Their growth record is also impressive.
Between 1979 and 2004, China grew at an annualised rate of 9 per cent, and
India at 6 per cent. In 2006, the combined nominal GDP (without adjusting
for purchasing power parity or PPP) of these countries was US$3.574 trillion
- roughly 27 per cent of the US economy. More importantly, 'Chindia'
accounted for 38 per cent of world population, 49 per cent of world iron ore
consumption, 55 per cent of world cement consumption and 59 per cent of
world vegetable production. According to one estimate, by 2020, China's GDP
will be US$12 trillion and India's GDP will be about US$3.4 trillion -
together, they would constitute 60 per cent of the US GDP. If current growth
trends continue, by 2050, China's GDP would exceed the US GDP significantly
while India's would match it.
Low current penetration levels (in terms
of ownership of durable goods) is another factor working in favour of these
markets. For instance, in 2003, only 0.9 and 1.6 per cent of the population
in China and India, respectively, had cars - versus 55 per cent for Japan,
25.7 per cent for Taiwan, 22.7 per cent for Malaysia and 9.1 per cent for
Thailand. There is strong evidence of the increase in percentage of car
ownership with increasing incomes, suggesting that both China and India's
markets have plenty of room to grow.
Operating in Chindia: some
misconceptions
Despite the attention received by these
markets in the popular press, many misconceptions remain about them. For
instance, many analysts and managers tend to view China as a cheap source of
low value-added manufacturing and India as a cheap location for low
value-added high-tech services (such as software and business process
outsourcing) while believing that the size of these markets is rather
limited for high-tech goods and services.
Another set of analysts and managers
believe that these countries offer large markets for counterfeit goods and
limited opportunities for genuine goods, which often come at high prices.
Finally, some question whether these markets are characterised by higher
levels of risk than what expected returns would suggest. On the other hand,
there are also optimists who believe that capturing even a one per cent
share of these markets would make a big difference to their overall
performance and that achieving this should not be a tall order.
China and India's low average income
levels belie the fact that they have plenty of consumers who can buy a wide
variety of goods and services - whether low or high- tech. By end-2006, for
instance, China had more than 350 million mobile phone subscribers and India
is expected to reach this number in late 2008.
As producers, these countries will play
an even bigger role in high-tech industries. India's exports of software and
technology-enabled services are expected to go up from US$22 billion in 2006
to US$140 billion in 2012. In 2005, high-technology exports constituted 28
per cent of China's total exports and amounted to US$220 billion.
As for the difficulty of operation in
these countries and the risk/reward equation, according to one estimate, 68
per cent of US companies in China are profitable and for 70 per cent of the
companies, the margins in China are greater than their global margins. The
proportion of profitable companies in India is as high as 90 per cent and
Indian operations exhibit better profitability than average for 60 per cent
of the MNCs.
Finally, while it is true that
counterfeits pose a challenge, Chindia offers plenty of opportunities for
selling genuine, high-quality (and premium-priced) goods. China, for
instance, is the second largest market for Louis Vuitton, the purveyor of
high-quality fashion accessories.
The challenging nature of these markets
implies that once strong competitive footholds are established, they are
likely to be sustainable simply because later entrants would often face
similar high entry barriers. In fact, there are several examples of firms
that struggle in their home markets but have managed to capture pole
positions in Chindia. These include Buick and KFC in China, and Suzuki in
India.
While the Chindia market represents a
tremendous opportunity, it is clearly not without challenges. In fact, firms
rushing in and expecting to easily capture even one per cent market share
may get a rude shock. Upon its initial entry into India, even Kellogg's - a
company with a wealth of experience of operating in global markets -
struggled badly. Its main product, corn flakes, was considered too expensive
and inappropriate (too bland) for local tastes.
Integrating Chindia into your strategy
So how can multinational firms integrate
Chindia into their global strategy? Here are a few rules of thumb:
1. Be early: In emerging markets, early
movers may be able to build brands cheaply, create impregnable positions in
the distribution channel and shape consumer expectations - all of which
would be difficult for later entrants to match.
Singapore-based Asia Pacific Breweries,
which makes Tiger beer, is a classic example in this regard. In China's
Hainan province, where it was the first multinational brewer, it commands 80
per cent of the market and its international brands, such as Anchor, enjoy
leadership position. The same company has found success to be elusive in the
Shanghai market, where it was not the early mover and jockeying for market
share is intense. KFC in China and Suzuki in India provide other salient
examples of successful early movers.
2. Take the long and broad view: Given
the evolving nature of these markets including factors such as the strong
role of politics (especially market participation through
state-owned-enterprises), multinationals looking for quick returns are
likely to be disappointed. On the other hand, those who patiently build
their operations are likely to be handsomely rewarded. It is also important
that multinationals go beyond a pure local market orientation (as an
opportunity to generate more sales) and look at these markets for diverse
purposes such as sourcing products/ services/talent; and learn new ideas.
