GROWING INDUSTRIAL INTERCONNECTIONS AND GLOBALISED COMPANIES
INTERNATIONAL CONFERENCE ON
GLOBALISATION OF KNOWLEDGE DEVELOPMENT AND DELIVERY
THIRD ANNUAL CONFERENCE OF THE FORUM FOR GLOBAL KNOWLEDGE SHARING
NEW DELHI OCTOBER 17-18 2008

Françoise Pardos, Pardos Marketing

World major trends

All the long term trends here defined are meant to set the scene. Forecasts are made barring any major catastrophes.

Population trends

The two major trends worldwide are a demographic revolution in reverse, fewer births and longer life expectations.

People in poor countries now exert more control over their own fertility, and over the size of their families. A generation ago the biggest worry about poor countries was overpopulation. Now, in the world as a whole, fertility has fallen from 4.8 to 2.6 in a generation, in the last 25 years, except in sub-Saharan Africa and parts of the Middle East. This means that the actively developing countries are on a trajectory of rapid population aging, the second demographic revolution, in reverse, leading to the greying of populations.

Although less publicized, the aging of developing world populations is likely to be dramatic, when income levels are low and there are few pension plans. There is the saying “China is to become old before getting rich”. The outlook will probably be less violent in India, because of a higher proportion of young people.

At the same time, the total world work force is growing, for one generation at least, similar to the baby boom in the 1950-1970s, in the industrialized world. However, in order to be effective, there is an urgent need for improved education at all levels in most emerging countries.

Rural exodus and growth of the very large urban areas

Everywhere, there is a huge move of peasants going to live in towns. This move affects all the interrelated questions of urbanization, industrialization, rural-urban migration, and squatter settlements in developing countries. This leads to the growth of very large urban agglomerations. There are now 20 very large urban areas of over 10 million people. According to the UN Population Division, World Urbanization Prospects, the world urban population is to grow from 3.2 billion people in 2005 to 4.6 billions in 2025 and 6.4 billions in 2050, about two thirds of the total population then.

Emerging versus developed countries

There have been a few major world changes, revolutions and globalization throughout world history, from the Roman Empire, to Gengis Khan, to the discovery of the New World, and the Industrial Revolution of the 18-19th centuries. A new era of globalization began to emerge, which was interrupted in the 20th century by two world wars and a depression. It was only in 1972 that global trade regained the level it would have achieved if pre-1913 trends had been maintained.

Now a second era of globalization has arrived, allowing other parts of the world, all Asia, South America, Eurasia, to catch up with the developed economies, Europe, North America and Japan.

World economic growth continues to be led by the most dynamic emerging countries, large and small. China and India, and many others, are exporting goods and services. Growth in the older developed countries slows down, in the US and Europe. In the last ten years, the emerging economies averaged annual growth of almost 7%, the fastest pace ever recorded for such an economic size, well above the 2 % growth in rich economies.

As of 2005, the so-called emerging economies had:

80% of the world population,
70% of the foreign exchange reserves
50% of total energy consumption
25 % of Gross Domestic Product, GDP, at foreign exchange rates
50% of total GDP at purchasing power parities, PPP, accounting for lower prices in poorer countries
45% of world exports
15% of stock market capitalization

Actually, some of these countries should be called re-emerging economies, because they are regaining their former shine.

Until the 19th century, before the Industrial Revolution, China and India were the world two biggest economies. According to Angus Maddison, an economic historian, the emerging economies, essentially China and India, were over 90% of the world riches one millennium ago. Their share in the early 19th century was still 70%. It went down to less than 30% in most of the 20th century, and bounced back now to 50%, with a forecast share of at least 66% by 2025.

Brazil, Russia, India and China are the four biggest emerging economies, grouped together under the acronym BRICs, created by Goldman Sachs in 2001. These four economies account for close to half of the total GDP of all emerging economies.

Yet, many impressive forecasts for the next four decades will still leave GDP per capita in the BRICs well below those in developed countries. In 2040 the average American will still be three to four times richer than the average Chinese.

Shifts of major consumer products and buying power

As people grow richer, they want more cars and household appliances as well as better homes and roads. This, in turn, means a huge increase in the demand for energy and raw materials.

By 2015, there will be a billion more people with annual household incomes over $5 000, roughly the threshold for spending money on discretionary goods and services rather than simple necessities. Consumers' spending power in emerging economies will rise from $4 trillions in 2006 to more than $9 trillions, nearly the spending power of Western Europe today. The fast growing middle class are eager for first equipment in cars, appliances, telectronics, and the widest variety of consumer goods.

The car industry is a major illustration of this. International Monetary Fund, IMF, forecasts for 2050 indicate that the total of cars in use will be multiplied by 5, from 600 million units to 3 billion units, between now and 2050. At present there are only two cars for every 100 people in China, against 50 in America. Goldman Sachs forecasts that China car ownership will rise to 29 per 100 by 2040. The total number of cars in China and India combined could rise from around 30 millions today to 750 millions by 2040, more than all the cars in the world today. And yet, car ownership rates in those two countries would still be only half those in America today.

