11
TOMORROW’S MARKETS

Emerging Markets

Embed Size (px)

DESCRIPTION

Tomorrow\'s Markets is a UK Trade & Investment report written in co-operation with the Economist Intelligence Unit, which examines global business attitudes to opportunities and risk within the BRIC countries – Brazil, Russia, India and China – and other, newer emerging markets.

Citation preview

Page 1: Emerging Markets

TOMORROW’S MARKETS

Whilst every effort has been taken to verify the accuracy of thisinformation, neither the Economist Intelligence Unit Ltd nor UKTrade & Investment (including its parent Departments theDepartment for Business, Enterprise & Regulatory Reform, and theForeign & Commonwealth Office) can accept any responsibility orliability for reliance by any person on this report or any of theinformation, opinions or conclusions set out in the report.

Published September 2008 by UK Trade & Investment© Crown Copyright URN 08/1238

The paper in this document is made from 50 per cent genuinewaste pulp and 50 per cent ECF pulp from sustainable forests.The inks are vegetable oil-based and contain resins fromplants/trees and the laminate on the cover is sustainable,compostable and can be recycled.

Page 2: Emerging Markets

Tomorrow’s Markets 2

About the report

Tomorrow's Markets is a UK Trade & Investment reportwritten in co-operation with the Economist IntelligenceUnit, which examines global business attitudes toopportunities and risk within the BRIC countries –Brazil, Russia, India and China – and other, neweremerging markets. The Economist Intelligence Unitcarried out a survey of executives in 561 companiesfrom 19 business sectors around the world in August2008. Just under 200 of those executives surveyed workfor companies headquartered in emerging markets; theremainder are from companies headquartered indeveloped countries.

Almost half (47 per cent) surveyed were small- andmedium-sized companies, with annual global revenuesbelow US$500 million; one-fifth had global annualrevenues of over US$10 billion. The surveyed executives,58 per cent of whom were C-suite or board members,were employed in a wide range of business functions.

Page 3: Emerging Markets

The big four emerging markets – Brazil, Russia, Indiaand China (the BRICs) – have for some time capturedinvestors’ imagination. But the picture has becomemore complex in recent years. Rising costs are forcinginvestors to look to less-developed regions, for examplewithin China, while rising wealth in the maincommercial centres, such as Beijing and Shanghai, hascreated major sales opportunities. A similar process isunder way in India, thanks to a rapidly growing middleclass, while improvements in infrastructure are alsoencouraging companies to invest beyond the main citiesof Mumbai and Delhi.

There are also promising opportunities in less prominentcountries. Vietnam especially is staking its claim tobecome a major investment destination. Such “newfrontier" markets may not be able to match China orIndia in terms of population size, but their progress inmarket reforms, trade liberalisation and governance willweigh more heavily in companies' investment decisions,especially given competitive wage levels.

Thus, in the search for “tomorrow's markets", investorsof the future are being pulled in two directions. On theone hand, they are considering a deeper drive intolesser-known regions within the BRIC markets,especially China and India, in search of lower costs andgreater availability of labour. On the other hand,investors are increasingly looking to relatively untappedmarkets beyond the BRICs.

Key findings of the report and survey are as follows:

The downturn in developed markets isfuelling further investment in and trade with emerging markets

Nearly two-thirds of executives (63 per cent) believethat the economic strength of emerging markets willoffset the impact of a downturn in Europe and NorthAmerica. As a result, emerging-market revenues, whichcurrently account for, on average, 29 per cent of thetotal revenues of those surveyed, are expected to rise to 38 per cent of total revenues in a mere three years'time. Indeed, over one-third of those surveyed (34 per cent) say their company will enter three or more emerging markets over the next five years, far morethan the 14 per cent of respondents who expect theircompanies to enter three or more developed markets.Over half of the companies surveyed are looking for newmarkets in which to sell their goods and services.

