Emerging market focus: Global trade and its future !
The technology, trade liberalization, environmental friendly policies,
and consumerism that brought the winds of change
Over the past many years the developing world has adapted
environmentally friendly high technology and focused on its high value added
products, and standard of living resulting in a shift of manufacture of many low
value added and energy intensive environmental hostile products to developing
countries. The initial shift that happened about 15 years ago was to South East
Asia, Korea and Taiwan, which created the Asian Tiger economies, and then
manufacturing shifted to China. The low value added service activities, back
office functions including software development was outsourced to India.
The developing countries also experienced an
increase in their population, income and consumption, while trade
liberalisation took root with the preferential trade agreements (PTAs) and
international treaties championed by World Trade Organization (WTO), which in
turn freed the movement of goods and services between participating nations and
created a more connected global economy.
The other forces that have driven global integration have
been technological innovations, broader political changes, economic policies,
and the mobility of people and information. These changes have ensured that the
overall costs associated with trade, such as financing, risk mitigation,
logistics, insurance and communications, have steadily fallen in recent years.
Given that trade is easier and less expensive, trade between countries–
especially in sectors where demand is expected to remain strong – is likely to
be bolstered further.
These changes have support from trade, investments and economic
activity
World trade is expected to rise over US$125 billion in 2030
and US$287 billion by 2050, accounting for 61 percent of world GDP in 2030 and
76 percent in 2050. In the early 1990s South-South trade accounted for
only 10% of world trade, and now it has risen to 25 percent.
South-South trade emerged from the latest worldwide economic
slowdown more or less unscathed. Emerging markets (EMs) have gained influence
in the post-global financial crisis world, and today account for almost 50% of
global exports. South–South trade between EMs has risen to 24 percent of global
flows, with China being responsible for much of the increase.
Foreign Direct Investment (FDI) flows to developing
economies reached US$759 billion in 2013, which is about 52 percent of global
FDI flows.
The global poverty rate had been cut in less than half in 20
years. In 1990, 43 percent of the population of developing countries (1.9
billion people) lived in extreme poverty and now it is estimated to be less
than 21 percent (or less than 1.2 billion). The largest decline is in China.
By 2016, Asia-Pacific (excluding Japan) private wealth will
top the world list and will displace North America. Asia-Pacific wealth is
expected to hit $57 trillion in 2016, compared with a $56 trillion target for
North America. By the numbers, China saw its millionaire count soar to nearly
four million in 2014, up from three million just a year earlier.
By 2050, world population in emerging Asia will rise to 47
percent of the total world population, and the share of emerging Asia’s GDP to
46 percent of the world total, with the lion’s share being by China, India and Indonesia.
Contagion of trade and investments spreads to China, India and
commodities countries
The 1990s saw China’s economy opening up and
transforming it into a global manufacturer and marketer of manufactured goods,
and also the creation of a complex supply chain to acquire resources and trade
in competitively priced goods. China’s growing demand for commodity products to
fuel its manufacturing base has massively strengthened trade links with
commodity producers in Latin America and Africa. The highly productive and
competitive labour force and infrastructure, attractive tax incentives, the
opening of the economy, and good infrastructure attracted a lot of multinational
companies to invest and set up their manufacturing bases in China.
India also emerged as the leading exporter of high-end
information technology services as it capitalized on its competitive and
educated labour force. Indian and Chinese companies also capitalized on the
political and cultural linkages of their large diaspora in the Middle
East, USA, and UK.
Trade between countries in the Southern hemisphere was
sparked by a series of national and continental trade agreements (e.g.,
MERCOSUR, ASEAN, COMESA, and SAARC) and by a growing need for greater
cooperation to enable these countries.
Within the Middle East-Asia trade corridor, India has
emerged as the largest trading partner, with volumes reaching $135 billion in
2012 compared with less than $10 billion in 2004. The Middle East, with its
energy supply, will remain at the heart of South-South trade flows.