3. Be adaptable: Being a fox is likely to
be more rewarding than being a hedgehog. Lack of adaptability has led to
many failures. Nestle's bottled water business in China failed because it
adopted a centralised facilities-based model resulting in high costs and
long delivery times. The business also suffered at the hands of nimble
competitors.
Ericsson lost market share on its handset
business partly because it refused to deal with cases involving defective
products.
4. Don't underestimate local companies:
Multinational firms often enjoy strong competitive advantages over local
companies in the form of scale economies, technology and brand advantages.
Some multinationals, however, run the risk of underestimating local
competition. Recently, many Chindian firms such as Haier, Huawei, Ranbaxy
and Tata Steel have emerged as important competitors on the global stage.
5. Be an insider: Multinational firms can
significantly enhance their chances of success by becoming an 'insider' - a
term coined by noted management consultant and writer Kenichi Ohmae.
Becoming an insider might include a broad range of strategies including
developing a local supply chain, getting involved in the local communities,
making extra effort to hire local managers and presenting a local face in
promotional and other strategies.
Korean car company Hyundai has become an
'insider' in India. It was early in developing the local supply chain, which
has reduced its costs and helped it charge lower prices. It also employs
Bollywood celebrities as its spokesmen, which has further enhanced its
popularity. In China, Motorola has benefited by being a model corporate
citizen by supporting education, environmental protection and also China's
bid for the 2008 Olympics.
6. Partnerships: Partnerships offer
multinational firms several advantages over going it alone. They can ease
the task of obtaining regulatory permissions, fill competence gaps
(especially in terms of local knowledge) and give a local face to the
multinational entity.
If you want to know how the rise of
Asia's new economic superpowers is changing the world, take a look at a new
book called Chindia: How China and India are Revolutionizing Global
Business. It's a collection of articles by journalists at Business
Week, nicely stitched
together by the magazine's former Asia correspondent Peter Engardio.
It's easy to be too golly-gee about
Asia's spectacular rise, but when you read some of the facts in this book
you can't help but keep exclaiming "golly," "gee" quite
a bit. For instance did you know that:
- Some experts estimate that there are
more information technology engineers in the Indian IT Mecca of
Bangalore (about 150,000) than in Silicon Valley (120,000)
- China is already the world's biggest
cellphone market, with more than 350 million subscribers, and that is
expected to hit 600 million by 2009.
- That same year, the number of Chinese
with broadband Internet access should surpass the number in the U.S.
- China and India produce half a million
new engineers and scientists a year, compared with 70,000 in the U.S.
- In 2008, the value of goods exported
by China is expected to pass $1-trillion (U.S.) a year.
We have never witnessed anything quite
like what is happening in India and China. As this book notes, the world has
seen other countries take off in breathtaking fashion: Japan in the 1950s
and 1960s, South Korea, Hong Kong and the other Tiger economies of the Far
East in the 1960s and 1970s. But none had the demographic heft - the pure
numbers of people - to change so much for so many industries around the
world.
You have to look back to the emergence of
a young, vibrant U.S. in the 19th-century to find a parallel to the rise of
"Chindia" today. But as BusinessWeek points out, even that
remarkable rise can't really compare with the phenomenon of China and India.
"Never has the world seen the simultaneous, sustained takeoffs of two
nations that together account for one-third of the planet's
population."
For the past 20 years, India's economy
has been growing at an average of 6 per cent a year, China's an amazing 9.5
per cent (11.1 per cent in the most recent quarter). If things continue at
that rate, China could overtake the U.S. as the world's biggest economy in
40 years and India could surpass Germany as the world's No. 3 economy in 30
years. By mid-century, India and China combined could account for half of
global output.
Of course, things could easily go off the
tracks. Chindia's authors are careful to point out the risks and
liabilities that both countries have. China has a brittle, undemocratic
political system and rising levels of open, often violent, unrest. Its
growth has been fuelled partly by massive government investment, some of it
wasteful and poorly directed. Its banking system is inefficient, with
bad-loan levels of up to 20 per cent. Its stock exchanges often seem more
like casinos than modern capital markets.
India, for its part, suffers from
crumbling airports, highways and ports, an enormous, stifling bureaucracy
and horrendous (though improving) levels of poverty and illiteracy, to say
nothing of religious tensions and the enduring shame of the caste system.
Despite their dazzling growth rates,
India and China started from such a low base that, put together, they still
produce just 6 per cent of world output. On the other hand, their growth is
blinding. During the Industrial Revolution, Britain and the U.S. doubled
real per capita incomes in 50 years. China is doing it every nine.
