How the Globalization Game is Changing: Assessing Growth and Risk
January 22 2010 by ChiefExecutive.net
Growth and risk dynamics for companies operating in world markets are in flux. As global markets emerge from the economic crisis, talk is heating up about the need for global rebalancing- the idea that nations with large trade surpluses should encourage domestic spending, while those with enormous trade and budget deficits must foster stronger consumer saving. Driving the discussion are alarming statistics around global economic trends or, more specifically, export-dependent emerging nations and their import-dependent advanced economy markets.
Ten years ago, advanced economies were responsible for 77 percent of global exports. Last year, that share dropped to 62 percent. What’s more, market statistics suggest that over the next 10 years China could represent as much as 25 percent of world trade.
More balanced global demand, goes the theory, will lead to more stable markets, which, in turn, will bring steady, more sustainable global economic growth. But while U.S. savings rates have climbed since the economic crisis, significant rebalancing isn’t likely to happen any time soon. “Because of their current stage of development, emerging markets are still heavily reliant on an export driven, merchandise-driven growth model,” warned Gene Huang, chief economist at FedEx, at a CEO roundtable discussion that FedEx held in partnership with Chief Executive. “For example, Chinese companies face regulatory hurdles, hidden costs and also issues with the readiness of consumers to receive their products and services in the domestic market place. In fact, some surveys suggest that export transactions are actually cheaper for them than doing business domestically.”
There are, however, signs of progress in China. More than 13million cars were sold there in 2009, putting China’s auto sales ahead of the U.S.’s for the first time. “The middle class is starting to emerge,” asserted Huang, who also pointed out factors likely to hamper domestic market growth. “The biggest issue in the emerging [Chinese consumer] market is the lack of financial institutions to support the personal credit market. That will hinder growth.”
Perils of Protectionism
Regulation and protectionist measures also pose trade hurdles. In the third quarter of 2009 alone, World Trade Organization governments initiated 44 new product-level investigations in response to requests from domestic industries for new import restrictions-a 52.6 percent increase from the same quarter in 2008.
In theory, global markets are more accessible than ever, but in practice regulatory barriers can make it tough for U.S. Companies to compete. “Asia, specifically China, is very difficult for us,” said Richard Bisson, President & CEO, Water Pik, Inc.,. “We manufacture in China but to sell there I have to ship my products out, pay duties and taxes, and ship it back. That process adds 40 percent to my costs.”
Even worse, however, is the lack of IP and trademark protection. Foreign companies face a paradox: Shut down the counterfeiter and he or she will simply continue to produce the product under a different brand name. “I’m actually considering allowing it to happen to build my brand in the market,” said Gillette. “The alternative-allowing him to build a brand based on my IP-is worse. When will China grow up in terms of IP and trademark laws?”
Haiyan Wang, managing director of the research and consulting organization China India Institute, argued that laws to protect IP are already in place, but resources to enforce them are limited. However, she says, companies can still find ways to prosper in the counterfeit-tainted domestic market. “Don’t let IP risk deter you,” she urged. “Counterfeiters can be the market developers, bringing out the customers’ awareness and needs.”
Over time, the issue may self-correct. Already, large retail chains in China are shunning less profitable counterfeit goods and reclaiming sales from street vendors, said Anil Gupta, professor of management at the University of Maryland’s Smith School of Business. “It’s not a short term solution, but it could correct itself over five or 10 years,” he said.
That hopeful outlook dovetails nicely with China’s five-year plan to build a sustainable, balanced economy and a harmonious society. To achieve its lofty goals, China will need to close the gap between rich and poor, shift from an export-driven to a consumption-driven economy and get domestic companies to consolidate and focus on innovation rather than imitation, said Wang.
“As industries consolidate, we’ll see more domestic Chinese champions become global champions,” she said. “They could become your competitor, your partner, your customer, your customer’s customer-or all of the above.”