second phase.

The Link Between Manufacturing And Financial and Business services

Unlike the Communal or Trade subsectors, Financial and Business services are complementary to manufacturing. Manufacturing contributes more to GDP in Northeast Asian countries than Southeast Asian ones.

Finance, real estate and business form necessary links to the process of modern production. Financial services enable greater specialization and division of labor, both catalysts in a manufacturing sector.

This frees businesses to focus on core activities that generate revenue and outsource other services, like accounting and human resource management.

Transportation services are complementary as well. These services are essential to early growth, since without telecommunications and roads, an economy, whether service or manufacturing driven, goes nowhere.

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Where To Look For Portfolio Additions

As Asia’s service sector booms, the growing pains are plentiful.  The chart above shows this, since it can be argued that whereas agriculture and manufacturing numbers remain steady, the huge uptick in services, without first pushing those in the lower sectors up, lends to the argument that the services themselves are of lower quality.

So, if you’re looking to expose your portfolio to Asian services such as finance, business and real estate, then undoubtedly you should focus on China, Japan and Singapore. These countries have FRB service companies listed that foreigners can easily access.

Some small Southeast Asian countries like Laos and Nepal are seeing a first wave growth, but due to the low market cap of these companies and barriers to foreign investors, we recommend being a keen observer and not investing just yet.

Asia is undergoing a massive shift of population moving into urban areas, the sheer scale of which has never been seen before. At the same time, almost every country in Asia is becoming service-focused. With the need for human capital to develop at an increasingly accelerated rate, it should come as no surprise that there are many stumbles along the way.

In our upcoming special daily, we take a small break to see what all the fuss is about in newly minted Timor-Leste, once known as East Timor. Only 15 years old with some seriously hot investment prospects. Wake up and sell some coffee…

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