Economic shift from West to East Global economic crisis is an opportunity for Asia? The new paradigm of financial markets Presented by Rana Faisal I.D Semester Spring 2009 Faculty: Mr. Mazhar Seminar & Economics Policy

Is this what a new paradigm feels like? Capital is flowing from West to East. Companies have seen opportunities in less- developed Eastern economies What we’re experiencing isn’t simply a credit crisis but a permanent shift in global economy that will end the West’s economic pre eminence and establish Asia as the center of the world economy. China & India accounted for 45% of world’s growth last year. The Gulf and China have built sovereign wealth funds that invest in the West and other emerging countries.

Soro’s View

Eastern business versus western business style  For India & China growing poverty, population is challenge. Either your bring out millions out of poverty and convert them into consuming class or this demographic advantage becomes your liability. Devised a product, figured out what it costs to make, added a margin and come up with a price. Start with a price point, what people can afford to pay, and work backwards from there. Arrogance is dangerous, the reason why many multinationals failed in east. West is kidding themselves if they believe being in a high end market makes them immune. In China, where labor is much cheaper, companies prefer to employ as many people as they can because they believe it gives them a strategic advantage as they grow. China isn’t all reverse engineering. Huawei spends US$1bn on R&D. it is 4 times the same R&D spend in America.

How the US crisis could change Asia Continue to next page

How the US crisis could change Asia

Economic power is transferring from west to east  Companies have seen opportunities in less developed eastern economies.  The world’s wealth is accumulating in Gulf, China and India.  The Gulf & China have built sovereign wealth funds that invest in west and several other countries.  Western developed economies have huge deficits while many of the developing economies have huge surpluses. America has entrepreneurial culture which has made its economy more resilient.

Western business reaction  The West still has a lead in innovation and technology and companies, confident of their competitive edge, could invigorate their business by investing in India and China.  Most people in China and India are still at the bottom of the pyramid and many businesses have to start with a price point, what people can afford to pay, and work backwards from there. In the West, we’ve usually done it the other way around: devised a product, figured out what it costs to make, added a margin and come up with a price. Continue to next page

Western business reaction  West can’t apply the same model to China, we have seen many multi national come in and fail, especially in technology and internet sectors because they haven’t adapted their product or business model.  On the other hand many Chinese companies have re invented the US model and succeeded.  The biggest danger is arrogance, the lesson which western companies take it the competition is fierce and it is going to get fiercer.  West will never succeed if they believe in being high end market, makes them immune. Continue to next page

Western business reaction  In west companies want to improve the productivity of their employees.  In China where the labor is comparatively cheap, companies prefer to employee as many people as they can because it gives them strategic advantage as they grow.  These economies are developing innovative business models and ways of producing products of quality at the right price. The best thing the West can do is partner companies using these models and learn from them.  Companies shouldn’t underestimate the time it takes to understand the complexity of the business environment, local regulation and dealing with governments. If you understand that, you can make a rapid return on your investment.

Criticism faced by Asian economies  China isn’t all about copying, reverse engineering and manufacturing. Huawei, the telecoms company, spends US$1bn (€670m) on R&D which, given local labor costs, it says is equivalent to four times the same R&D spend in America.  The success of Indian IT may originally have been down to cost but it has moved high up the quality curve. Also, Chinese and Indian components are widely used in Western manufactured goods. So it is unfair to suggest they only compete on cost, not quality.  Developing economies start by copying best practice to bring it up to standards.  Being innovative is not necessary in every market, where the size of the market is small, you don’t need to be innovative. Continue to next page

Criticism faced by Asian economies  As economies grow the consumers spend more you will see more innovation.  The internet spend has grown about 50% in China and many Chinese IT companies have floated on NASDAQ this year.  Quality is not an issue as portrayed in western media because if we have Chinese companies product recall, quality conscious western companies have suffered equally, DELL battery recall, Apple iPhone, to name few.

Brands from emerging economies can become global players.

Why haven’t Asian countries Developed Global Brands  It takes a lot of time, money and trouble to build a brand. It’s easier and cheaper to buy one than build one – as Lenovo did when it acquired IBM’s PC business – and It is expected, more Chinese and Indian companies will do that. (Mittal acquired Arcelor)  There have been some spectacular successes: look at Samsung in mobile phones & Embraer, the Brazilian airline manufacturer that has pretty much conquered the small plane market.  China’s economy is growing 8 – 9% a year since 10 years and when domestic growth is so fast it is hard to think about expanding into foreign markets.  Brands like Sony, Coca Cola and Toyota took 20 years to emerge so it will take some time for Chinese companies to gain experience and emerge.

Threats to Asian economies  Politicians.  Russia is desperate for foreign investments to build their oil field.  Pakistan sold the worlds largest Reservoir which contains 20.9 million ounces of gold and 12.3 million tons of copper in inferred and indicated resources.  The copper-gold deposits at Reko Diq are believed to be even bigger than Sarcheshmeh in Iran and Escondida in Chile.  The most credible international surveys suggest that Reko Diq is one of the biggest undeveloped copper projects in the world with over 11 billion pounds of copper and nine million ounces of gold.  So far, three foreign companies have purchased stakes in the strategic copper and gold assets setting off a cycle of ‘change of foreign ownership’ of Reko Diq copper project.  Pakistan has only 25 per cent stake in the Reko Diq copper project.  The rest of the 75 per cent stakes had first been transferred to BHP Billiton, the Anglo-Australian mining giant and then BHP Billiton under a ‘deed of waiver and consent’ transferred it to the Australian Tethyan Copper Company Pty Ltd (TCC) and now TCC has sold its per cent stake to Antofagasta Minerals. Continue to next page

Threats to Asian economies  Bring millions out of poverty and convert them into consuming class.  Investing in quality education and relevant skills is a very high priority if demographic advantages are not to become a liability.  For India, insufficient investment in infrastructure is already adversely impacting growth.  China is not immune to the downturn – but the government is trying to incentivize consumer demand. The stimulus package does help exporters, but the long-term shift is still towards a more consumer- driven economy.  In Russia and the Gulf, for example, too much of the wealth is held by a few billionaires. It needs to trickle down.  Venture Capitalist issues. Continue to next page

Strengths in Asian economy  Reliance is opening 1000 stores every year, venturing into retail and controlling the whole supply chain.  Average age in India is 25.  In China you need 20% to buy a house which is very conservative, if US had the same policy the economy wouldn’t be suffering from the sub prime collapse.  China and India support free trade, they present an opportunity for business to expand into countries with a rich resource – at a very cheap rate – which accounted for around 45% of the world’s growth last year.

Conclusion  The paradigm shift is evident, the capital is flowing from east to west.  Be it in a form of acquiring brands like Lenovo or building it (Samsung).  The accumulation of wealth coming to Gulf and the world greatest business minds (Donald trump, Michael dell etc.) investing aggressively in this side of the world increases its importance.  For countries like Pakistan it is no favorable to count on only FDI, however if they fail to capture their due share of this economic shift to the region, their existence will be next to impossible and will become history.