Compare and contrast
Government policies in China and India have been very different in terms of the approach to generating growth. The difference illustrates the importance of the consumer sector in a modern economy.
China has directed the massive investment percentage of GDP into the creation of industrial capacity, aimed substantially at export markets. It is therefore vulnerable to downturns in global markets, particularly in the USA. Significantly since 2004 China has commenced a slow re-orientation towards strengthening consumption in the home market relative to investment. The savings rate in China has been exceptionally high, and the level of credit in relation to GDP has been very low by world standards. The level of consumption had fallen to 38% of GDP by the end of 2005, just about the lowest level of any major world economy. Coupled with this we note that the excess capacity generated by the high level of investment relative to consumption has resulted in overcapacity, stagnating or reducing prices, growing levels of unsold inventory and pressures on profitability. Excessive construction and the reluctance of the majority of the population to draw down on savings have prompted falling prices in the property sector. One economist has recently calculated that if personal consumption in China as a percentage of GDP had remained at its 1990 level it would be 30 per cent above current levels - a more rational balance in relation to other GDP components (Lardy 2006). There is sufficient spare capacity and inventory backlog in China to enable consumption to rise significantly without resulting in price inflation.
India has followed a different path. The major point of difference has come about as a result of demographic change. The size of India’s middle class has quadrupled to almost 250 million people over the past 15-20 years. Overall population growth has slowed considerably, with large gains in per capita income. India’s demographics are beginning to resemble those of the developed West - a move away from a high birth rate, overpopulation and predominant poverty towards smaller families and increased average income. There still remains, of course, a major issue of poverty and poor education. If, however, one looks at the economy as a whole, as the current generation of potential baby boomers matures and the consumer sector of the economy continues to prosper, spending power and modern consumer behaviour look set to “trickle down� through the economy for decades. The big issue in all this is that India has relied considerably on a combination of growing domestic market demand and investment in knowledge-intensive industry and services, which has meant that India has been to a great extent insulated from global downturns affecting physical trade. Personal consumption accounts for just over 60 per cent of Indian GDP, making it increasingly comparable with a fully-developed Western economy. Thus it has been argued (for example Das 2006) that India’s “boom� is intrinsically more durable than China’s, noting that China’s population is likely to peak around 2030, whereas India’s will continue to grow, on current projections, till about 2065.
Impact on European companies
Both areas should figure in the thinking of Western companies. They will be a source of new opportunity and new competition.
Growth in the mature economies of North America and Europe will be increasingly difficult to find for the majority of Western companies. Value migration will continue to be a phenomenon of 21st century economics. This means that activities enjoying a comparative advantage in an Asian location will migrate there simply because (a) it is logical that they should and (b) it is becoming easier and less costly to manage such activities as a result of increasingly widespread availability of low-cost technologies of doing business.
If we think how many products and services we now buy from companies that did not even exist a generation ago and how many of these companies are based substantially (if not headquartered) in Asia or the Indian subcontinent, the magnitude of this issue becomes clear. Whether this constitutes an opportunity or threat is something that is under the control of existing management teams. The combination of the WTO (despite its sometimes difficult processes and experiences) and facilitating technologies (especially information technology) ensures that opportunity and threat will increase simultaneously.
India will continue to develop as a market for increasingly sophisticated consumer goods and technical services. It will be a natural location for production of the former for the domestic market and the latter for global markets that can be served by web-based distribution. China will continue to be an attractive location for manufacture and re-export into the Asian region and world markets. This will not be restricted to basic specification goods with a high labour content: there are world-class operations in China producing to standards that are comparable with any in the USA, Japan and Europe.
The Chinese domestic market will, however, open gradually as its middle class grows as a proportion of the total population. Many luxury goods are now sold in the Chinese domestic market. Consumer tastes and preferences, especially amongst younger people, are visibly converging with the developed world.
The fourth and final part of this article will be published here tomorrow.
This entry was posted
on Tuesday, March 13th, 2007 at 10:45 am and is filed under Industrial Research, White Papers, Market Research China, Market Assesment, International Market Research.
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