Asia Business Podcast Asian Markets and Strategic Transitioning Away from China - with Pilar Dieter
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Full show Transcript below Summary and Timestamps
Overview
In this episode of the Asia Business Podcast, host Art Dicker interviews Pilar Dieter, CEO of YCP Solidiance, an Asia-focused strategic advisory firm. They discuss the challenges and opportunities in the Asian market, focusing on China’s decreasing foreign direct investment (FDI) and the strategies for diversifying supply chains due to geopolitical tensions and supply chain resiliency. Pilar provides insights into the factors leading to net capital outflows from China, the impact of global perceptions on investment, and the shift toward domestic consumption driving growth in China. The conversation also covers the trend of businesses de-risking by moving operations from China to Southeast Asia, India, or nearshoring to places like Mexico, and how YCP Solidiance facilitates this transition. They delve into industry-specific shifts, the increasing interest of Chinese companies in outbound investment, and the importance of strategic and post-merger integration services in navigating the complexities of the Asian market. The episode wraps up with how companies can reach Pilar and YCP Solidiance for strategic advice and support.
Timestamps
00:00 Welcome to the Asia Business Podcast with Pilar Dieter
00:57 Deep Dive into China's Business Landscape
01:49 Navigating Supply Chain Resilience and Diversification
03:21 The Future of Foreign Direct Investment in China
06:05 De-risking Strategies for Global Supply Chains
11:20 Exploring New Markets: The Shift in Asian Investment Patterns
23:09 The Role of Strategic Advisory in Global Business Expansion
28:07 M&A Trends in Asia: Insights and Opportunities
36:03 Closing Thoughts and Contact Information
Transcript
Art: [00:00:00] Welcome everybody to another episode of the Asia business podcast. I'm your host, Art Dicker. And today we have the true pleasure of welcoming Pilar Dieter. She is the chief executive officer at YCP Salidians. YCP Salidians is an [00:00:15] Asia focused strategic advisory firm with 17 offices worldwide, predominantly in Asia.
Art: Welcome, Pilar.
Pilar: Thank you, Art. It's a true pleasure to be here. Thanks for having me.
Art: Yeah, we've talked about [00:00:30] doing this for a while now. And we both had recent visits to China. And so I think we've got plenty to talk about. We're gonna I think China is going to be a big part of what we talk about today.
Art: But as we said at the top, your firm is a big presence all throughout Asia. And I think it's [00:00:45]going to be interesting to do a bit of comparison between different parts of that region and see what's going on. So I'm happy to get into it today and really looking forward to it.
Pilar: Absolutely. I'm looking forward to the exchange as well.
Art: Great. Let's off maybe with With China. And I [00:01:00] know you guys work a lot with the sort of the top fortune 500 companies there. But also you work with them throughout Asia and beyond. And we've seen a lot of statistics come out lately where looking at the net capital outflows from China after [00:01:15] years and years of inbound investment increasing year after year.
Art: And do you see that trend reversing anytime soon? And if so, the trend of the negative outflows, negative inflows, I should say. Do you see that trend reversing [00:01:30] anytime soon? And if so, what sectors might it reverse in?
Pilar: I think the way to determine whether or not this is something that would reverse is it's first important to understand why that F.
Pilar: D. I. into China has decreased over the last few years. So there's a couple, [00:01:45] I would point to three things. Two are obvious, one might be a little less obvious. So I would point to number one, really the supply chain resiliency move. This concept of. Diversifying supply chains. This isn't a sudden thing.
Pilar: We can track [00:02:00] this back to really 2016 2015 era, even before trade tariffs were starting to come into play. So a lot of conversation around why diversification matters in supply chains. That's 1 of the reasons that you're starting to see a little bit of that [00:02:15] decline in F. D. I. The other one, another obvious element is the geopolitical tension.
Pilar: Lots of media attention that's driving and easily influencing the way that U. S. corporations or multinational corporations are really viewing China with a bit [00:02:30] more of a fine tooth comb before making really readily decisions to make big investment into China because of the beauty of the growing market and the size of the market.
Pilar: But I'd say the third and maybe less obvious. Point that would be directed to why [00:02:45] FDI in China is decreasing is when you actually talk to some of the bank leadership in China, they will actually point to a decrease due to companies moving liquid capital out of China as a result of interest rates coming down [00:03:00] markedly And that, I think, when we looked at what was happening during COVID times, China interest rates were obviously quite high compared to other countries, making it a little bit more of an attractive play.
Pilar: So now, with the decrease continuing that seems to be something that [00:03:15] others, especially domestically or regionally, that I was talking to when I was in Shanghai a couple days ago or weeks ago were also pointing to. But to your point about, Given these realities of why FDI has declined, do I see this trend reversing?
Pilar: My short answer is [00:03:30] no, not in the short term and for the USA, most decidedly, not in this election year. The two main reasons I would point to for this, though, would really be, while China still would like to maintain strong performance on [00:03:45] investment, when GDP numbers and their aggressive growth target of 5 percent that's been stated by Xi Jinping.
Pilar: What we end up seeing is the investment lever of GDP is something that has been a big driver for them achieving their growth rates. But at this point in [00:04:00] time, the investment lever is taking a back seat. To some of the consumption activities that they're trying to really influence and push.
Pilar: So I would say, looking internally in China, they're really going to be focused more on domestic consumption to be able to drive that [00:04:15] growth. And then the second reason why I would say that the trend might not be reversing, at least within this next year, Is US companies are just continuing to face more scrutiny within their own organizations.
