Asian Business Outlook
Part of the Global Business Outlook
A joint survey effort between
Duke University,
PwC China
and
CFO magazine
Asian Business Outlook
Duke University /CFO Magazine
June 2017
1
Top Concerns of Asian CFOs
1. Economic Uncertainty
2. Difficulty attracting qualified employees
3. Currency risk
4. Government policies
5. Employee productivity
6. Weak demand for product/services
7. Data security
8. Employee morale
9. Geopolitical/Health crises
10. Access to capital
Asian Business Outlook
Duke University /CFO Magazine
June 2017
2
Business Optimism Index
Asia registers strong growth in optimism in June 2017, with notable gains in India, China, Singapore
Global Trends
June 2017 Response
Country Business Optimism Index
Country / Region
75
65
55
45
35
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
80
70
60
50
40
30
20
10
0
China
Europe
Japan
India
Singapore
Own-Firm Business Optimism Index
Own Company
75
65
55
45
35
Jun 2016
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
80
70
60
50
40
30
20
10
0
Europe
China
Notes: Presented data are the mean value for each region or country, Scale from 0-100
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Japan
India
Singapore
3
Expected Product Price Inflation
Overall Asian inflation outlook is flat, as modest inflation expectations in India and Singapore
is offset by negative expectations in Japan and China
Product Prices
Global Trends
June 2017 Outlook
10%
4%
5%
2%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
Europe
Relative to other regions, inflation expectations
currently are the lowest in Asia and highest in LATAM

0%
Low inflation expectations in India and Singapore are
tempered by negative expectations in Japan and China
-2%
Inflation expectations decline across many Asian countries
 Within Asia, India has the highest expected inflation, even
though the Indian outlook is down from last quarter.
 CFOs in Japan and China expect prices of their products to
fall, while CFOs in Singapore are expecting a reversal with a
price increase this year
Notes: Presented data are the mean or median values for each region or country.
Asian Business Outlook
Duke University /CFO Magazine
June 2017
4
Expected Growth in Sales Revenue
CFOs in Asia expect modest growth in sales revenue of 3.6%, the lowest among the regions
surveyed
June 2017 Outlook
Global Trends
15%
15%
Revenue
10%
10%
5%
5%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
Europe
Asian revenue growth expectations are similar to
those of the previous quarter


0%
CFO’s revenue growth expectations remained
flat/declined across all regions
Overall, Asian revenue growth expectations are the
lowest, with Latin America a close second
China expects the most rapid revenue growth, followed by
Singapore
 Overall Asian growth is pulled down by Japan and India
 China has the highest revenue growth outlook at 11.9%, followed
by Singapore at 10.3%
 India’s sales revenue expectations have dropped since last
quarter’s survey
Notes: Presented data are the mean or median values for each region or country.
Asian Business Outlook
Duke University /CFO Magazine
June 2017
5
Capital Spending Plans
Asian capital spending is on the upswing, while Latin America and the US are scaling back on
future expansion
June 2017 Outlook
Global Trends
15%
Capital Spending
15%
10%
10%
5%
5%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
Europe
Capital spending plans on the rise


0%
-5%
Business spending is largely positive in Asia
Asian CFOs expect rise in business spending growth,
signaling a shift from the flat/decline in the past 2 quarters
Business spending is expected to increase in Europe and
Asia, while expectations have dropped in the US, partially
because of greater uncertainty in regulatory policy, and in
Latin America, partially because of the Odebrecht
corruption scandal and the economic crisis in Venezuela
 Except China, many of the other Asian countries such as Japan,
India, and Singapore anticipate growth in capital expenditures
 In Singapore, expectations indicate a significant boost in capital
spending
Notes: Presented data are the mean or median values for each region or country.
Asian Business Outlook
Duke University /CFO Magazine
June 2017
6
Expected Change in Earnings
Earnings growth is expected to increase in Asia, in spite of significant decline in India’s
earnings outlook
June 2017 Outlook
Earnings
Global Trends
15%
15%
10%
10%
5%
5%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Europe
Outlook positive for Asia and Africa


0%
Jun 2017
Asian earnings are expected to grow but at a lower
pace compared to Africa
United States earnings expectations have softened
this quarter, even more so in Europe and Latin
America
-5%
Earnings growth outlook mostly positive across Asia, except India
 Japan, Singapore and China anticipate earnings growth increases,
while expectations outlook in India are negative
Notes: Presented data are the mean public company value for each region or country.
Asian Business Outlook
Duke University /CFO Magazine
June 2017
7
Fulltime Employment Outlook
Asian, European and US CFOs expect fulltime employment to grow moderately next year
June 2017 Outlook
# FT Employees
Global Trends
10%
12%
5%
8%
4%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
Europe
Employment outlook in Asia is positive but declining