These forecasts are given in spite of other dire context, like the growing price of steel that can erase half of the profits of an auto maker from one year to the next. The major challenge is the search for non polluting cars, oil free and with zero CO² exhaust.

The older Original Equipment Manufacturers, OEMs, in cars and other industries have been relocating assembly facilities to lower cost countries. The next trend is to decentralize R & D, because of the growing availability of lower cost intellectual work in emerging countries.

The search for new production processes might affect the whole car manufacturing structure. The making of electrical batteries requires very little labour, major investments, and the finished product is better used locally.

The boom of infrastructures

The biggest investment boom in history is under way. Over half of the world infrastructure investment is now taking place in emerging economies. Sales of excavators have risen more than fivefold since 2000. In total, emerging economies are likely to spend currently an estimated $1.2 trillion on roads, railways, electricity, telecommunications and other projects, equivalent to 6% of their combined GDPs.

Estimated infrastructure investments in emerging markets, 2008-2017, in trillions of dollars:

China 9.3
India 2.8
Other Asia 2.4
Russia 2.2
Brazil 1.1
All other 3.4
Or over $ 20 trillions for all emerging economies.

Source Morgan Stanley

Questioning food supplies and availability

Food supplies have kept apace, so far, but there are increasing local shortages, local wars and famines. The new bio fuels, the rising standards of living, with more intensive cattle raising, climate changes and drought, all will have a growing impact on food supplies.

Household food expenses are 10-20% in the developed world but still 65% in developing world, mainly hitting the poor.

Growing shortages

Water: According to United Nations Development Program, UNDP, 40% of the world population will suffer water shortages by 2050.
Gas, oil, uranium, will all have diminishing reserves, with yet unknown peak dates.
Fishing is to be depleted to less than 10% of the earlier maximum catches.

Does the world have enough resources to meet the growing needs of the emerging economies?

Environment

Probably more certain than the much hailed global warming, generalized pollution is the most worrying phenomenon for years to come, water, air, land, food, chemicals and many types of pollution.

Technologies

Among the innumerable new development fields, telecommunications play a major role, with overall convergence leading to the merging of computers, cell phones, TV, hi-fi, and all other electronic devices, as well as the blending of cables, wireless and satellite communication.

Globalization

Globalization now is not just physical goods, but also services, finance, people, information and ideas.

In spite of the recent failure of the World Trade Organization, WTO, talks, the world is becoming ever more interlinked.

Financial shifts

There is a shift from traditional money managers to sovereign wealth funds which result from very large trade surpluses, hedge funds and private equity groups. Another major new trend, the topic of this paper, is for companies in developing countries to buy companies in developed countries.

The current flow of capital from poor countries to the richest economies in the world is the opposite of any economic theory. Capital should flow from rich countries with abundant capital, such as America, to poorer ones, such as China, where capital is relatively scarce.

Asian economies are pursuing a deliberate policy of currency undervaluation to ensure strong export-led growth. To hold their currencies down, Asian central banks have been buying lots of American Treasury bonds. This reduces interest rates and supports consumer spending in the United States, allowing Americans to buy more and more Asian exports, which, for the moment, is convenient to both Asia and America.

Current raging world crisis and the future

The current world crisis, 2007-2008, affects three main vital aspects of modern economies, oil, raw materials and finance. No end is in sight.

The fact that people in rich countries are fretting about the success of the emerging economies, rather than no longer about their poverty, shows the progress these economies have made. Poverty in the third world is still rife, but as the emerging economies continue on their way, their rapid expansion can be sustained for several more decades.

China and India offer immense opportunities, and they also bring new risks. If these economies slow down, or even if they simply decide to sell their American Treasury bonds, a crisis would have a much bigger impact on the global economy than formerly.

The balance of power is shifting to the East. The postwar era witnessed economic miracles in Japan and South Korea. But neither was populous enough to power worldwide growth or change the game in a full range of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st century global economy.

The closest parallel to their emergence is 19th century America, a huge continental economy with a young, driven workforce that took the leadership in agriculture, manufactures, and the high technologies of the era, steam engines, telegraph, and electric lights.

But even the rise of America still falls short in comparison to what is happening now. Never has the world seen the simultaneous, sustained takeoffs of two nations that together account for one third of the earth population. For the last fifteen years, China has been growing by 9.5% a year, and India by 6%. Given their young populations, high savings, and the sheer amount of catching up they still have to do, most economists figure China and India can keep growing by a 7% to 8% average, for many years.

In the coming decades, China and India will disrupt workforces, industries, companies, and markets in ways that can barely be imagined.

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