The world's investment eyes might be glued to China and India, but where are the new emerging markets?
By Deborah Tarrant
Without doubt the emergence of China and India as economic superstars has dominated the early 21st century. Economists, politicians and the international business community have been preoccupied by their mega-player magnitude and influence, from the shifting global demand for oil and other commodities to the hunger for infrastructure and the move of manufacturing to China and services to India. At the same time, business, from multinationals to SMEs, has been dazzled by the alluring vastness of their populations and burgeoning numbers of cashed-up middle-class consumers.
Debate and extraordinary activity has focused on the challenges and opportunities posed by the stirring giants. They are an undoubted attention-grabber as they tilt the economic axis more to the east. But this has possibly meant that comparatively less attention has been paid to the market movements elsewhere.
As with any business opportunity, vigilance and preparation are required to seize early offerings presented by emerging markets. So, looking beyond 'Chindia', as the emergent superpowers have become known, the urgent question becomes: Where to next? Ask the experts to pick the next new performance market and if nothing else you'll spark a lively debate. Certainly, there's no secret that serious contenders are Russia and Brazil, as they form the other letters in the BRIC acronym, the term used to refer to the rapidly developing economies that are expected to eclipse the world's currently richest countries by 2050.
A big picture view comes from The world in 2050: beyond the BRICs - a broader look at emerging market growth prospects, a paper released by PricewaterhouseCoopers in March 2008 that charts the course of what it calls the E7 emerging economies, that's the BRICs along with Mexico, Indonesia and Turkey. The report estimates that by 2050, the E7 will be around 50 per cent larger than the current G7, the US, Japan, Germany, the UK, France, Italy and Canada, with the Brazilian economy potentially outstripping Japan's.
When looking for new growth markets, the aim is not dissimilar to the approach that has been taken to 'setting up shop' with China or India, namely, to look beyond immediate gains to the longer term by considering the demographics of emerging economies, the key to both their workforce capabilities and their ongoing demand for goods and services, and, vitally, their political stability.
Sharp analysis is needed to determine which markets will thrive and which may wither in the future, and in some cases, a crystal ball would certainly help.
Indonesia, for example, with 220 million people and a true wealth of minerals under the ground, is being keenly watched. Doubtless, it's had major setbacks from the late 1990s Asian financial crisis, a tsunami, bombings and much-reported political instability. But business pundits believe it could positively boom if, and when, laws are changed to allow further development of its natural resources. Mexico, on the other hand, may have shored up its trading links with the US, but compared to other emerging economies it has higher costs of labour, capital and services, and relatively poor infrastructure, which may stymie growth.
Austrade's chief economist Tim Harcourt looks first to Russia, and the many good reasons why it's become a leading engine of growth in Europe. Currently the world's largest energy exporter with resources worth an estimated US$340-380 trillion, Russia enjoys a large trade surplus thanks to its sales of massive quantities of natural gas and oil in Europe, China and Japan. Many Russian companies are achieving sales growth between 15 and 45 per cent.
With 25 per cent annual increases in retail sales, we assume a lot of Russians are shopping till they drop. Australia is already cashing in by sending meat exports worth almost $140 million per annum to Russia. It's also sending raw hides and skins.
Australian companies are also doing well selling mining expertise, from engineering to management know-how, to Russia and the resource-rich 'Stans' (Kazakhstan and Uzbekistan).
A sign of the greater expectations from this part of the world is that BHP Billiton, Rio Tinto and Macquarie Bank have all leapt into joint ventures in the former USSR. In the near future, Harcourt tips strong growth, but others are frightened by elements of lawlessness in Moscow and a substantially ageing population.
Eyes are also on Latin America, and Brazil in particular, with its natural resources adding to the riches of a population nudging 187 million and a manufacturing sector that's growing in sophistication. Its economic growth sitting steadily at around 4 to 5 per cent may be the lowest of all the BRICs, but its period of recent political stability under president Luiz Inacio Lula da Silva puts it ahead of the rest in the governance stakes, economists insist. The PwC report shows its projected GDP growth far outstrips Russia's.
But companies have to date typically looked to the resource riches coming from the Andes and consequently have based themselves in Chile. Still defined by its rural emphasis, Argentina's wealth is growing more slowly.
Exports to Brazil have been concentrated in the mining sector and less on the recreational demands of its comparatively young population.