0%
US
Europe
Asia
China
Japan
India
India and China lead employment growth in Asia
Africa and Latin America expect no growth in employment
Europe registers positive growth in employment outlook,
while the US saw a marginal increase q-o-q, now leading
the world in employment growth expecations
CFOs in Africa are optimistic about reversing the negative
outlook in FTE employment
 China and India expect strong growth in fulltime
employment, increasing relative to March 2017
levels and among the highest in Asia
 Japan’s outlook is marginally positive at 0.7% but
declined by 2.1 percentage points as compared
to the previous quarter
Notes: Presented data are the mean value for each region or country
#FT=Number of Fulltime Employees
Asian Business Outlook
Latam
Duke University /CFO Magazine
June 2017
8
Expected Wage and Salary Increases
While Asian wages and salaries are projected to increase by 3% over the next year, there are
notable variations among its constituent countries
June 2017 Outlook
Global Trends
10%
Wages & Salaries
10%
8%
5%
6%
4%
0%
Jun 2016
-5%
Sept 2016
Dec 2016
Mar 2017
Asia
United States
Latin America
Africa
Jun 2017
Europe
Wage growth converging to 3-4% range across regions



2%
0%
US
Europe
Asia
Latam
China
Japan
India
China’s wage growth much higher than other countries and regions
Wage growth outlook is the highest for the US at 4.1%,
lowest for Asia at 3%
Asia’s wage growth has been volatile, and June 2017 is
the lowest it has been in the past 5 quarters
Europe saw the greatest uptick in wage growth q-o-q
across regions
 China’s wage growth outlook has risen from 7.7% during the previous
quarter to 9.1% in June 2017
 Wages in Japan are expected to increase by 1.1% over the next 12
months
Notes: Presented data are the mean value for each region or country
Asian Business Outlook
Duke University /CFO Magazine
June 2017
9
How Uncertain is the Current Business Climate?
Compared to the typical amount of uncertainty that your company faces, how would
you rank the current level of uncertainty facing your firm?
Above average
Average
Below average
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
US
Europe
Asia
Latin America
Africa
China
Japan
India
10
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Actions Taken in Response to Uncertainty
Compared to an average or normal amount of uncertainty, has the current amount of
uncertainty about governmental policies and/or economic conditions led your firm to?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Proceed more aggresively
Proceed at a normal pace
uncertainty above average
Delay or proceed at a slower pace
cancel expansion/new projects
uncertainty below average
11
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Best Practices When Uncertainty is High
What are the best practices for running a company when uncertainty is high about
governmental policies and/or economic conditions?
• Stay the course Continue to pursue core strategies built on the companies’ strengths. For the most part, don’t expand into
new projects that stretch the firm in new directions. Focus on what you can control.
• Be cautious Many firms pull back and operate very cautiously, making changes slowly. Some cut existing projects or cancel
new projects but this is the exception rather than the rule
• Focus on the short-term Focus on getting through the short-term, remain flexible, but don’t lose sight of long-run
objectives
• Reduce costs
• Carefully study analyses and scenarios Have a plan and contingencies for how to react if various scenarios occur.
Hire consultants or other experts.
• Engage in risk management Be more active in risk management and hedging. Understand the economic outlook of
various scenarios very well.
• Accumulate liquid assets Reduce financial risk by accumulating liquid assets, especially cash. Don’t increase debt loads.
• Take care of the customer Communicate more with, and take extra care of, key customers.
12
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.)
holding back your company's plans for expansion and new projects?
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Economic growth
Tax policy
Regulatory policy
Trade policy
Interest rates
Immigration Policy
13
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Uncertainty About Policies/Conditions Slowing Expansion
About which if any of the following items is uncertainty (about policy details or timing, etc.)
holding back your company's plans for expansion and new projects?
80%
70%
60%
50%
40%
30%
20%
10%
0%
Asia
China
Economic growth
Japan
Tax policy
India
Regulatory policy
Trade policy
Singapore
Interest rates
14
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Hurdle Rates and Investment Decisions
What hurdle rate does your company use to evaluate investment projects? (red line)
80%
20
Yes
No
Hurdle Rate
18
16
60%
14
12
40%
10
8
Hurdle Rate
Yes/No, pursue all E(return)>hurdle projects
Does your company pursue all projects that are expected to earn a return > the hurdle rate? (gray
and blue rectangles)
6
20%
4
2
0%
0
US
Europe
Asia
Latin
America
Africa
China
Japan
India
Singapore
15
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing all projects that are expected to earn a return > hurdle rate?
