Earnings season is upon us once again, and if initial pronouncements are any indication, corporations are delivering returns 35% above the same quarter of a year ago. Earnings are great, but “guidance”, the harbinger of things to come, is the attention getter. In that vein, business leaders remain cautious, but optimistic. The debate goes on as to why companies are not putting the throttle down on domestic hiring, but balance sheets are awash in nearly $2 trillion in cash, awaiting investment and other forms of capital deployment. Comments abound about a slow growth recovery, but CEOs seem to be walking the tightrope of maintaining a positive outlook for the future with the hope to lower future expectations while having the objective to lower bar for next quarter.
Purchase managers indexes in the United States and Europe indicate optimism and confidence about future prospects. Corporate leaders, however, try to look the other way when pressed about domestic growth in both developed parts of the world. The fact is that everyone is banking on growth coming from anywhere but in his own home market. From one earnings conference call to another, the four-letter word on everyone’s lips is “Asia”. Regardless of the complexities of language, legal infrastructure, or having a foreign presence, the consensus opinion is that the developing countries of the world have the cure for everyone’s economic woes, their massive population of new consumers eager to emulate western lifestyles.
China appears to have successfully navigated a “soft landing” from their high growth years down to more reasonable demand from developed countries in the world. Officials have stated that the next goal is to transition the country’s economy from being driven by export demand to one more dependent on the needs of its consumer base. Wherever China goes, India will be quick to follow. The missing piece in the equation is what the local officials in China and India expect from foreign firms looking to profit in their respective domestic markets. Multi-national corporations with aspirations in Asia may be viewed as “carpetbaggers” of old, although they will be arriving with shipping containers laden with products instead of bags filled with their belongings.
In United States history, "carpetbaggers" was a derisive term given to Northerners who moved to the South during the Reconstruction era following the Civil War. Suitcases were non-existent, but two pieces of carpet sewn together with handles was a worthy substitute. The outsiders were viewed as opportunistic and presumptuous with questionable objectives. They meddled in local politics, bought up plantations at fire-sale prices, and generally took advantage of the local populace.
Basic human nature around the globe has not evolved beyond this isolated case in our country. Every society on the planet is suspicious of the motives of any outsider that attempts to profit at their expense. The Chinese have a long history of dealing with opportunistic Westerners, as do all other Asian societies. The road to growth on the backs of Asian consumers will not be as easy as modern day plunderers may believe.
The shear numbers, however, suggest that a workable compromise will be found. The global energy market, the largest industry on earth at $6 trillion and growing, is a case in point. The developed countries of the world, some 10% of the population, consume 50% of global energy output. Something has to change in that picture if consumers in China and India are to be served. Electricity generation, storage, distribution and usage technologies will all need addressing on a monumental scale if the smart grid of the future is to run effectively and economically.
The Chinese are not sitting on their hands. If they have learned one lesson over the past century, it is to plan well ahead for the needs of their burgeoning population growth. Despite proclamations by the Obama administration to expand investments in Cleantech, the Chinese have already committed billions in the renewable energy sector. They already have solar, wind and smart grid companies with excess domestic capacity looking to external markets to generate profits and returns. Chinese solar companies have already achieved a 50% global market share.
The Chinese can be aggressive marketers, too. The solar industry in Spain grew dramatically over the past few years due to heavy government subsidies. Demand for solar panels was so great that auctions for Chinese panels were held on board container ships before they reached port. A subsequent asset bubble formed, and its collapse contributed to Spain’s debt problems. The crisis in Europe last May rocked Forex markets and sent Forex brokers back to their screens to manage Euro volatility.
Is there any reason to believe that “Asia” will gladly make our cash registers ring at home? To the consternation of Western business leaders, the opposite scenario probably has a greater probability of occurring.
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