The money multiplier effect later translated into a dramatic
transformation of emerging markets consumers, economy, infrastructure,
financial services, defence and manufacturing facilities that are now modern,
automated, and sophisticated. The ensuing consumer and economic boom has also resulted
in China and India sourcing more for their own domestic consumers.
Diversification by MNCs and local manufacturers out of China,
the rise of Asian MNCs, and expansion of consumer markets for Chinese
manufacturers also ensued that manufacturing bases or infrastructure were created
in rest of Asia, Africa, Middle East and OECD countries to facilitate trade and
investments.
China’s and India’s emergence as trade and service
powers, and the rise of their consumer
forces, led to the expansion of their sourcing of resources from Australia,
Indonesia, Peru, Brazil, the Middle East, Sub-Sahara Africa, Russia, and Africa,
and then marketing into OECD countries and rest of the world.
The unquantifiable, economic and human multiplier!
Modern-day trade has created jobs, grown economies, helped raise
global living standards, improved demand for services, raised nutrition
standards, and helped political stability, world peace and harmony.
Favourable spinoffs of trade include tourism, travel, migration, expansion of
educational skills and services. There is an increase in demand for ancillary
services – hotels, air and surface transportation, food and educational
services. Information asymmetry and cultural barriers are collapsing. The trade trends seem irreversible as
population demands for a developed market lifestyle, education standards, and a
significantly improved quality of life continue to increase.
Government participation has also helped build bilateral
regional partnerships, cooperation agreements and free trade agreements (FTA),
though multilateralism is limping and that regional partnership agreements have
ended up creating a ‘noodle bowl’ of FTAs. Bilateral trade agreements are
strengthening interdependencies among countries, leading to peace. China-Taiwan
relations have improved significantly, driven by trade and investments.
Regional central banks are cooperating to take concerted
actions that intend to stabilize the impact of volatility in financial markets
and systems.
Political institutions recognize that trade is creating
jobs, economic growth, a higher standard of living and higher nutrition levels.
A highly engaged and employed population promotes social and political
stability. Political support empowered people, and helped reduce both natural and
man-made barriers. Natural barriers are falling with education, ICT, cultural
exchanges and travel, and man-made barriers are falling as stakes in
growth increase and regional partnerships emerge.
Investments are displacing aid. The Chinese model of
investing in Africa is gaining ground, displacing developed markets’
aid. The Africans love it as it is helping develop skills, infrastructure and
jobs – it’s teaching to fish versus giving a fish!
The opportunities
galore as prosperity spreads
Rising GDP and growth of consumers in emerging markets, and
a share in demographic dividends, is fuelling trade, infrastructure
development, falls in tariffs and trade barriers, expanding trade-related
services and expansion of economic activities to newer markets. The population
in developing economies is experiencing improved standards of living, social
and economic development. Growth in services is linked to trade. Millions have
been lifted out of poverty in China, India, Indonesia and
other Southeast Asian countries.
The accelerated use of information communication technology
(ICT) is also improving awareness of goods, services and opportunities. For
example, Indian is leaping forward from no technology to smart phones and
tablets.
For the past 10 years, the world has seen a significant
reduction in man-made and natural barriers to trade, transportation and packing
costs. There is a surge in bilateral free trade agreements, and increases in a
highly educated and mobile population, and extensive use of information and
communication technology for exchange of information.
The growth opportunities for emerging multinationals are
also supported by availability of risk management tools, financing, and pricing
benchmarking on local and international futures exchanges. Sovereign wealth
funds, export credit agencies and banks from Asia are establishing
their footprints with emerging multinational companies.
In order to diversify risks, companies increasingly partner
with sovereign wealth funds, government-linked companies, private equity funds,
and developed market MNCs. Companies also increase outbound foreign investments
to acquire resources, technology and suppliers.
Emerging market brands and multinational companies are a
force to reckon. There is a convergence of process, value systems, capabilities
and corporate governance standards of EM companies with that of the developed
market companies. The cash hoard of developed market companies is also fuelling
organic growth and M&A in emerging markets.