Whatever challenges they face, the
dynamism and optimism of these two giants seems unquenchable. "What
makes the two giants especially powerful is that they complement each
other's strengths," Chindia's authors remark. China is a
manufacturing powerhouse, India specializes in software, design, services
and precision industry.
That makes for a world-beating
combination. But it doesn't mean the rest of us lose out. The Economist
magazine predicted last year that, largely because of exploding growth in
places like India and China, "the first decade of the 21st century
could see the fastest growth in average world income in the whole of
history."
Golly. Gee.
- by Marcus Gee GLOBE
& MAIL 30 May 2007
CLSA projections of what is to come: By 2020, Chindia
will have one-third of the world mobile subscribers and a $100 billion
mobile handset market. Its packaged food market size will be $480 billion,
which is one and a half times the present US market and five and a half
times the present United Kingdom market. The aggregate of bank loans in Chindia
will be $9 trillion in 2020 — twice the current GDP of Japan.
An increasingly prosperous region makes its presence felt in the world's
economic, political and creative fields.
“As Asians become wealthier, they have
also become more aspirational. They are spending more money on products that
they previously perceived as luxuries.”
When China and India
opened their markets to the world, they ushered in unprecedented prosperity
and a cultural renaissance that shaped human history itself. That happened
more than 500 years ago – and it is happening again.
History, indeed, repeats itself. And while today’s rates of economic
growth for the Asian behemoths are decidedly anemic compared with their
mind-boggling expansion in the almost 400 years since the 1500s, this hint
of a new growth cycle will be no less historic than what was witnessed half
a century ago.
The intriguing table
overleaf, adapted from an International Herald Tribune report
citing figures from a study commissioned by the Organization for Economic
Cooperation and Development, with projections from the International
Monetary Fund and based on 1990 US dollars, shows how the Indian and Chinese
economies surged in the 1500s to the late 19th century as trade with the
outside world brought in untold riches.
After slowing down in the
aftermath of the Pacific war and the lost years of economic mismanagement
between the 1960s and the 1970s, these two giants are stirring again,
marking a new stage in the region’s economic evolution since the late
1940s that started with the Japanese phoenix, followed by the East Asian
economic tigers.
A land of
superlatives
Today, Asia is once again a land of superlatives – brimming with the
biggest and the tallest, the deepest and the dearest, and the most
outrageous moneymaking ideas.
According to Michael
Spence, a 2001 Nobel laureate in economics and professor emeritus of
management at the Graduate School of Business at Stanford University, there
are only 11 cases of sustained growth among developing economies in the
world – gross domestic product (GDP) growth of more than 7% maintained
over 25 years or more, with income doubling every decade. Eight of these
economies are in Asia – China, Hong Kong, Indonesia, South Korea,
Malaysia, Singapore, Taiwan and Thailand.
In a recent report, Ifzal
Ali, chief economist at the Manila-based Asian Development Bank, said that
the economies of developing Asia, which excludes Japan and Australia, grew
8.3% last year – the fastest rate of expansion since 1995. This rate has
been fueled by blistering growth in India and China, which together account
for 70% of developing Asia’s growth.
Last year, almost US$90
billion in net private capital flowed into Asia – an increase of about 50%
from 2005. And yet, the Asia Pacific already boasts more than US$3 trillion
in foreign currency reserves – over 60% of the global total.
This year, Asia will contribute some US$1 trillion to the global economy. In
contrast, the US and Europe will chip in about US$750 billion each. But,
according to a forecast by investment bank Goldman Sachs, if current growth
rates hold, China will surpass the US as the world’s biggest economy by
2035. Fifteen years after that, India will also outstrip the US. Needless to
say, the impact from all these years of economic expansion has been nothing
short of miraculous.
Human exodus
Some 25 years ago, only two of every 10 people in China – or 20% of the
population – were living in cities. Last year, that proportion surged to
40%. In other words, roughly 200 million people moved from China’s poor
rural areas to its increasingly prosperous urban centers in a span of about
a quarter century – probably one of the most massive rural-to-urban
migrations in the history of mankind.
During the same period,
the proportion of India’s rural population has hardly budged from 75% of
the total. But given India’s astounding economic growth over the past few
years, the world is about to witness another epic farm-to-city exodus. In
fact, 700 million Indian rural dwellers – practically the size of Europe
– will migrate to cities by 2050, a staggering rate of 45,000 migrants per
day, said Goldman Sachs.
Across the region, some
1.1 billion more people will be moving into Asia’s major cities over the
next 20 years. And, according to the World Bank, while half of the people
from the developing economies of East Asia – a region stretching from
South Korea to Indonesia – lived on less than US$2 a day before the Asian
financial crisis in 1997, that rate has now receded to 29%.
