Global Trends & China: Economics, Technology, and Competitiveness

1. The Global Scene – with China as a Main PlayerTopic: Focus on the Global Trends, Increasing Competition & China. Part One: Economics & Technology. By: Adjunct Professor - CBS, Visiting Senior Research Fellow - ISEAS, Jørgen Ørstrøm Møller. www.oerstroemmoeller.com.

2. Prelude • Potential versus reality. - The potential is an unprecedented shift in power structure. - The reality is whether it will be allowed to happen and if so the circumstances. • The bad news. All the ingredients known from the world wide depression in 1929 are smiling at us – like the Cheshire cat in Alice in wonderland. Too much liquidity chasing assets instead of productive investment. The bubble(s) will burst. • Japanese stockmarket. Then Japanese property market. Third Nasdaq/IT bubble. Fourth property bubble (US, UK).

3. Prelude • Three rules of thumps announcing a melt down. - Liquidity chases fast profits trading assets. - Anyone can make money in the market. - Exponential rise in asset prices. All three are here – right now. • The good news: May be China and India. If the US allows them to step in.

4. 1. Current Trends • Business cycle. Global growth peaked in summer 2004. Falling since. • Electronic cycle does not look promising. • Economic policies in major countries (primarily US) is not any longer expansive. • Profit outlook for US discouraging. • Oil price impoverish the global economy. • Main culprit US economy with strong and persistent imbalances. • Deficit on balance of payment about (↑) 5% and rising in the phase of the business cycle when it should be falling. What does it tell us about competitiveness and growth disparity.

5. 1. Current Trends • Deficit on public finances about 4% and rising. • For the fun: Website US National Debt Clock. Debt calculated continously. October 31, 2005 at 04.32.33 AM GMT: $ 8,022,865,293,257. Not so fun: It rises with 1,63 billion USdollar….every day. 8.78% % of US GNP per year; 239% of DKs GNP! http://brillig.com/debt_clock/ • Imbalances in Japan. Almost the opposite of US. Japanese recovery? Monetary policy? • Europe? Nothing much happens there. • China and India revert later

6. 2) The global economy is a roller coaster having derailed in a curve continuing out in the free airspace! • Key words for the global economy: US consume. China (and India) produces. Low costs in Asia keep global inflation down. FED is splashing out liquidity. The global financial markets are transferring funds from relatively poor countries (China) to relatively rich countries (USA) despite being designed to do the oppositeThe whole dump show is financed by Japan and China /Greater China accumulating USdollars as a substitute for consumption but how long can you live eating greenbacks? Come and buy a chunk of the wild west! • Key of the key: Under-consumption in Asia, over-consumption in US. Over-production in Asia, under-production in US.

7. 2) The global economy is a roller coaster having derailed in a curve continuing out in the free airspace! Adjustment must and will take place. Transfer of purchasing power/economic strength from US to Asia. It can be done in one of the following ways: • Economic policies primarily in US. Fiscal policy. Monetary policy. • Currency rate changes. • Protectionism • Let the market do it not knowing what will happen. • Where are we right now? Tighten your safety belts.

8. Which factors will stop it: - Either Asian unwillingness to produce without being paid = a change of preferences production/consumption in China. - Or the US real interest rate gets to a level corresponding to the trend growth of US (approx 3-3,5 %). Nominal short-term rate now 4% after twelve consecutive increases. Forecast  5 may be 5,5% summer 2006. Impact? Long term Interest rates? • Can the world function with savings surplus in developing (poor) nations and dis-savings in developed (rich) nations?

9. 3) The shift from US to China and India a) Economics • Measured in official exchange rates Chinas share of global GNP is about 3%, India about 1,4%. BUT PPP gives about 13% respectively about 7%. China and India 80% of US GNP, add Japan, Korea and Southeast Asia  125%. • China is the factory of the world, pricesetter for industrial goods and offer technology. PPP second largest economy, largest recipient of Foreign Direct Investment (FDI). • India is the servicecenter for the world, price setter for service goods and offers solutions. Fourth largest economy (PPP).

10. 3) The shift from US to China and India • Total communication. Nomads. • China 402 mio subscribers on mobile phones end 2005. India 60 million subscribers on mobile phones. 2 million more every month. • Handphone starts to become credit card, key to our doors • About 103 mio Chinese on internet. Broadband user 2005: US 39 mio, China 34 mio. Prognosis for 2007. China 57 mio – US 54 mio. SMS China 6 billion in ONE DAY! New language emerges. Prognoses 2010. China globally number one PCs 178 mio. India 80 mio. • Cernet2, IPv6. 3G technology. • EU-Commission forecast. About 2010 China surpasses EU  R&D as per cent of GNP.

11. 4) What makes the Asian economy tick • The Asian economy has changed completely. Not an annex to the US economy or the global economy. Self sustained and integrated. • Two flywheels. Production – outsourcing- supply chain. Consumption – middle class – urbanization - branding- young YOUNG consumer. • Outsourcing – computercontrolled container transport – Free Trade areas (FTAs) – 90% of all intra-Asia trade less than 5% tariffs – air freight 1% of volume but 35% of value VOUW!

12. 4) What makes the Asian economy tick China is the spider in the center of the net.

13. 4) What makes the Asian economy tick But the coin has two sides: Decreasing growth in China’s import (from a monthly average growth of 35% in 2004 to 15% in 2005.) puts a squeeze on the economic growth in the rest of South East Asia – from 5,5% in 2004 to 4,4% in 2005

14. 5) China and India – a comparison a) Demography. Share of population. 0 – 14 years. China 23,1%. India 32,2%. 15 – 64 years. China 69,5%. India 63%. 65 - years. China 7,4%. India 4,8%

15. 5) China and India – a comparison b) Differences between China and India

16. 5) China and India …. b) Differences between China and India China: 30% of GNP goes to export. India: 15%. China: Savings rate measured as share of GNP 40%. India: 25%. China: FDI 54 billion Usdollar. India: 6 billion Usdollar. What does it tell us about efficiency of the use of capital? China: Non-performing loans as per cent of all loans 40%. India: Negligible. What does it tell us about the financial system? The role of the financial system: Investment or trade surplus.

17. 5) China and India ….. China: State Owned enterprises the incubator. India: The market. China: Strong government. Autocratic India: Weak government. Democracy. China: Good infrastructure. India: Lousy infrastructure, but…….. China: Corporate governance????. India: Not bad. China: Legal system not bad. India: In the long run we are all dead! Water. Key factor. China urbanized. India less so. A whole string of political, economic, social and infrastructure investment repercussion. b) Differences between China and India

18. 5) China and India … C) The snake in the paradise if any! China: Energy, Environment, Water. Non-performing loans. India: Fiscal deficit. Infrastructure. Prudent financial system. Politics. Labour market.

19. 6) The strength of the Asian economies • Two scenarios. • A) Positive Scenarium. • China and India keeps growing. Economic center moves across the Pacific. • The international system adjusts to this new situation. The world sees a peaceful and orderly transformation from an American dominated economy to a global economy with China and India in the drivers seat. • New technology paves the way for a new investment cycle. • The demographic and environmental problems is under control. Terrorism, international crime, infectious diseases are not allowed to derail the global economy.social and infrastructure investment repercussion.

20. 6) The strength of … • B) Negative scenarium. • The ice cream gateau slides too fast. China and India cannot make up for the vacuum created by the weakening US economy. • The global economy comes under pressure. US is not strong enough any longer to exercise control and no one else in sight. Rising egoism and rising threat of protectionism heralds the day. • NOIC appears just over the horizon. Gradually we move away from a global model towards a more national model. A more destructive world emerges breaking with may of the hitherto unchallenged ideas. • The decisive factor will be private consumption – topic later today.

21. 7) Implications for Danish enterprises – A sketch. • The Chinese market. • Phenomenal, great, exponential increases, unlimited, infinite, the sales curve goes through the roof - but are these sayings also true for YOUR product? • Competition right now in China is cut throat. Profits are difficult to obtain. The cemetery is full of companies haven broken their neck there. • It is not a lane for cyclist with guaranteed tailwind. Many fiascos, many obstacles, many disappointments. • Case in point: Bare-foot lawyers! • First lesson: Do your homework; that is why you are here!

22. b) But then why bother? Why run the risks, take the trouble. Because: • Growing market, increasing returns to scale. • Trendsetters are to be found here • Your competitors are here, absorbing new trends • Do you prefer to meet your future competitors (Asian/Chinese companies) here with an offensive strategy or at home with a defensive strategy? • Long term perspective: look at partners. • Second lesson: James Bond, George Patton.

23. c) How to survive and ultimately prosper? • Be ahead of the curve and shift incessantly upwards • Integrate product concept in your thinking • Combine product with accompanying services • Tap China for talent and human resources. • Who adapts? Our company, our competitors? Why does it matter? • Third lesson: Do it differently, some kind of blue ocean strategy.

24. d) Ultimate lesson: If you can prosper on the Chinese market you have secured your competitive edge, if not you have to fight a relegation battle on terms defined by others. J. Ørstrøm Møller www.oerstroemmoeller.com