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DTU – Insead, November 11, 2005. Globalisation – its impact on Asia

DTU – Insead, November 11, 2005. Globalisation – its impact on Asia. By Adjunct Professor at CBS, Visiting Senior Research Fellow at ISEAS, J. Ørstrøm Møller. www.oerstroemmoeller.com. Prelude. Potential versus reality. - The potential is an unprecedented shift in power structure.

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DTU – Insead, November 11, 2005. Globalisation – its impact on Asia

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  1. DTU – Insead, November 11, 2005.Globalisation – its impact on Asia By Adjunct Professor at CBS, Visiting Senior Research Fellow at ISEAS, J. 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 businesscycle 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. • US National Debt October 31, 2005 at 04.32.33 AM GMT: $ 8,022,865,293,257.95. 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/ . The Federal Gov liabilities and long term commitment (Social Security and Medicare) have risen from just over 20 trillion USdollars in 2000 to 43 trillion in 2004. 150.000 Usdollar for every American. Approx 215 times DKs GNP! • 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! What makes the global economy ticks: 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 opposite The 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!

  7. Keywords: Under-consumption in Asia, over-consumption in US. Over-production in Asia, under-production in USA. • 71% of US GNP consumption ctr trend = 67%. EU = 58%, Japan = 55%, China = 42%. US personal savings are negative. EU = 14%, Japan = 8%, China = 35%. (per cent of GNP).

  8. 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.

  9. Which factors will stop it - Until now the job market and private incomes are still holding but how long? - Asian unwillingness to produce without being paid – a change of preferences production/consumption in China. Jobs in China  New cohorts, restructuring, immigration etc. • 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 Forecasts for spring/summer 2006 5 may be 5,5% Long term steady at 6% Can the world function with savings surplus in developing (poor) nations and dis-savings in developed (rich) nations?

  10. 3) The shift from US to China and India a) Economics • 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 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 in Japan, Korea an Southeast Asia equals 125%. • India is the servicecenter for the world, price setter for service goods and offers solutions. Fourth largest economy (PPP).

  11. 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.

  12. 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! • First half 2005. 24% increase in bilateral trade China-Asean to a total of 60 billion Usdollars.

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

  14. 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

  15. Private consumption vital for sustainable growth in Asia and consequently vital for global growth. • The middle class will be decisive. • Few people realises what global cities signifies. The trendsetters live in global cities finding themselves at ease inside this cultural framework. The Hubconcept. Branding, comsumer preferences. • L´Oreal, Avon, Christian Dior, LVM. • Shanghai, Beijing, Guangzhou-Hong Kong-Macau, Mumbai, Kolkatta, may be Tokyo. Subhubs Bangkok, Saigon, Singapore-Johore, Sydney. Many more. • Centre-Periphery-Hinterland. • All the new hubs will be in Asia. All. Not a single one outside Asia.

  16. b) Not only that. Mass consumption. Recall Rostow’s theory of economic development with mass consumption as the crucial stage? Ask Walmart, Carrefour, Metro. They are here expanding like a sparkler. Or Wumart established in 1995, 453 stores, revenue of more than 300 mio Usdollars, profitable (25 mio Usdollar) and Chinese.

  17. c) Now listen to this. • Every time consumption takes one percent point more of GNP consumption goes up with 70 mia Usdollars (approx 40% of DKs GNP). • Now 17,4% of urban households in China income  5.000 Usdollars. In 2014  90% with an annual increase of 24%. • In the next decade or two between 100 and 200 million Chinese will emigrate from the countryside to the cities. Impact on investment and consumption.

  18. 5) The strength of the Asian economies • 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.

  19. 5) 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 in Asia primarily China.

  20. 6) Implications for Danish enterprises – A sketch. a) 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!

  21. 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.

  22. 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.

  23. 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

  24. 6) Cont: Conclusion and Forecast. • Keywords. Trends • - Asian economic integration • - US decline J. Ørstrøm Møller www.oerstroemmoeller.com

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