The BRICs will continue to dominate futureinvestment flows into emerging markets…

Nearly half of survey respondents still see strongpotential within the BRIC markets: 49 per cent say thatChina is a priority for future expansion, while 42 per centchoose India, 33 per cent Russia and 29 per cent Brazil.This finding is in line with the Economist IntelligenceUnit's forecasts, which see an annual average of aroundUS$87 billion in foreign direct investment (FDI) over thenext five years going to China, and a dramatic annualincrease in FDI into India, from US$23 billion in 2007 toa forecast US$60 billion in 2012.

…but an increasing amount of thisinvestment will be redirected to the BRICs'outlying regions

Survey results suggest that within the next ten yearsinward investment in China will have spread beyond themain cities of Beijing and Shanghai, most notablytowards the Yangtze river delta, the north-east and thewestern interior. A similar pattern can be observed inIndia, with companies looking to expand from Delhiand Mumbai to areas such as Gujarat and Ahmadabad.Certain regions will be more attractive to specific sectorsas a result of the local government’s investment inrelevant infrastructure.

The search for lower costs is a major factor inshifting investment patterns

Companies that depend on a low-cost base may bemost susceptible to relocation. While two-thirds ofmanufacturers in our survey currently operate inBeijing, this number will decline to a mere 14 per centin ten years' time. Executives from developed markets inparticular say that rising labour costs are the mainreason for looking beyond BRIC markets.

Vietnam is seen as the most attractiveemerging market beyond the BRICs

Vietnam's low-cost base and sizeable population meansthat it could begin to challenge China as a leader oflow-cost manufacturing: the country is attractinginvestment in industrial, IT and electronicsmanufacturing, in addition to its traditional strength intextiles. Mexico, the UAE and Ukraine are also seen asattractive new markets, for a variety of different reasons.However, most companies in the survey view these “nextwave” emerging markets as an addition, rather than analternative, to their existing BRIC investments.

Weak legal structures, corruption and poorinfrastructure are the biggest deterrents toinvestment in newer emerging markets

Respondents from developed as well as other emergingmarkets say that poorly established legal and regulatoryinstitutions, closely followed by corruption, will be themain obstacles to operating in new emerging marketsover the next ten years. Corruption and poorinfrastructure appear to be greater worries forcompanies headquartered in emerging markets thanthey are for firms from developed markets.

3 Tomorrow’s Markets Tomorrow’s Markets 4

EXECUTIVE SUMMARY

Page 4: Emerging Markets

More investment will go into more emerging marketsand regions within those markets over the next decade,despite – or perhaps partly because of – an economicslowdown in developed markets. While the big fouremerging markets – Brazil, Russia, India and China,known collectively as the BRIC economies – have longdominated investors' interest in emerging markets, thispicture is becoming more complex. As production costsin the BRICs rise in line with growing prosperity,Western manufacturers are having to recalculate theirrisk-reward assessment and seek lower-cost bases inthese countries' less-developed regions.

The focus of China’s economic development, forexample, is already shifting to its central and westernregions, helped in part by investment in their transportand telecommunications infrastructure. Meanwhile,lesser-known regions in India, such as Gujarat, are alsoproviding increasingly attractive manufacturing locations.

At the same time, rising incomes in the moreprosperous regions within the BRICs have becomemagnets for consumer goods companies. With aneconomic slowdown in developed markets, the prospectof maintaining global sales growth through sales inemerging markets is particularly enticing.

The picture for investors is made yet more complicatedby the emergence of a new wave of developing markets.Countries such as Vietnam, Mexico, the United ArabEmirates (UAE), Ukraine, Indonesia and others, whichhave made significant progress on market reforms, havejoined regional trade regimes, offer low wages or boaststrong economic growth, now also offer attractivealternative investment locations.

How are businesses reacting to the shifting investmentlandscape? In August 2008 the Economist IntelligenceUnit, commissioned by UK Trade & Investment, the UKGovernment’s international business developmentorganisation, carried out a survey of 561 executivesworldwide, to assess their attitudes to opportunities andrisk within the BRIC economies and other emergingmarkets. Just under 200 of those executives surveyedwork for companies headquartered in emerging markets,while the remainder are based in developed countries.

In general, emerging markets remain as attractive asever. Over one-third of those surveyed (34 per cent) saythat their company will enter three or more emergingmarkets over the next five years, far more than the 14 per cent of respondents who expect their companyto enter three or more developed markets. Additionally,the proportion of firms' global revenues that areexpected to come from emerging markets is expected togrow rapidly. Currently, emerging-market revenuesaccount for, on average, 29 per cent of the globalrevenues of companies surveyed, and this figure isexpected to rise to 38 per cent in only three years’ time.

Where is this investment likely to be directed? TheBRIC markets continue to dominate. Nearly half ofsurvey respondents still see strong potential within theBRIC markets, and in particular within China and India: 49 per cent say that China is a priority for futureexpansion, while 42 per cent choose India; these arethe two most frequently selected choices. The nextmost frequently selected region was the rest of Asia-Pacific (41 per cent), followed by Russia (33 per cent),the rest of Central Eastern Europe (32 per cent) andBrazil (29 per cent).

This finding is roughly in line with the EconomistIntelligence Unit's forecasts of continuing strongforeign direct investment (FDI), particularly into Chinaand India. China is expected to attract an annualaverage of around US$87 billion over the next five years– a small rise on recent years. India is expected to seethe most dramatic annual increase, with FDI rising fromUS$23 billion in 2007 to a forecast US$60 billion in2012. Annual FDI into Brazil is likely to remain ataround US$31 billion during the forecast period, whileannual inflows into Russia, which totalled US$52 billionin 2008, will dip to US$44 billion next year before

recovering to US$50 billion in 2012. The latter declineis likely to reflect the base effects of unusually highinflows in previous years – partly the result ofrepatriated offshore funds – more than any majorweakening in the business environment. That said, therecent conflict in Georgia (which occurred after oursurvey closed) did trigger falls in Russian financialmarkets (though direct investors stayed firm), and,although the crisis is likely to blow over, a moreassertive Russian foreign policy, towards neighbouringUkraine in particular, may raise political risks for foreigninvestors in the region in coming years.

A forecast of trade flows tells a similar positive story forthe BRICs, all of which will enjoy a rise in their share ofworld exports: China's share is expected to increasefrom 8.6 per cent in 2007 to 10.7 per cent in 2012, amassive figure that is driven in part by foreign directinvestors; India's share will rise from 1.07 per cent to1.35 per cent; Russia's share will increase lessdramatically, from 2.51 per cent to 2.68 per cent; andBrazil's will grow from 1.13 per cent to 1.25 per cent.

Stagnation in Western economies is also helping to fuelinterest in emerging markets: almost two-thirds ofrespondents (63 per cent) think that the economicstrength of emerging markets will offset the impact ofthe slowdown in Europe and North America, while only20 per cent disagree or strongly disagree with thisassessment. It would appear that many companies givesome credence to the notion that emerging marketshave “decoupled" from developed economies and willremain relatively immune from a US and EU downturnor recession. However, such a sanguine outlook mayprove over-optimistic given the dominance of US andEU demand in the global economy and the persistenceof major operating shortcomings in emerging marketsthemselves. Thus the full impact of a US and EUdownturn may yet be felt by investors and traders inemerging markets.

5 Tomorrow’s Markets Tomorrow’s Markets 6

INTRODUCTION

INVESTMENT CONTINUES TO FLOWThe BRIC emerging markets have been central to companies' expansion plans for manyyears, but with costs rising in the more established centres, investors are increasinglyexploring less-developed regions for sales, sourcing and production. At the same time, newemerging markets, from Mexico to Vietnam, are also offering a compelling business story.Thus investors will increasingly be pulled in different directions: do they spread theirinvestments into new emerging economies, or penetrate deeper into existing markets?