Pilar: Whenever I see clients trying US [00:04:30] clients in particular, trying to make decisions on deeper investment in China, whether that's through acquisition or through basic investment into greenfield or brownfield plants, or even finding new supply base that might actually be Chinese based. [00:04:45] It's coming with a very high higher bar in terms of scrutinizing whether or not it's the right partner.
Pilar: So bottom line not reversing I would say within the foreseeable future being at least 12 to 18 months out
Art: Yeah, and I'm [00:05:00] sure you got this question a lot when you visited China as well, both even from friends and business people in China, asking you maybe when, when do you think things will get better as far as the investment there and stuff.
Art: I certainly got that. I just got back and got that a lot. [00:05:15] And I agree. It's part of it is it's. It's perception and reality, right? The reality is the Chinese economy is not doing well. And so that probably, as you said, might be the biggest factor, even beyond anything we read about in the news [00:05:30] and the headlines and the politics of of of, not great relations between the U S and China right now.
Art: And at the same time I hear what you're saying too, with some of my own clients getting internal pushback for any, anything that, you know, because, and again, [00:05:45] that might be more of just as much perception of what they see in the headlines of the wall street journal or whatnot, and say why are we investing there more?
Art: I thought it was getting harder, whether or not that's true or not. That's at least we can say that perception is there, and that's not going to help make [00:06:00] that fight any to get increased investment any easier internally, like you said. You see then, I guess it goes without saying that companies are de risking from China and moving either to Southeast Asia or India, if [00:06:15] it's manufacturing or even coming back closer to home let's say, Mexico.
Art: Do you, are you actually with, internally at your firm trying to position yourself? As a bridge for that that de risking, where clients say we've [00:06:30] really valued all the advice you've given us in China we see you have offices all throughout Asia.
Art: How have you guys been helping clients through that process a lot recently?
Pilar: It would be relatively [00:06:45] relatively easy to say absolutely a hundred percent. I think that it wants, we want to caveat this a bit because I think the question oftentimes when our clients come to us and say, hey, here's our direction.
Pilar: We've decided we need to de risk or sometimes the [00:07:00] terminology becomes anti fragility and that concept really means putting us putting our company or the client in a state where we are not subjected to the exogenous effects of any global economic player. [00:07:15] That could impact our business so detrimentally.
Pilar: So put another way. Make us bulletproof, help us figure out what can we do, whether it's, taking these out of China and putting them into Southeast Asia, bringing things [00:07:30] nearshore, reshore, friendshore, back over to Mexico. Those are the common go tos. But what we have found is it helps to actually bring the client before they come to us with, here's our decision.
Pilar: We want to take factories or [00:07:45] take suppliers out of China and move them to somewhere else in the world. We say let's take a step back and try to understand what is your objective here? And a lot of times when you really peel those layers back, what you're starting to hear the client say is we don't want to have another [00:08:00] COVID impact our complete business.
Pilar: We also don't want another, whether it's a pandemic or it's a landshoreman strike in Los Angeles, or it's some kind of labor union strike in Europe, or it's pirates [00:08:15] in the Panama Canal, all of these global realities is what's causing us to reconsider. Are we securely operating and supply chain is the natural 1st place to go.
Pilar: When you hear companies jump immediately to, we need to. [00:08:30] de risk and reshore. I think those can actually they're not mutually exclusive, so when you can separate them, you can actually unpeel a lot more on this de risking piece as opposed to the reshoring piece. But to come back to the [00:08:45] specifics of your question, are we seeing clients wanting this?
Pilar: Yeah, definitely. We have one client, for example, in Furniture manufacturing, right? So a sector that is very well entrenched in China, they had been sourcing probably 70 percent of [00:09:00] their products out of China maybe doing some sub assembly in places like Mexico, and this was an American company and what they decided, and this was probably about a year or two after COVID lockdown ended and they said, [00:09:15] we really want to figure out a way to.
Pilar: Bring this back home. So we want to double down on our investment in Mexico. Now, as you rightedly pointed out at the onset, we're more of an Asia based firm, but because we recognize the need for this [00:09:30] kind of pivot, we made a small investment in Guadalajara, Mexico, where we now have a small team that supported specifically these kinds of requests.
Pilar: And this example on the furniture company is not, is only one, but I think it highlights the point where we took this [00:09:45] client and said Okay. What are the components or products that are coming out of China for you? We did the cost arbitrage of which products were the most expensive to relocate versus those that might be easier to relocate and wouldn't disrupt their supply chain too dramatically, but bring them additional cost [00:10:00] savings.
Pilar: And in doing that, we ended up going through a, an MNA process in Mexico to help them find not just suppliers, but actually some manufacturing footprints that they could. Absorb and take over and move on. So in that example, I would argue that it [00:10:15] wasn't so politically driven. There wasn't the motivation was more on cost management.
Pilar: China is no longer the cheapest place to source furniture. Not to say that Mexico is significantly cheaper, but when you put the landed cost calculations into play, [00:10:30] you do start to see. Some benefits there.
Art: Yeah. And shipping, like you said, the risk of factory shutdowns, that's not necessarily a political risk.
Art: China, I guess everything can be somewhat political but that's the, The supply chain disruptions, [00:10:45] that, that's something that is maybe wasn't as much of an issue, but you're seeing your clients and helping your clients price that additional risk into their calculations and then it's at a place like Mexico makes more sense.
Art: I wonder if that's going to be, or, if you're seeing that as a trend for not just. [00:11:00] traditional multinational companies, American or European based, but even Asian companies and even Chinese companies realizing, Hey maybe this whole, the potential for supply chain disruption, obviously it affects our business as a Chinese manufacturer just as [00:11:15] much.
Art: