Report Summary

Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009.

What does the emergence of Asia as a major engine of global economic growth mean for companies operating in the region? Asia’s robust economic outlook—coupled with diminished growth prospects in many other parts of the world—has attracted new investment into the market both from regional players and Western multinationals. As a result, competition in the region is expected to intensify. Given the darkening global economic outlook, and the expected impact on some economies and sectors in the region, growth and profitability look uncertain in the near term. But over the medium to longer term, Asia’s strong economic fundamentals will ensure consistent growth across a range of industries. How are companies positioning themselves to capitalise on Asia’s growth over the next few years?

The Asia Competition Barometer assesses the intensity of competition and changing market dynamics in several key sectors. This report examines the precision engineering (PE) sector, which includes the following sub-segments: instruments and appliances for measuring, testing and navigation, irradiation, electromedical and electrotherapeutic equipment, optical instruments and photographic equipment, power-driven hand tools, metal-forming machinery, other machine tools, other special-purpose machinery, air and spacecraft and related machinery and medical and dental equipment and supplies.

Among the key findings of this report are the following:

Over the past decade, Asia’s emergence as a manufacturing powerhouse has led to a boom in demand for PE products. PE components and machinery form the backbone of many industrial processes, including in the automotive, aerospace and defence, consumer electronics, solar energy and medical device sectors. As manufacturing firms in Asia move up the value chain to produce ever more sophisticated products, they will further boost demand for PE products.

Profitability in Asia’s PE sector has continued to grow, despite the global financial crisis. Profitability plummeted in 2005, but since then has steadily increased. The average gross margin of publicly-listed Asian firms declined from 43.1% in 2004 to 27.6% in 2005. This was due largely to an increase in competition and a spike in material costs that year. The average gross margin then rose steadily to reach 37.4% by 2009. Of the five sectors that the Economist Intelligence Unit analysed for this Barometer, PE is the only one where profitability continued to grow uninterrupted through the last global economic slowdown, partly due to strong regional demand. Combined operating revenues increased from US$26.6bn in 2007 to US$35.1bn in 2009.

Rising private consumption in Asia has boosted demand for PE products and services, but whether it can replace demand in the West remains to be seen. The rise of Asia’s middle class has been accompanied by an increase in discretionary spending, particularly on goods such as cars, mobile phones and computers. This has, in turn, driven growth in the region’s PE sector. Still, it remains to be seen if this indigenous regional growth will be able to offset the likely slowdown in demand in the West over the next few years. PE firms’ success over the next few years will depend on how accurately they have planned for and managed this shift, particularly given the broader global macroeconomic uncertainty.

The PE industry is evolving rapidly, as low-cost Asian producers and high-technology Western firms seek to acquire each other’s competitive advantages. Global PE firms have been moving into Asia to tap its burgeoning market, and to lower their production costs by shifting capacity from higher-cost countries to Asia. Meanwhile, Asian companies have been adapting to this competitive threat by placing a greater emphasis on technological advancement in order to move up the value chain and produce more sophisticated machinery. Asian PE firms are eager to transform from being simple contract manufacturers to providing production and supply chain management capabilities. This emphasis is reflected in a five-fold increase in Asian firms’ total R&D expenditure between 2004 and 2009. As a result, Asia’s PE industry has been witnessing the confluence of two hitherto distinct business models.

The number and size of players in Asia’s PE sector is growing. The number and size of publicly-listed firms in the PE sector in Asia has increased dramatically. The total number of listed companies in the industry increased 57% between 2004 and 2009, from 131 firms to 206. Over the same period, the total combined revenue of publicly-listed PE companies more than tripled from US$9.8bn to US$35.1bn; these firms’ combined total assets rose from US$13bn to US$63.3bn.

Competition has increased only marginally, with the industry’s biggest players continuing to expand their positions. Competition in the PE industry grew significantly between the years 2004 and 2006, largely due to an influx of new players into the sector. However, between 2006 and 2009, the largest firms in the industry began to steadily increase their concentration, partly by exploiting economies of scale. A related trend that has benefited large firms is greater vertical integration, as PE companies seek to diversify their product offerings and provide more comprehensive end-to-end services to their customers. In the future the sector is likely to be characterised by fierce competition between big Asian and non-Asian players, who may increasingly resemble one another.