Page 5: Emerging Markets

The headline numbers fail to capture a more interestingtrend, namely that future FDI into the BRICs is likely tobecome more adventurous as it seeks simultaneouslylower costs and richer consumers. And this is expectedto take businesses deeper into the relatively untouchedregions, especially of India and China.

India's regions

Companies in our survey are for the most partconcentrated in two areas of India: Maharashtra, whichincludes Mumbai (favoured by 62 per cent of surveyrespondents), and Delhi National Capital Territory (61 per cent). The Delhi figure may be higher if oneincludes neighbouring Noida and Gurgaon. In addition,46 per cent of respondents are also active in the stateof Karnataka, which includes Bangalore.

However, the trend will be to expand into other citiesand regions over the next ten years. Popular regionsinclude the western coastal state of Gujarat (whichincludes the city of Ahmadabad), where one-third ofsurvey respondents said that they intended to investwithin the next ten years, and Andhra Pradesh (which

includes Hyderabad), where 38 per cent of respondentsplanned investments. That may not be too surprising:Gujarat and Andhra Pradesh have seen significantinvestment in infrastructure, giving them an advantageover other regions.

Gujarat has also attracted significant manufacturinginvestment in recent years. Among the manufacturingcompanies surveyed, 38 per cent say they will beoperating there within ten years, compared with just 7 per cent now. Andhra Pradesh is also likely to see asurge in investment from IT and technology companies –17 per cent of survey respondents say they operate theretoday, but this will increase to 58 per cent in ten years.In addition, while none of the survey respondents saidthat they had operations in Rajasthan, an astonishing 40 per cent said they planned to be there in the future.

Accor, the French hotel group, which recently openedits first hotels in Mumbai, Delhi and Ahmadabad,predicts annual demand growth for hotel rooms in Indiaof some 20 per cent up to 2012, almost three timesfaster than demand growth in Western Europe (7 per cent) over the same period.

7 Tomorrow’s Markets Tomorrow’s Markets 8

EXPLORING THE REGIONS

Where in India is your company operating today, and where doyou expect to have operations within the next ten years?(% respondents)

25

17

33

19

30

23

38

28

25

39

23

62

Page 6: Emerging Markets

China's regions

Investment patterns in China over the next ten years aresimilar, with investors expected in the main to stay inthe country but to explore lesser-known regions. Atpresent, inward investment is unsurprisingly focused onBeijing, Shanghai and the Greater Pearl River Delta. Ofthose companies surveyed, 57 per cent are operating inBeijing and 60 per cent in Shanghai. But almost two-fifths (39 per cent) of respondents also say that they willhave operations in the Yangtze River Delta area within adecade, compared with 24 per cent of respondents withoperations there currently. A similar trend emerges in theBohai Gulf region, where in August European aircraftmanufacturer Airbus began assembling aircraft at a newfactory in Tianjin. The plant will cater to China's fast-growing aviation market and is expected to beproducing four aircraft per month by 2011.

The most marked shift in investment will occur inChina’s north-east and its western interior. While a mere13 per cent of survey respondents are currentlyoperating in the north-eastern province of Liaoning, thisfigure is expected to rise to 38 per cent in ten years'time. Likewise, areas of the western interior such asSichuan and Chongqing will see a similar change (from19 per cent today to 33 per cent in ten years' time).

The popularity of parts of the north-east possiblyreflects a lingering advantage for coastal cities such asDalian as bases for exporting locally manufacturedgoods. In early 2007 Dalian received a major boostwhen US semiconductor vendor Intel announced plansto open a plant there (see case study). Several factorsattracted Intel to the region, including governmentefforts to regenerate the region, cultural issues and thecity’s experience in managing outside investment.

