AAM Advisory: Why supply chain pain will be temporary
The coronavirus crisis has had a dramatic impact on global supply chains. Never before in the history of post-war capitalism have the cogs of the global economy halted, and government mandated lockdowns prevented shops from opening, manufacturers from producing and services from serving. This, in turn, is bad news for investors.
But there are two big reasons that suggest the Covid-19 induced supply chain disruption will be a temporary phenomenon, and that the long-term looks bright for supply chains and export markets.
First, the temporary supply chain disruption should not become a long-term barrier to economic activity and growth. Looking at the elements that constitute supply: capital, labour and the efficiency by which these factors can be combined, it becomes clear why.
Unlike wars or natural disasters, the economic shutdown caused by the pandemic has not resulted in significant damage to capital stock. It’s true that some sectors will fare much worse than others in this regard, none more so than the airline sector which will have planes sitting idle on the tarmac, but the capital stock has been made temporarily redundant rather than being destroyed altogether. Productive capital stock, the engine room of the economy, is relatively undisturbed.
With human capital too, any crisis runs the risk that unemployment becomes rampant and the quality of work suffers as skills degrade and are lost. In the case of the current pandemic, however, there has only been a limited reduction in the size of the workforce and unemployment, so far, appears to be temporary. As a consequence, economies should avoid a wholesale loss of skills as workers lose their jobs and seek employment in different industries.
Looking at the efficiency by which both labour and capital are combined to produce goods and services, otherwise known as productivity, it is clear that this could suffer as a result of the pandemic. Clearly, the requirement for social distancing will make supply chains less efficient, but there is also now an incentive for firms to shorten and localise their supply chains by reducing the geographic distance between stages of the chain and reducing the number of stages in the production process.
Second, looking long-term, businesses and supply chains located in Asia will benefit enormously from the Regional Comprehensive Economic Partnership (RCEP) agreement once it is ratified by member states. Signed at the AEAN Summit on 15 November, the free-trade agreement spans the Asia-Pacific region incorporating the ten AEAN states as well as Australia, China, Japan, New Zealand and South Korea.
The RCEP agreement is the world’s largest free trade agreement, comprising 30% of global GDP and around a third of the world’s population. Crucially, the agreement will ensure tariff elimination of at least 92% of goods traded amongst signatories, with additional preferential market access for Singapore’s exports. The agreement also covers the service sector, and at least 65% of countries’ services sectors will be fully open, including financial services.
For investors in the region, this means they should be able to benefit from the enhanced trade opportunities, as well as the liberalization of investment markets which would lead to new investment opportunities emerging in ecommerce, Asian small and medium enterprises and Asian consumer trends.
In summary, the world is experiencing considerable disruption to our normal way of life and this looks set to continue for some time to come. But while the disruption is temporary, supply chains should not just bounce-back, but bounce-back stronger. Permanent supply chain disruption can be halted, output can return to a similar path as before the crisis and, the world’s largest trade agreement, combined with the roll-out of an effective vaccine should supply a shot in the arm for supply chains and businesses located in Asia.
Asia-Pacific seeing surge in cleantech-focused VC funds
Cleantech became one of the hottest investment sectors among VCs a decade ago with cleantech VC deal volumes doubling between 2005-2007, according to Brookings Cleantech Venture Capital report. And while the global recession in 2007-2008 halted many investments in cleantech, the sector has gained traction over the last few years.
Asia Cleantech Capital is an early-stage investment firm focused on clean tech projects and companies in the APAC region; DreamLabs Innovation is a US$50m fund established to invest in disruptive, scalable, people-focused companies in areas including cleantech and energy; and ENGIE New Ventures runs a US$61.2m fund dedicated to making minority investment in tech startups in sustainable energy including across Asia.
More recently, in 2021, in light of the pandemic and increasing focus on sustainability, there’s been a surge of cleantech-focused VC funds being set up both globally and across Asia-Pacific with the aim of supporting startups that are developing advanced technologies to tackle global problems, whether renewable energy or food waste.
Climate Solutions Partnership unveiled
Just last week, HSBC, World Resources Institute (WRI) and WWF unveiled their Climate Solutions Partnership (CSP), which aims to unlock barriers to finance for innovators developing climate solutions with a focus on startups in Asia developing carbon-cutting technologies, projects that protect and restore biodiversity, and initiatives to help the transition to renewable energy.
Backed by US$100m of philanthropic funding over five years from HSBC, and part of the banking giant’s climate strategy, this partnership will help identify future business opportunities for sustainable innovations, and mobilise finance, including helping startups and next-generation new sustainable approaches.
Spotlight on Japan and China
Set to launch this month is a new cleantech-focused fund targeting investments in Japan, Europe and the US. Sony Group, Suzuki Motor, Mizuho Bank and 15 other Japanese companies have joined forces on a startup investment fund focused on companies that are developing technologies related to digital transformation and decarbonisation.
The fund, set up by California-based VC firm World Innovation Lab (WiL) with a maximum fund size of US$911m and a lifespan of 10 years, will invest in 50-60 startups in the first 3-5 years. Focused on the environmental sector, the fund is set to invest heavily in companies with digital technology, such as software and data analysis tools that can help streamline the operations of large companies, and those developing advanced technologies to tackle global problems, from water shortages to development of plastics-free products.
And the recently launched TDK Ventures, the corporate venture capital arm of Japanese multinational TDK Corporation, is scouting for more industrial tech investments in Asia and especially China, following the recent close of its US$150m TDK Ventures Fund II. This fund is targeting early-stage, global investments in ‘hard tech’ spanning the advanced materials, industrial, robotics, energy, autonomous vehicles, electric vehicles, clean-tech and health-tech verticals.
“This new fund renews our commitment to supporting hard-tech entrepreneurs creating innovations for the greater good,” says Nicolas Sauvage, managing director, TDK Ventures. The materials science field has always been part of the technology sector’s foundation, and as such, it can help the sector address some of the world’s biggest challenges, including sustainability.”
ADB Ventures brings a more sustainable future to Asia
Back in March, ADB Ventures, the Asian Development Bank’s venture capital arm, announced its first two investments since its founding in 2020. ADB Ventures, which aims to pursue environmental, social and governance (ESG) investments in verticals such as FoodTech, AgriTech, HealthTech, FinTech and CleanTech, revealed two green investments, funding Indian electric vehicle manufacturer Euler Motors and Indian CleanTech startup Smart Joules.
The firm is currently partnered with the Ministry for Foreign Affairs of Finland, the Climate Investment Fund, Nordic Development Fund, Korea Venture Investment Corp., and Korea’s Ministry of Economy and Finance to help bring a more sustainable future to Asia.
Nordic Development Fund managing director Karin Isaksson says: “ADB Ventures represents a timely complement to traditional development approaches through the involvement of the private sector in addressing critical climate change challenges. We are pleased to be working with the ADB on this important initiative that has particular relevance in the post-COVID recovery.”
And finally, while not exclusively tech-focused, last month Singapore-headquartered global gaming firm Razer announced the launch of its new (and first) sustainable US$50m fund. The Razer Green Fund aims to invest in environmental and sustainability startups with up to US$1m funding for startups in the seed and series A stages.