Every company is playing to its strength or weakness in
developing growth strategies in emerging markets. There are a few important
strategies that are being played out daily. Companies are building future
models that are orchestrated for high performance where the multi-polar world
and technology meet. Companies adopt single or multiple strategies, each
of which is handled by a separate vertical such as Go to Market, Go for Technology
and assets, Go for Talent, Go for Infrastructure, Go to Partner, Go for Funding,
Go to Mitigate risks. Companies also build world standard execution
capability. Strategy does not succeed without execution, and execution delivers
customer value and brings sustainable profits.
As scale is achieved, companies partner for innovation,
technology, customer acquisition, and diversification of Emerging Market risks. Sourcing
of capital equipment coupled with long term financing and sourcing investments
from international markets helps deepen financial pockets. Companies also set up
global hubs and offices in countries with bilateral FTAs to take advantage of
treaties and tax benefits, and to harness talent.
As trade helps local economies, companies also invest in
infrastructure in the local markets and participate in spinoffs from trade with
increasing investments in hotels, infrastructure, services, local trade and
banking.
Enablers have deepen market opportunities
· Significant
demographic dividends and growth markets: Opportunities for companies are
growing, with better access to markets, improved communication, interaction,
and confidence, political and institutional support, investments and breakdown
of cultural barriers.
· New
currencies are being used to trade replacing dollar which is helping manage foreign
exchange volatility: RMB use is supported by the Chinese government, INR is
used for settlement of oil exports from Iran, and bilateral lines of
credit for trading in local currencies are being established, replacing the US
dollar.
· Emerging markets
export credit agencies and banks are increasingly providing risk management
solutions: they are assuming risks via financing of exports and long term
capital whilst in the past that was a feature that was concentrated with
western banks. Increasingly, Chinese banks and ECA’s have been providing
financing to Indian steel mills, ICT companies and power plants. Export-Import
banks of China, Korea, Japan and the Middle East are taking long term credit
exposures on emerging market companies, which buy equipment, goods and services
that have significant export content.
· Outbound
investments by government-owned or linked companies is surging, creating
comfort for corporates to invest: GIC and Temasek of
Singapore, China Investment Corporation, Dubai Investment
Corporation, Khazana of Malaysia, Russian state-owned investment companies, and
Abu Dhabi Investment Corporation have significantly increased their investments
on the back of government reserves. The focus has been around resource
acquisition, technology transfers and contract farming. Asia Infrastructure
Investment Bank that is primarily supported by Southern nations and will focus
on growing infrastructure that will support South- South trade.
· Easy to
leverage on the international bank’s knowledge, capability and network: International
banks with vast international network and historical ties and emerging market
banks where their diasporas (e.g. Indian banks in Africa and the Middle
East) are located are helping trade and supply chain financing, and managing
counterparty and financial risks. These institutions provide valuable
information on legal frameworks, import export regulations, credit and
financial risks, helping manage risks and open up opaque markets.
· The
popularity of emerging market multinationals and brands is significant:
Samsung’s popularity has impacted both Nokia and Sony. Infosys,
Samsung, Toyota, Tata-Nano, HTC, Lenovo, and Huawei are gaining
significant market share in the emerging markets.
· Countries
with multiple FTAs, such as Singapore, are also becoming bespoke hubs for
trading and value addition: Infrastructure, transport and shipping,
insurance, information communication technologies (ICT), banking and financial
services have become powerful catalysts of trade for these hubs.
· Developed market companies are learning from
EM and also changing their business models: Developed market companies
are increasingly going local to adapt to local demand, predominantly hiring
local talent, and are also creating local structures with little interference
from head office. McDonald’s and Pizza Hut are increasingly providing
foods to meet local preferences, there is an all vegetarian Subway, and Microsoft
is delivering local language capability. Some of the highly successful MNCs
in India, such as Hindustan Unilever, P&G, Cadburys, Cargill and
Philips, have historically adapted to local business demands and have been
exporting products or technology to other emerging markets from India.
