Asian Market Power: The Next Steps of Globalization

Reprinted from Harvard Business Review, June 15, 2009. Click here for original.

In early 2008, when U.S. markets began to slide but Asian markets held steady, analysts worldwide asserted that western economies were decoupled from those in emerging markets, namely China and India. The crisis, it seemed one year ago, was a problem created by and for those in the west. As 2008 ended and 2009 began, however, growth rates in China and India, while still impressive, did not meet expectations. Decoupling theorists, tails between their legs, rushed to offer different explanations of the economic conditions, and while, yes, Asia felt the pain of the recession caused by the west, they are now emergent again, reaping the benefits of their own stimulus plans, proving perhaps that the decouplists were on to something. And now, as China and India lead Asia — and the world — into recovery, it’s fair to wonder if the next step in globalization will be governed by a new set of economic rules that are not Euro-centric but instead devised in Beijing and Bombay.

The economies of China and, to a slightly lesser degree, India account for the majority of Asian economic growth today. As their growth regains momentum in the east, western economies are headed for a slower and less-pronounced recovery. These dynamics will enable the Asian economies to amass more and more market power which, over time, they are likely to assert in creative, novel ways that could significantly impact the future arc of global business:

I. Currency market power: Western efforts to exert influence over currency valuations (mainly the Chinese RMB) will continue to fall on deaf ears, a condition which could have negative long-term effects on western manufacturing.
II. Energy market power: China and India are growing at paces that require vast, diverse supplies of energy; their race for resources will drive up world prices and create strong incentives for their indigenous global firms to scour the globe for the best deals.
III. Increased power of indigenous firms: Conglomerates born in China and India, such as Chinese state-owned enterprises and Tata Sons, for instance, are flush with cash and primed to deepen their existing roots in high-growth markets such as Africa, the Middle East, and Central Europe, and even the west through mergers, acquisitions, and spin-offs. Western incumbents will have no choice but to factor these companies into their own competitive threat analyses.
IV. Government power: Many credit China’s massive 2008 stimulus, which was twice as large as the United States’ (as a percentage of GDP), to paving the way to its recovery. Both China and India have significant infrastructure needs, so it’s safe to assume both governments will continue to allocate GDP for this development. Therefore, consumer demand will follow.
V. Consumer power: Buoyed by more government-sponsored stimulus, citizens in emerging markets will grow more comfortable with spending their savings, and this spending could perhaps be accelerated with the introduction of personal loan financing and state-sponsored retirement programs. The growing Chinese and Indian consumer markets will be the base source of this new Asian market power, where the majority of global firms, in order to survive, have no choice other than to create products and services these emergent players want.

Organized in such a framework, the potential for a new Asian economic order may alarm many, but none of these trends should strike anyone as surprising. While capitalism as our collective system of governance is here to stay, the luxury of writing the rules is bound to shift with the ownership of capital as it has over centuries, from Alexandria to Rome, from Florence to London, and now from New York to China and India. Western firms would be wise to acknowledge these slow yet tectonic shifts and adjust their long-term global strategies accordingly. Those failing to do so may not survive — or they may become acquisition targets.