The New Silk Road of Emerging Markets.
Stephen King is a very well respected Economist at HSBC. He wrote a paper called the Silk Road that is stating the emerging nations will increasingly be trading with each other in the future, thereby leaving the western economies more and more isolated. This is why BT is investing so heavily in Asia with Project Prosperity. Stephen King wrote in The Independent re-iterating this view.
[http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-western-nations-may-be-forced-to-sell-off-some-of-their-prized-assets-2300034.html]
The issue is as the UK, Germany, France and the USA all emerge from recession, investors are wondering where the growth is going to come from. Take Marcopolo. Brazil’s biggest bus maker. It’s having a fantastic year, with revenue up 47 percent so far. However, we don’t see Marcopolo buses on the streets of Europe or North America though. They’re cruising the roads, highways and city streets of Argentina, Colombia, Mexico, Egypt, India, China, and South Africa. Maybe the Brazilians have a better relationship with these customers than the traditional big multinationals. Interesting point, Marcopolo sold 460 buses to South Africa for the World Cup last year. Stephen King, chief economist of HSBC, has dubbed “the new Silk Road”—a 21st-century version of the trade routes that criss-crossed Asia almost 2,000 years ago, linking merchants in China to their counterparts in India, Arabia, and the Roman Empire. The new Silk Road spans the globe, connecting companies and consumers in Latin America, the Mideast, Asia, and Africa, and generating some $2.8 trillion in trade, according to the World Trade Organisation.
[an interesting side comment, US$2.8 Trillion = GBP £1.72 Trillion, in Oct 2008 at the height of the global financial crisis was the size of the Royal Bank of Scotland balance sheet was over £1.7 Trillion, yes RBS had assets of GBP £2.2 Trillon, remember the UK GDP is about GBP £1.4 Trillion….]
King is quoted to have said that emerging markets will grow about three times faster than rich nations this year and next. There are now massive trade connections within the emerging markets. It means in one sense the emerging world is protected from the worst ravages of the developed world. The WTO estimates intra-emerging-market trade rose, on average, by 18 percent per year from 2000 to 2008, faster than commerce grew between emerging and advanced nations.
The developed world will increasingly compete with these fast-rising countries for resources like oil and iron ore. The established multinationals will also encounter new pressure from emerging-market rivals, many of them state-supported. Yet for Western and Japanese companies that are the best in their industries, the opportunities are great. One example: Caterpillar, the world’s largest maker of construction equipment, raised its full-year earnings forecast last month on higher demand in developing countries for mining, energy, and rail equipment. Note that demand was not from mature markets. While the USA, Europe (not Greece….) and other developed countries hope to find their place on the Silk Road, the central player is China. Chinese exports to the emerging world accounted for about 9.5 percent of its gross domestic product in 2008, compared with 2 percent in 1985. Last month the Saudi Railways Organization awarded a contract to China South Locomotive & Rolling Stock to supply 10 locomotives. The Mecca-Medina rail contract went to Beijing-based China Railway Group. Shenzhen-based Huawei Technologies, China’s top maker of phone equipment, is investing $500 million in its research centre in Bangalore. China Mobile, the world’s biggest phone carrier, may soon invest in Africa. India and Brazil are stepping up their efforts, too. India’s Tata Group was one of the largest investors in sub-Saharan Africa in the six years through 2009, according to the Organisation for Economic Cooperation & Development. Many Silk Road companies are becoming aggressive acquirers. We are seeing the same phenomenon with European and American companies as they went global over the past 100 years, eg Vodafone, BP, HSBC, Nestle, Ericsson, Unilever, Cisco, Shell, Coca-Cola, UPS, Toyota, Oracle, Boeing, Pfizer, Ford, Siemens, Proctor and Gamble, ExxonMobil, McDonalds blah, blah, blah….
Today, Brazilian mining company Vale has invested in three copper projects in Zambia and the Democratic Republic of the Congo. In April the company agreed to pay $2.5 billion for iron ore deposits in Guinea, and another example is Australia’s mining giant, BHP-Biliton who bought Chesapeake Energy Corp for $4.75bn, note that the balance sheet of BHPBiliton shows they have assets of $98.2bn.
Such trade used to be conducted in Dollars, Pounds, and Euros, even when the deals did not involve U.S. or European companies. Today companies in emerging markets are more willing to take Reals, Rupees, and, above all, Yuan as the Silk Road economies prosper. If emerging-market fundamentals continue to be superior there is the potential for serious currency appreciation against old-guard currencies, (the mature markets).
With trade comes competition. About a third of the order book of Brazilian plane maker Empresa Brasileira de Aeronáutica, or Embraer, comes from emerging-market customers, up from 1 percent in 2005. Yet Embraer doesn’t have the field to itself. The Brazilians are bracing for a fight from Russia’s Sukhoi and Commercial Aircraft Corporation of China, which are both developing airliners.
Traffic on the Silk Road is getting pretty heavy. Names like ZTE, Petrobas, Huawei, Tata, China Life, America Movil, ICBC, Levono, Bank of China, Ping Insurance, BHPBiliton, Bank of Baroda, SingTel, China Telecom, Haier, Reliance, Hutchison Whampoa, Shanghai Automotive, Astra International, China Mobile, Dr.Reddy, Mahindra & Mahindra, AirAsia, RioTinto, PT Indosat, Vale, Sinopec, Infosys, Cemex, Bumi Resources, State Bank of India, Petronas, ICICI Bank, Wipro, Mittal Steel, Bajaj, Godrej….blah, blah, blah will be household names in the very near future.
Finally, trading ties among developing nations are intensifying fast and may eclipse emerging-market ties with the West.