Conventional trading strategies and business approach still remain
unchanged
Not much has changed in the modern day in terms of the approach
to trade, though the nature, pattern and routes of trade have changed
substantially with information technology, education and modern modes of travel
making trade easier, efficient, reliable, and transparent.
Modern day trade involves an exchange of goods and services
that emerges from value specialization, a quest for resources and new markets,
and acquisition of new technologies. Modern day trade still places heavy
emphasis on integrity, trust, exchange of information, risk-taking, dealing
with different cultures and society and valuing differences.
The cornerstone of sustainable success is a change in mind set and building
a multinational brand
Corporates have to have changes their mind-set while
exploring frontier markets. Companies have to invest and develop world-class
talent, processes, and systems. They have to adopt international corporate
governance systems that help in creating a learning and adaptable organization coupled
with ability to manage global complexities, ambiguity, risks, and volatility.
Investments in talent and information communication technologies are essential
to building a multinational. A truly multinational company should have values,
systems and people that bind the company together, helps operate the business
24x7, and manage operations that are spread thousands of miles away from the
headquarters.
Companies and their employees must view the world as a giant
supermarket and the company as a multinational. A single-minded focus on
building trust and a reputable brand earns sustainable growth and rewards.
Doing business the right way not only attracts people to a company, but creates
loyalty to the organization as well.
Corporate reputation stems from a strong brand image that is
backed by every employee’s commitment and adherence to honour its obligations,
compliance with guiding principles, and commitment to corporate social
responsibility and environment.
New market developments may result in companies spreading
their resources in multiple directions. A laser-focused, robust strategy
calibrated to return, risks and execution capability is necessary.
A good corporate citizen that cares and invests in the local
community and follows environmentally-friendly practices achieves sustainable
and long-term success. Initiatives on social and environmental
projects help build brand and reputation.
As international trade increases, the growth of trade and
services within home markets provides a scale that cannot be ignored. As
strategies of many companies flatten out, a right balance between global and
local strategies is essential.
Emerging markets are developing at a phenomenal pace and are
set to reshape world trade patterns in the coming years. Many companies will
need to gear up to manage complex and volatile socio-economic, political and
legal systems, and to manage demanding consumers in a highly differentiated
market.
The market footprints, opportunities, and challenges of
Southern markets, most of which are emerging, are no different than a complex
and diverse local market. With the right approach and attitude, companies
and managers will be equipped to succeed in emerging markets.
This isn’t
business as usual, the world isn’t flat!
Inevitably, the recent stagnation of commodity prices, which
few expect to be reversed in the near future given the slowdown of China’s
growth, has impacted the growth of South-South trade flows, especially those
involving commodity-producing regions such as Africa and Latin America.
Emerging markets are complex and fraught with a high degree
of implementation risks as socio-economic, cultural and legal frameworks are
different and need different approaches and spreads of corporate resources.
Further, markets are opaque and may lack financial depth. Volatility in foreign
exchange and prices of commodities can have a material impact on the company’s
investments and exposures in emerging markets.
Trade also creates interdependence which carries higher risk
of contagion and foreign shocks. Intense competition has increased
redundancies and resulted in inefficient use of resources. Competition for
resources can also create inflation, shortages and geopolitical tensions.
Urbanization is also bringing changes that governments are
unable to cope with. Unplanned growth in many emerging markets is also creating
pressure on the environment, usage of water, air quality and quality of human
relationship and family lives.
Government intervention and policy changes can impact
investments and trade as political institutions feel unsecure with volatility in
their currency and foreign exchange reserves. Social and economic challenges
intensify as a result of pressure on infrastructure, inflation, disparities in
income and wealth.
Increased empowerment of people and challenges to socio-economic
conditions of the local population makes economic and social policy making
unpredictable.
