How Chindia will impact the world economy

Among the large emerging economies such as Brazil, Russia, Nigeria and Indonesia, it is the rise of China and India (Chindia) which will have (and already has) enormous business implications during the first half of this Century mostly beneficial to the world. First, both nations will require enormous natural resources because not only are they manufacturing and service centers of the world, but because of their own rapidly expanding domestic consumer markets. And this demand for natural and industrial resources such as oil, gas, coal, copper, bauxite, aluminum, iron and steel will be for many years.While China today is roughly nine times as big as India, it is expected that China will very soon become an aged and affl uent nation, similar to what happened to Japan, Singapore, Taiwan and others and will begin to plateau its economic growth. Also, it will outsource manufacturing to other nations, especially in Africa and other resource rich nations.The rapid aging of Chinese population attributed to its one child policy implemented over two generations will impact its domestic economic growth. On the other hand, while India is at present one tenth in size of China, it will experience accelerated growth in less than ten years with better infrastructure, political reforms and fi nancial transparency.

Also, India will refocus on manufacturing both for global supply as well as for its domestic demand. Unlike China, however, India’s manufacturing will be selective and largely concentrated on high-end aerospace, military, space and consumer durables including automobiles and appliances. It will begin to catch up with China and some experts even believe that its growth rate will surpass that of China. In any case, both nations with more than a billion people each, will have enormous need for industrial, agricultural and other natural resources and raw materials.

Since a vast majority of these untapped resources are in other dormant or emerging economies in Africa, Caribbean, Latin America, Central Asia and Russia, the rise of Chindia will create economic boom for them which otherwise did not happen for nearly 200 years of colonial rule.

Second, the global integration of China and India will be radically different. India’s economy and enterprises will be globally integrated especially with other advanced countries (Europe, US, Canada, UK, Australia, Singapore, Japan, South Korea) through large scale acquisitions of well established and well respected foreign companies with technology, branding and manufacturing assets.

The journey has already begun with Mittal Steel’s acquisition of Arcelor, Tata Steel’s [Get Quote] acquisition of Corus Steel, and Hindalo’s acquisition of Novelis (largest North American sheet aluminum company). And it will not be limited to industrial raw materials and to private enterprises of India. For example, several large public sector units (PSUs) of India such as ONGC [Get Quote] (Oil and Natural Gas Corporation), Indian oil [Get Quote] and SBI [Get Quote] (State Bank of India), who have the domestic scale and capital reserve, are starting to fl ex their acquisition muscles. Similarly,

Wipro [Get Quote], an information technology (IT), engineering services, as well as consumer products company, has recently made several worldwide acquisitions (including Infocrossing, a data center company in the US, and Unza, a personal care consumer products company in Singapore).

Finally, Ranbaxy [Get Quote] and Dr. Reddy’s have become significant players in the global pharma industry largely through acquisitions. So have Mafatlal and Raymonds in fashion and garments. In other words, India will contribute to global growth as much, if not more, through revitalizing and investing in Western assets as it would through growth of its domestic consumer markets.

On the other hand, China’s growth will be proportionately more domestic and only on a selective basis through global acquisitions. This is due to several reasons. First, China has begun to focus on domestic demand especially in consumer markets such as consumer electronics, appliances, automobiles and financial services. It has the physical infrastructure as well as large scale domestic state-owned enterprises such as Haier, Lenovo, China Mobil, Petro China and China Development Bank [Get Quote] to capitalize on domestic demand.

Second, the advanced world seems less willing to sell their assets to China (especially technology assets) due to what I believe are myopic misperceptions about the peaceful rise of China (in contrast to rise of India).

For example, Chinese oil company, CNOOC’s attempt to buy Unocal as well as Haier’s (the largest Chinese appliance company) attempt to buy Maytag Company in the US, met with political resistance. The obvious exception is IBM’s sale of its personal computer (PC) business to Lenovo. But it is more an exception.

Consequently, Chinese enterprises that have the scale and incumbency advantage to dominate the domestic Chinese markets will end up expanding globally by first going to other emerging economies such as countries in Africa, Caribbean, Latin American and the ASEAN as well as in Central Asia and India, both through trade as well as foreign direct investment (FDI). In addition, despite history and current uneasiness of rise of China, it is inevitable that both Japan and South Korea will quickly integrate their economies with China, just as what Taiwan has already done.

This will result in rapid growth in bilateral trade as well as reciprocal foreign direct investment between China and Japan and China and South Korea. Consequently, the largest trading bloc will be Asia especially with free trade with India. This will require formation of a new currency comparable to the Euro; and it will become the dominant currency of the world similar to the rise of the dollar as a global currency after World War I.

While the global integration paths taken by China and India will be different, their impact on businesses worldwide either as suppliers, customers, partners or competitors will be benefi cial and enormous. In fact, it is no exaggeration to state that the future survival of most admired enterprises from all advanced economies including the United States, Canada, Europe, Australia, Japan, and South Korea will depend on how quickly they participate in ensuing rise of China and India even if they have to distance from their own government’s politics and public opinion.

This includes companies such as General Electric, HSBC, Mercedes Benz, Siemens, Alcatel and many others.

Extracted from: Chindia Rising by Jagdish N Sheth.