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Spire Highlights New Economic Trends for 2008


19 December 2007

Spire Highlights New Economic Trends for 2008

Asia’s leading strategic market intelligence consultancy predicts how competition for RHQ and manufacturing hubs as well as inflationary pressures will shape the business landscape in 2008.

SPIRE Research and Consulting Group Managing Director Leon Perera said: “2008 will see continued healthy growth in the Asia-Pacific, but rising inflation will expand pricesensitive segments. India and Vietnam-made products will increase share of export markets while Shanghai and Beijing will join Hong Kong and Singapore as key locations for regional business hubs.”

Growth, Inflation and Inequality – what it means for business
Inflation was driven by rising food, commodity and energy prices due to structural demand-supply imbalances rather than one-off events such as poor weather (Annex, Fig. 1&2). However even the core inflation rate has been rising to a year’s high in various countries and is expected to remain at high levels in 2008. At the same time, Gini coefficients (indicators of income inequality) are on the rise across Asia.

Rising inflation in the context of strong economic growth and rising inequality will affect consumer buying patterns as well as business strategy. We foresee:

A growing niche for small-scale traders importing and reselling online, as well as team buying

North-Asian Regional Headquarters
Singapore’s position as the leading location for Regional Headquarters (RHQs) in the South/East Asia region is fairly secure. Going forward, Spire foresees more international companies establishing two Asian RHQs, with Hong Kong, Beijing and Shanghai competing for the North Asia projects.

Spire’s research has shown that international companies in Asia are increasingly creating separate Regional Headquarters (RHQs) for North and South Asia. Singapore and Hong Kong are currently the two most attractive destinations.

China, however, is playing catch-up in the RHQ department, rolling out attractive incentives and legislation to attract Multi-National Companies (MNCs) into Beijing, Shanghai and to a lesser extent, Guangzhou.

By the end of 2006, there were 154 MNC regional hubs in Shanghai, 181 in Beijing and 1,228 in Hong Kong.

According to Spire’s survey of over 100 MNC manufacturers operating in the region, Singapore, China, and Hong Kong were respectively preferred as RHQ locations over the other Asian countries. India, Japan and Korea followed at fourth, fifth and sixth place.

MNCs are increasingly lured by Beijing and Shanghai to (re)locate their RHQs there, as both cities – together with the Ministry of Commerce – broadcast attractive RHQ schemes to offer generous incentives such as tax rebates/exemptions, special distribution and export/import rights and wider market access to MNCs.

The past few years have witnessed several MNCs – including AMD, Honeywell, Fuji Xerox, General Motors, Goodyear, IBM and UPS – uprooting their RHQs in Hong Kong, Singapore or even Japan and relocating them to mainland cities.

Competition for Manufacturing Investment
Spire’s research suggests that, while China will continue to be the most attractive manufacturing location in Asia by a wide margin, many international companies are quietly increasing (or planning to increase) production FDI into India and Vietnam, to diversify risks and tap into the domestic market in these countries.

Spire’s recent survey of 105 international manufacturing companies based in AsiaPacific revealed that China is the most attractive location for manufacturing investment by a large margin, followed by India, Malaysia, Thailand, Hong Kong and Vietnam (see Annex, fig. 3).

One-third the respondents feel that China is the most competitive location in theregion for manufacturing and that they would move more manufacturing there in future. However this perception is significantly less positive than in previous years where MNCs [re]located to the Mainland in droves.

India was the next most favoured location for manufacturing facilities. The strong showing of India underlines the trend going forward.

In India, Special Economic Zones (SEZs) are being established at an astonishing rate to stimulate manufacturing investment. A selling point for Indian SEZs is the fact that more sectors are being allowed 100 percent foreign-owned equity in Indian-based ventures.

Investment in the infrastructure of SEZs is expected to exceed US$2 billion.

Four industries that will be among the most promising drivers of SEZ investment in India are telecommunications, biotechnology, electronics and automotives. Nokia, for example, currently manufactures 10% of its global production of mobile phones in India.

While India rose to first place in terms of manufacturing jobs created (126,000), displacing China, Vietnam doubled its performance of the previous year, tying China with 100,000 jobs. With WTO entry in 2007 and its history of frequently being Asia’s second-fastest growing major economy, Vietnam is well poised to attract more manufacturing FDI from MNCs wary of placing too many eggs in the China basket. 

Most notably, in eight months, Intel has committed as much money to Vietnam as it had to China in the previous 10 years. Other manufacturing giants currently operating production facilities in Vietnam include Canon, Yamaha Motor, ABB and Honda.

However China is set to remain the leading production hub in Asia in the mid-to-long term. Spire’s research suggests that domestic market size has become the second most important factor in deciding where manufacturers locate factories, which augers well for China as the world’s fourth largest economy.

About Spire Research and Consulting
Spire Research and Consulting is Asia’s leading strategic market intelligence consultancy. Spire’s competitive advantage lies in its ability to deliver to its clients actionable intelligence on the external business environment in support of their strategic decision-making in marketing and business development. Spire is one of the few companies in its industry to be headquartered in Asia. Spire’s clients include over 20 Fortune 500 organizations as well as Government agencies in ten countries. For more information, visit us at www.spireresearch.com.

For media enquiries, please contact:
Deborah Lee Spire Research and Consulting
Phone: (65) 6327 6131
E-mail: deborah.lee@spireresearch.com
Ronald Wong Fleishman Hillard
Phone: (65) 6424 6386
Email: wongr@fleishman.com

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