Wealth transfer
This pan-regional shift in wealth, which remains uneven to a certain extent,
has led to profound changes in almost all sectors – from investment
banking to art collecting, from property buying to even candle shopping.
“The wealth management business has become increasingly competitive and
yet remains highly prospective because of the rapidly increasing affluence
in the region,” said a spokesman from Deutsche Bank, the fourth-largest
private wealth management company in the region. “One of the features of
the industry is that the demand for more sophisticated structured products
is growing very rapidly.”
According to the spokesman, Deutsche Bank’s wealth management business in
the region grew an average of 25% a year for the past eight years and the
bank manages assets of more than US$29 billion – bigger than the GDPs of
Bolivia, Panama or Qatar, in purchasing power parity terms.
Unreal estate
In the more mundane world of the property market, the region’s economic
expansion has propelled some of Asia’s erstwhile backwaters into the top
ranks of the world’s most expensive office and residential locations.
“The impact on the
property market has been dramatic,” said Nicholas Brooke, chairman of
Professional Property Services, which has a network of offices in China and
Southeast Asia. “A lot of private buyers are upgrading their properties or
investing in the market, mostly in the residential sector. Even businesses
are expanding and also buying accommodation units.” For Brooke, who
has lived and worked in the Far East for the past 30 years, China remains
the big opportunity. “It’s the place to put one’s money, although it
does not currently have very much quality property products.”
He said that most of the
funds being invested in Asia have been coming from Europe and the Middle
East, with a trickle from the US, where investors are more risk-averse.
“Japan and South Korea have also come back as strong sources of money,”
he said, cautioning that some of the property price appreciation have not
been healthy and that all the emerging markets were bound to undergo some
correction.
Eye-popping art
prices
In the art market, the changes have been likened to a shift in plate
tectonics. “We are tremendously on the positive side because of the new
money coming into the market,” said Ken Yeh, deputy chairman of
Christie’s Asia.
Yeh, a Chinese art specialist, has seen an almost across-the-board market
surge – involving Chinese porcelain and bronzes, as well as 20th-century
and contemporary art.
“Prices for Indian and
Russian art have also been skyrocketing. New Russian buyers have become
major players in Impressionist and contemporary art, buying both new and
established names.”
He sees a correction ahead, but it won’t be a bubble bursting, as he
believes that the market has become more global than before and the army of
speculators has been balanced by the ranks of genuine collectors.
“It’s not quite like the art bubble in the late 1980s, when the main
reason for prices going up was mainly Japanese buying. Now, everybody is
buying – Europeans, the Chinese, Russians and other Asians.”
Repatriating
heritage
While Chinese and Indians used to acquire only local art, they have started
buying Western artists as well, as shown by the record-setting price for an
Andy Warhol work paid by a Hong Kong-based collector, Yeh added.
Even more interestingly,
China’s state-backed corporations have joined the fray. “It’s good for
these Chinese entities to bring home artifacts,” Yeh said. “Museums
abroad were never really in the market because of budget constraints and
they had to wade through red tape. So it’s normal for Chinese people to
buy back their heritage.”
The increasing
sophistication of the region’s middle class has also been reflected in
other more esoteric domestic rituals.
“As Asians become
wealthier, they have also become more aspirational,” said Ian Carroll,
managing director of The Candle Company, which has several branches in Hong
Kong and is slowly expanding across the region. “They are spending more
money on products that they previously perceived as luxuries. For example,
they are buying candles to create a special atmosphere in their homes, and
consuming more wines and spirits both at home and for entertaining.”
How the West was
won
The wealth creation in the region has reached a critical level that some
countries, though still technically classified as developing economies, have
started to export capital.
Flush with cash from its
ever-ballooning trade surplus, China is creating what some people estimate
will be a US$300-billion state investment fund, akin to those humongous
state-funded capital pools in Singapore, Kuwait and the United Arab
Emirates. This likely injection of massive cash into Asian assets is
expected to boost local economies and regional economic integration. It
could also signal another chapter in the acquisition of Western corporate
jewels by Asian entities.
Even more interesting in geo political terms, the world may see an
accelerating shift in political loyalties as the growing economic clout of
China, Taiwan, South Korea, India and even Malaysia sees them acquiring
assets from resource-rich countries in Central Asia, Africa, South America
and the Central and Eastern European states formerly controlled by the
Soviet Union.
In a way, the Asian
sphere of influence is now extending into the front yards of their former
colonial and imperial lords. It will not be exactly a case of history
repeating itself, but as Asian conglomerates start buying up Western assets
in a kind of reverse-colonialism, it sounds more like history reversing
itself. - REVIEW
ASIA 2007