Shortage of production capacity
Better projects might come along in the future
Shortage of employees
Shortage of funding
Shortage of management time and expertise
The risk of the project is too high
Project is not consistent with company's core strategy
Some projects appear attractive only due to optimistic projections
There is too much uncertainty about some projects
0%
Asian Business Outlook
10%
20%
Duke University /CFO Magazine
30%
40%
50%
June 2017
60%
70%
16
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing all projects that are expected to earn a return > hurdle rate?
US
70%
Europe
60%
Asia
50%
Latin
America
Africa
40%
30%
20%
10%
0%
Shortage of
management time
and expertise
Project is not
consistent with
company's core
strategy
The risk of the
Shortage of funding There is too much
project is too high
uncertainty about
some projects
Shortage of
employees
Some projects
appear attractive
only due to
optimistic
projections
Pressure to cut
expenses
17
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Why Not Pursue All Value-Enhancing Projects?
What prevents you from pursuing all projects that are expected to earn a return > hurdle rate?
100%
China
90%
Japan
80%
India
70%
60%
50%
40%
30%
20%
10%
0%
There is too much Some projects appear
uncertainty about attractive only due to
some projects
optimistic
projections
Project is not
consistent with
company's core
strategy
The risk of the project Shortage of
is too high
management time
and expertise
Shortage of funding
Shortage of
employees
Better projects might Shortage of
come along in the
production capacity
future
18
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Weighted Average Cost of Capital
US
Europe
Asia
Latin America
Africa
What is your company's overall
weighted average cost of capital
(WACC) for 2017?
10.6
8.8
9.3
11.7
13.4
What cost of debt do you use in
your WACC calculation?
7.1
6.7
6.5
9.3
12.2
Cost of equity?
11.8
10.7
8.2
13.4
13.7
Approximately what proportion
of debt financing do you use in
your WACC calculation?
36.4
30.9
29.8
33.4
28.3
19
Asian Business Outlook
Duke University /CFO Magazine
June 2017
WACC vs Hurdle Rate
WACC
Hurdle Rate
20
18
16
14
12
10
8
6
4
2
0
US
Europe
Asia
Latin America
Africa
China
Japan
India
Singapore
20
Asian Business Outlook
Duke University /CFO Magazine
June 2017
Why Do You Set Your Hurdle Rate > WACC?
•
•
•
•
•
•
•
•
•
•
So that we choose only the best available projects
To ration – because we can’t pursue all projects
To account for riskiness of projects being evaluated
To account for costs not captured by WACC
To provide a margin of error in calculations and in investment outcomes
So that we earn excess return and increase firm value
Hurdle rate is cost of equity, to ensure we create value for shareholders
To help us select projects that are profitable every year
Expect cost of capital/mkt conditions to increase/change in near future
To preserve funding (because we have limited access to funds)
Asian Business Outlook
Duke University /CFO Magazine
June 2017
21
Chinese CFOs’ Opinion on Most Important Financial Functions
Which three finance functions do you believe are most important to your firm?
Shared service center establishment
Globalised governance and control
Career development of staff
Capital structure management
Business intelligence
Profitability management
Management reporting to executives
System implementation
Financial modelling for decision-making
Efficiency and effectiveness of data analytics
0%
Asian Business Outlook
5%
10%
15%
20%
25%
Duke University /CFO Magazine
30%
35%
June 2017
40%
45%
50%
22
Japanese CFOs’ Opinion on Institutional Investors
In last two years, institutional investors
have submitted a greater number of
specific requests to our company,
relative to before the governance
reforms.
In the last two years, specific requests
submitted by institutional investors
generally support the direction and
types of policies our management
team thinks are best for our company.
Neutral
18%
Neutral
7%
Disagree
18%
Strongly
Agree
0%
Strongly
Agree
9%
Asian Business Outlook
Disagree
50%
Disagree
0%
Agree
28%
Agree
55%
In the last two years, specific requests
submitted by institutional investors
have influenced or changed our
company's policies.
Strongly
Agree
0%
Strongly
Agree
29%
Strongly
Agree
36%
Duke University /CFO Magazine
Neutral
30%
Agree
10%
June 2017
Strongly
Agree
10%
23
Return on Assets (ROA)
Return on Assets in Asia expected to remain the highest relative to other regions
14%
12%
10%
8%
6%
4%
2%
0%
US
Europe
Asia
Latam
Approximate ROA in 2016
China
Japan
India
Singapore
Expected ROA in 2017
Return on assets are expected to rise in all regions, relative to 2016
 Regional ROAs expected to rise between 1.0 and 1.4 percentage points in 2017 versus 2016
 CFOs in most Asian countries expect ROA to be same or higher in 2017 relative to 2016
 CFOs in China expect the highest ROA in 2017 among Asian countries while Japan
Asian Business Outlook
Duke University /CFO Magazine
June 2017
24
Asian Business Outlook
Part of the Global Business Outlook
A joint survey effort between
Duke University,
PwC China
and
CFO magazine
Asian Business Outlook
Duke University /CFO Magazine
June 2017
25