Rich developed economies remain the most important markets for U.S. goods and services. The European Union is America’s largest trading partner, and the volume of this bilateral trade is the largest in the world—worth nearly $1 trillion a year. Trade with Japan accounts for another $200 billion annually.
U.S. exporters and multinational companies in general are eager to find new sources of growth and are looking at opportunities offered by rapidly developing emerging economies.
After the 2008 financial crisis, the Detroit giant General Motors was saved—to a certain extent—by overseas markets. The Chinese market, now the world’s largest in terms of unit sales, buoyed GM when sales in the United States declined.
Since then, GM has become highly profitable once again and has reclaimed the top spot among the world’s largest automakers. It now sells more vehicles in China than in its home market—and by a widening margin. Even though its U.S. sales in early 2013 were the strongest in five years, GM sold 22% more vehicles in China than it did in the United States, or 800,000 cars and trucks.
China’s economic growth has greatly enriched its consumers, who before market reforms had been implemented, subsisted literally from hand to mouth. Per capita disposable income measured just $300 a year in 1990, increasing tenfold over the past two decades.
Official statistics understate the true amounts. Given China’s high savings rate and underreporting of incomes, the actual consumer power is much greater. McKinsey & Co. estimates that by 2020 the number of Chinese households owning a car and spending money on at least some luxury items will grow to 167 million households, comprising 400 million people—higher than the entire population of the United States.
Affluent consumers, moreover, will number 60 million by the end of the decade. With rising income levels comes demand for better-quality products and services, which invariably benefits U.S. companies. At the same time, modern urban lifestyles go hand in hand with fast food, which American companies do best.
As a result, China has emerged as a crucial growth market for major U.S. restaurant chains. Louisville, Ky.-based KFC dominates China’s fast-food business with its 4,000 restaurants. Over the past two years, McDonald’s implemented a major expansion program there, opening 700 new restaurants.
Apple, just like GM, had the best quarter ever in China from January to March 2013. China still trails the Americas and Western Europe as the largest market for iPhones and iPads. But with sales growth of 10% a year or more and a boundless pool of consumers, it is likely to catch up in the next couple of years.
The Other BRICs
China is part of the BRIC group of major emerging economies, along with Brazil, Russia and India. What those countries have in common is not only strong growth rates but also large and underserved populations, which translate into vast consumer markets.
Starting from a low base, those four countries have been moving up the learning curve, as far as buying power and consumer sophistication are concerned. They are gradually shifting to domestic consumption as a driving force of economic growth.
In India, disposable personal incomes have been rising by an average of 6.8% over the past five years, while personal consumption expenditures expanded by 7% annually. Russia and Brazil also experienced a major boost in consumption over the same time period, with a large inflow of increasingly more expensive consumer imports.
From the point of view of major U.S. consumer goods and services companies, revenues from their international operations have been growing, even as demand in Western Europe and Japan has weakened. Overall, for companies that make up the S&P 500 stock market index, international sales have risen from less than a-third of the total to around one-half since the start of the century.
Apple is a case in point. Some 56% of its sales comes from outside its home market. Not surprisingly, when articles began to appear in the Chinese press that were sharply critical of Apple and its iPhone warranty policies in China, CEO Tim Cook rushed to remedy the situation.
Sales growth in emerging markets has been a major factor driving Wall Street stock market indices to record highs in the first half of 2013. And while analysts debate how long the latest uptick will last, there appears to be plenty of rosy prospects abroad for U.S. companies.
China’s economic growth has averaged close to 10% a year since 2001, slowing down only briefly in the 2008-2009 period due to the global financial crisis. The government in Beijing has worked to maintain rapid growth rates by financing various public works and infrastructure projects.
China now has super-modern highways, high-speed railways and gleaming new air terminals, along with some recently constructed cities that are in need of residents. But while, some government-financed projects were wasteful, and over-investment was rampant, U.S. heavy-equipment manufacturers and engineering companies have been major beneficiaries of such investment projects.
Other emerging nations also have been investing heavily, building infrastructure and, in many cases, upgrading their facilities for agricultural and commodity production and transportation in order to take advantage of rising food and commodity prices.
Now, both the rapid investment-driven development phase and the cyclical upswing in investment among BRICs could be coming down from its peak. China’s economic growth is expected to moderate to 7% a year over the next decade, for example.
A new wave of developing nations, though, has now moved to the forefront. This next group is known by the acronym TIMPs and is comprised of Turkey, Indonesia, Mexico and the Philippines.
It’s true that the TIMPs may not show the same consistent growth year after year as China has done over the past three decades. Still, they are major emerging economies and, moreover, they start from a higher base of development than both China and India.
Their consumers are generally richer, as well. And, while not as populous as the two biggest BRICs, which account for more than one-third of the world’s total population, the TIMPs represent a sizeable consumer market of more than half a billion people on a combined basis.
The Next Wave
The ability to win market share in foreign markets is influenced by a variety of historical, cultural and political factors. U.S.-based companies, by and large, been welcome in China. As a result, the two economies have become so close that economists have coined a new word, Chimerica, to denote the crucial axis of the global economic system. The two economies are completely dependent upon one another.
In this environment, GM, like Germany’s Volkswagen, has emerged as one of China’s largest automakers. Japanese companies, on the other hand, have lagged behind in China, despite their geographical proximity. (More recently, Japanese exporters were dealt a further blow when Chinese consumers boycotted Japanese products in response to rising tensions between the two countries over a territorial dispute in the East China Sea.)
In India, on the other hand, a smaller Japanese automaker, Suzuki, stole a march on the rest of the field. It was one of the first foreign players to focus on India, and its strategy paid off when the Indian market took off. (Its local subsidiary, Maruti Suziki, maintains a 35% share of the extremely promising Indian motor vehicles market.)
The emergence of the TIMPs should benefit U.S. companies. The United States has a long-standing connection to Mexico and the Philippines, and Mexico provides by far the largest number of legal immigrants to the United States, while the Philippines is in fourth place. American-educated expats tend to be extremely valuable for cracking foreign markets and managing local operations.
Turkey, meanwhile, is a member of NATO and the closest U.S. ally in the Muslim world. Turkey’s application to join the European Union has long been cold-shouldered by Brussels, and in recent years Turkey, thanks in a large measure to its robust economy, has been steering an independent course, diversifying away from Europe. This means excellent opportunities for U.S. companies in the Turkish markets.
As for other markets, Africa has enormous pent-up demand, and its transportation, industrial and human infrastructure needs are enormous. Those needs have been neglected in recent years as foreign aid and soft loans dried up.
However, if African economies, buoyed initially by higher commodity prices, start to pick up steam, and if endemic local corruption can be better controlled, there will be funds for large-scale investment projects. At the same time, according to forecasts by the African Development Bank, the consumer market in Sub-Saharan Africa, for example, is expected to triple by 2030,when it could reach $2 trillion.
In Africa, Asian companies are ahead of some of their global competitors. China is rapidly moving up along the technology curve, starting to make and export more sophisticated products with higher value-added content, so U.S. multinationals are likely to pay close attention to such developments as they move to compete and establish a presence in this promising area.