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May 28, 2013 at 08:00 PM
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.
Emerging Strength
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.