Doing business in Brazil requires local presence, partnerships with local enterprises and plenty of patience, advises Tim Kiessling CPA, an adjunct professor of international business at Bond University in Australia.
Kiessling also has something to say about Europe. Given 25 per cent of the world's commerce is emanating from the European Union, Kiessling suggests following the eye-line of western European investors and businesses when considering where to pay some attention in this part of the globe. His pick of emerging regions is the centre and east of Europe itself. 'Slovenia, Slovakia and Croatia will definitely be the next marketplaces,' Kiessling says. 'Eastern Europe has a highly educated people, who due to wars and unrest have been left with poor economies, but we're starting to see that turn around.' What's more, their populations are young, they understand the internet and they want to be consumers, he says.
Also not to be ignored is the move by many European and Japanese players to establish manufacturing bases in the fast-growing economy of Turkey, Kiessling says. 'Strong infrastructure and a recent period of stability, combined with the fact that around half its 73 million population is under 25, also means it's a great place to sell products,' he says. Spurred by its reformist government's attempts to enter the European Union, Turkey has developed a robust economy, with growth anticipated to sit around 6 per cent. In industrial components, it is already outstripping China and Russia.
Damian Fisher is Australia's trade commissioner in Istanbul. He expects Australia to build on its already-strong presence in oil and gas, infrastructure, information and communication technologies, food and beverages in Turkey by moving further into services areas such as education, healthcare and recreation.
But if we head east, it must also be realised there is more than China in the Asia-Pacific region. Perhaps the sheer power of proximity to China has meant the Asia-Pacific regional focus has consolidated. However, multinationals globally are seeking a more cost-effective foothold in the region, and are now adding to their Asian operational interests by adopting the strategy known as 'China plus one'.
While China has been the most powerful magnet for foreign investors and business recently, its fast growth has been characterised by roller-coaster stock markets, rising inflation and labour costs. However, as the Chinese population grows wealthier, and older, the cost of manufacturing is rising, along with the price of commodities and other overheads. Plus, a recent change to the tax rules for foreign investors has suddenly made other Asian destinations attractive.
Vietnam is 'the new Asian tiger', says Austrade's Harcourt, not least because its economic growth is averaging 7.5 per cent, second only to China in the Asia-Pacific region. While its economy and population are far smaller than China's, Vietnam's total direct foreign investment currently is roughly a tenth of China's, at about $6 billion annually. Its per capita GDP is still about $480, meaning labour costs are lower, whereas China's GDP, already over $1000, has given its people greater purchasing power but also sent wages skyrocketing.
Entry to the World Trade Organisation has accelerated Vietnam's development. 'Vietnam has a very young population that's making a move from poorer rural areas to the bright lights of Ho Chi Minh City and Hanoi, which is why many Australian household names from Foster's to the Commonwealth and ANZ banks made early moves to ensure they were well represented there,' Harcourt says.
Vietnam has a growing need for professional services, engineering, tourism and education, with Australia enjoying particular synergies through its 300,000-plus Vietnamese community (according to ABS statistics), whose members want to invest back home.
Harcourt, who rates Singapore and Malaysia as beyond emergent status, does not isolate one Southeast Asian emerging market, but regionally suggests a sortie into the lush Mekong Delta. Thailand, with a population 66 million, for instance, is already receiving due attention across the world, grabbing media space for its hot pursuit of bilateral trade agreements.
In 2005, the Thai-Australia Free Trade Agreement kicked in, and since then Bangkok has become the hub for many businesses developing commercial interests both within Thailand and with neighbouring Cambodia and, less so, with Laos. Key growth areas in Thailand are in environmental technologies and telecommunications due to rapid uptake of mobile phones and the internet.
But many variables come into play as markets emerge. Growth alone does not equal a safe bet. Indeed, the PwC report shows the nations with the greatest growth potential include Nigeria, Iran and Bangladesh, countries where politics seem certain to influence any quest for great wealth.
The future impact of rising carbon consciousness is also a new unknown, not only for emergent economies, but also for Australia's export capacity. What it loses in green miles with the tyranny of distance and the increased cost of fuel, it may well gain with environmental know-how, argues Harcourt. 'Australia is going to help China with its climate-change issues,' he says. And, if logic prevails, it stands to reason that Australia's green-savvy expertise will be equally attractive to whoever comes next.
