INDIA AND CHINA ECONOMIES REBOUND FROM THE WORLDWIDE RECESSION, AND POISED FOR SIGNIFICANT GROWTH

Economic recovery in China, India, and elsewhere in the region could be the strongest source of sustained global growth for years to come.

 

Illustration by Lars Leetaru

In September 2008, the global financial crisis hit Asia like a tidal wave, flooding in from the U.S. and Europe. Within weeks, Asian GDP growth rates began to tumble: China’s annual growth rate dropped from 13 percent in 2007 to about 9 percent in 2008, India’s slipped from 9 percent to below 6 percent, and Singapore’s plunged from 8 percent to less than 4 percent. Underlying these stark statistics were significant declines in exports. In March 2008, China and India had boasted year-over-year export growth rates of more than 30 percent; nine months later, both were well into negative territory. Foreign direct investment in these countries, and in Korea, Japan, and the nations of Southeast Asia, fell significantly as well.

But by September 2009, it was clear that China, India, and other emerging Asian economies would be the first part of the global econ­omy to rebound. In the second quarter of 2009, China’s GDP was up 7.9 percent compared to the same quarter in 2008; India’s growth rates began to rise over the same period. This all came as a surprise to many observers, who had overestimated the importance of exports to the largest Asian econ­omies and otherwise underestimated Asia’s healthy fundamentals. As it turned out, domestic banking systems in China and India were relatively unaffected by the subprime and securitization crisis, and rapid growth in domestic demand, spurred by government stimulus, compensated for at least some of the drag caused by declining exports.

Forecasts call for even better results in 2010. In addition, economic prospects are either stable or re­bounding in Pacific Rim nations. In the second quarter of 2009, according to a survey in the Economist, Singapore, China, Korea, Japan, and Australia showed quarter-on-quarter annualized GDP growth of 21 percent, 15 percent, 10 percent, 0.9 percent, and 0.6 percent, respectively. The accuracy of specific numbers may be open to debate, but the general direction is undeniable.

This kind of growth, at a time when prospects for the economies of Europe and North America remain ambiguous or moribund, offers substantial opportunities for global businesses. And it also offers a warning: As the recession eases, the shift of global economic activity to Asia is accelerating. This transition had begun well before the collapse, but as recently as 2008 many Western businesses were essentially ignoring it. That is no longer a viable strategy.

Inside the Transition

For hundreds of years prior to the West’s Industrial Revolution, China and India together accounted for about half of the world’s economic activity. Then, as Western econ­omies industrialized, China and India fell behind — down to only 8 percent in 1970. This trend began to reverse in the 1980s, and today, these two countries account for just over one-fifth of global economic activity. That may seem like a great deal, but not when you consider that they contain more than one-third of the world’s population. There are innumerable consumers in India and China seeking to buy products they have never had; an immense amount of financial capital, deployed effectively for growth; many eager and capable entrepreneurs; and a highly favorable business environment for the first time in hundreds of years. All this adds up to a significant shift in the world’s economic center of gravity.

Perhaps the most important component of this transition is the growth in Asian consumer markets. When the economic crisis struck, there were fears that weakening consumer spending around the world would spread to Asia. Indeed, more than 20 million Chinese people lost their jobs in the export sector, and the McDonald’s Corporation, a bellwether of consumer confidence in emerging markets, reported falling sales in southern China.

But retail sales growth has rebounded sharply in China and India. One force driving this turnaround is consumer credit; younger populations in Asia are more amenable to buying on credit than their parents are, and as aspirations and incomes grow, people recognize the value of credit in allowing them to make purchases they would have otherwise put off for years. Levi Strauss & Company has just an­nounced the first consumer credit program for low-ticket items in India, offering jeans on an interest-free, “buy now, pay later” installment plan. In an experiment con­ducted over two months in com­pany stores in Bangalore, consumers spent 50 percent more than usual when offered the installment op­tion. The number of credit cards issued annually in China, meanwhile, was about 140 million in 2008, and it’s growing more than 50 percent per year.

Another factor affecting spending patterns is the gradual change in government-supported social benefits that is planned in countries such as China. Improvements in health insurance and pensions, although still in their early stages, may free consumers from the need to save as much as they have traditionally saved for their old age.

As global consumer products companies turn to this Asian consumer base, they find themselves welcomed. China is already Adidas’s second-largest market after the United States. Mattel’s Barbie brand is a big hit in Shanghai. Retailers such as Walmart, Tesco, Carrefour, and Metro, and consumer products companies such as Unilever, Procter & Gamble, PepsiCo, and Coca-Cola have credibly ambitious growth plans for the region. Indonesia, with a population of nearly 240 million, has generated attractive profits for local companies such as Ramayana and multinationals such as Unilever. In India, government policies still hobble foreign companies, to some extent. But the government is steadily liberalizing, and a 2009 global survey conducted by KPMG International of corporate investment plans predicted that “India will...become the world leader for investment in manufacturing in five years.”

Companies based in Asia are finding ample opportunities as well. Because they escaped the economic crisis relatively quickly, many leading Chinese and Indian companies gained prominence on the global stage in 2009. By market value, five of the top 20 banks in the world, including the two largest, are Chinese. (See “What Banking Needs to Become,” by Vanessa Wallace and Andrew Herrick, s+b, Winter 2009.) As consumers in the U.S. and Europe retrench, Asian companies are looking elsewhere for sales growth. For example, China’s trade relations with Latin America, Africa, and the Middle East are growing rapidly; Brazil–China trade alone has shown a 12-fold increase since 2001.

The crisis has also made the connections among Asian companies stronger. Japan and Korea have begun to relocate their manufacturing and customer service sites to lower-cost nations in their backyards. Nissan Motor Company plans to produce the next-generation version of its super-mini, the March, in Thailand in 2010. This will be the first major mass-market Japanese car to be manufactured completely outside Japan; the move will reduce costs for this vehicle by as much as 30 percent. And many Chinese companies have been ex­plicitly mandated to “go out” (zou chuqu, in the words of the declared government policy) seeking customers and alliances across Asia.

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COMMENTARY:  I strongly recommend you read this article to identify new business opportunities and emerging trends in China, India and other Asian countries, that have rebounded from the global recession and financial meltdown that occurred in the U.S.

In some previous articles I have posted on my Blog I have mentioned several opportunities, and not to my surprise, they have been mentioned in the aforementioned article.  Some of these opportunities include infrastructure, health care and education.  

It also appears that Chinese consumers are starting to adopt purchasing things on credit card, a nasty habit of American consumers, and a prime reason for all the bankruptcies and slowdown in our economy.  But, then again, that's another subject.    

Courtesy of an article dated November 24, 2009 appearing in Strategy+Business