In order for companies to succeed and sustain, companies
have to accept that one size does not fit all, talent is hard to find,
relationships with government are unpredictable, and competition is intense
from both local companies and developed market companies.
The gains of South-South trade have not been sustained, as
many economies have not made structural changes the benefits have not
percolated to local consumers and populations. The commodity countries focused
on exports have seen the biggest drop in their economic activity. The biggest
drops were in Brazil and Australia.
Despite a positive outlook for South–South trade,
significant challenges remain. A lack of transparency, persistent opacity and
the absence of regulatory clarity in many EMs are cause for concern.
The change is irreversible and more trade corridors will open up!
Growing middle-class populations (particularly in Asia),
greater sophistication in supply chains and the rising importance of domestic
corporate sectors have all contributed to the expansion of South-South trade. The
South-South flows are opening new trade corridors that are increasingly
expected to characterise the 21st century’s emerging-market-led growth.
Africa is currently lagging because it is mainly trading
commodities in raw form with low technology use and very little value addition.
Sub-Sahara Africa has emerged as the new frontier and a competitor in
agricultural and resource space. Africa has almost 60 percent of the world’s
uncultivated and arable land. Africa is rich in natural resources
such as copper, coal, cobalt, and diamonds. It also has a large English-speaking
population with about 360 million cell phone users.
Egypt, Morocco, South
Africa and Tunisia have significant manufacturing and service
industries. Algeria, Angola, Libya and Nigeria earned
about US$1 trillion from petroleum exports from 2000-2008. Along with
rich dividends, Africa is a mixed bag and is often fraught with
political, financial and economic volatility. South American countries such
as Chile and Peru are also seeking increasing investments.
Australia and New Zealand will also see a strong growth. Investment interest in the Eastern European,
MENA and Mekong regions is increasing. The
Mekong region and Africa will likely benefit from interest from manufacturing
firms.
The game is not over
for North-North nor for the Asian tigers as they still continue to remain
important consumption markets and economic reform create more opportunities in
near future.
The North and Asian tigers continue to remain important consumption markets and may become competitive with growth in standard of living and costs in China, India and other South economies. The game is not over for North-North nor for the Asian tigers – ignore them at your peril!
The economic and financial restructuring and employment challenges in the developed markets, the increase in standard of living and costs in developing markets and the need for diversification of supply chain may shift trade patters for North with more manufacturing occurs in North zone and near to markets. The adaptation of environment and energy efficient technologies by South economies will also see some shift in manufacturing to North.
Most governments, after the 2008 financial crisis, are short of tax revenues and has pressure to create employment opportunity in their own countries using robotics, ICT, nano technology, tissue harvesting and organ plantation, and 3D printing; the impact of which may result in creating non-tariff barriers that may again shifts pattern of trade and investments to North.
The change is irreversible and neither politics nor trade wars will change the expansion in trade and economic activities globally that lifts the human race out of poverty, improving quality of life, and creates economic freedom.
The trade trends seem irreversible as population demands for a developed market lifestyle, education standards, and a significantly improved quality of life continue to increase.
The economic and financial restructuring and employment challenges in the developed markets, the increase in standard of living and costs in developing markets and the need for diversification of supply chain may shift trade patters for North with more manufacturing occurs in North zone and near to markets. The adaptation of environment and energy efficient technologies by South economies will also see some shift in manufacturing to North.
Most governments, after the 2008 financial crisis, are short of tax revenues and has pressure to create employment opportunity in their own countries using robotics, ICT, nano technology, tissue harvesting and organ plantation, and 3D printing; the impact of which may result in creating non-tariff barriers that may again shifts pattern of trade and investments to North.
The change is irreversible and neither politics nor trade wars will change the expansion in trade and economic activities globally that lifts the human race out of poverty, improving quality of life, and creates economic freedom.
The trade trends seem irreversible as population demands for a developed market lifestyle, education standards, and a significantly improved quality of life continue to increase.
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