Intel's arrival may signify a broader sectoral shift in FDI, with light industries such as electronics andbiotechnology starting to eclipse textiles, silk andmachinery. Areas such as the Yangtze River Delta, theBohai Gulf and north-eastern China are likely toexperience an explosion of interest, from IT andtechnology companies in particular, over the next tenyears. Of those IT and technology companies surveyed,10 per cent are in the Yangtze area now, but this willincrease to 52 per cent in ten years' time, while in theBohai Gulf and north-eastern China the operations ofthose IT companies surveyed will grow from nothing atpresent to 47 per cent and 44 per cent respectivelywithin the next ten years.

9 Tomorrow’s Markets Tomorrow’s Markets 10

Where in China is your company operating today, and where do youexpect to have operations within the next ten years?(% respondents)

Manufacturers will also soon be on the move. Thesurvey found that while 67 per cent of manufacturerscurrently operate in Beijing, this number will decline toa mere 14 per cent in ten years' time, and the 75 percent of respondents with manufacturing operations inShanghai will drop to 21 per cent. Meanwhile, thenumber of manufacturers may double, from 22 per cent

to 44 per cent in north-eastern China, according to thesurvey, and from 17 per cent to 39 per cent in thewestern interior. These figures also suggest that thesharp shift away from Beijing and Shanghai may not befully taken up by other regions within China, and thatcost-driven manufacturers may be looking to stillcheaper locales outside the country altogether.

Page 7: Emerging Markets

The new wave of emerging markets still come withmany of the shortcomings that have long been familiarin the BRICs – political instability, wobbly legalsystems, low purchasing power, poor infrastructure andso on – but, as with the BRICs, a series of marketreforms, improved trading relations and growingeconomies have improved their appeal. Althoughunable to compete with the massive potentialconsumer bases and labour resources in China or India,significant market reforms have altered the finely tuned“location-cost-risk” calculus that previously ruled outlesser-known markets. Our survey indicates thatalthough investors are indeed looking seriously at thesenewer emerging markets, in general they are likely toconsider them in addition, rather than as analternative, to their existing BRIC investments.

In fact, just over one-third of respondents (36 per cent)currently see major opportunities within these new-frontier markets overall – far fewer than those withplans for further BRIC investments. Nevertheless, four-fifths of respondents still have at least three non-BRICmarkets in mind for expansion some time in the nextdecade. Asked to name their priority location from achoice of 27 non-BRIC markets globally, Vietnamattracted most interest, followed by Mexico, the UAE,Ukraine and Indonesia (see table). These levels ofinterest are roughly in line with the EconomistIntelligence Unit’s FDI forecasts, which show foreigndirect investment rising from US$7.6 billion in 2008 toUS$10.7 billion in 2012 in Vietnam and from US$18 billion to US$26.5 billion in Mexico. AlthoughFDI in the UAE is forecast to peak in 2009 beforedeclining, FDI is expected to increase noticeably inUkraine and Indonesia during the 2008-12 period.

Perhaps more interesting is the highly varied nature ofthe top ten “next-wave” markets, which togetheraccount for three-fifths of all respondents’ choices ofpreferred location. These comprise three South-eastAsian, two Latin American, two east European, oneMiddle Eastern and one African market. All havesignificant pros and cons, and investors will have tocalculate the combination of location, demand, risks andcost that best suits their widely varying investmentgoals. Two – the UAE and Singapore – are relativelywealthy, with Western levels of GDP per head, but theirpopulations, at around 5 million each, are the smallestof the group, and many investors see them as developedtrading hubs for their respective regions. By contrast,Indonesia, with a population of around 235 million, andsecond-ranked Mexico, with 109 million, offer sizeablepotential consumer markets, but GDP growth rate in thelatter has been sluggish. And fast-growing Vietnam isstill significantly poorer (with GDP per head at a mereUS$823) than other countries in the ranking.

These next-wave contenders for investment present avarying mix of pros and cons when compared withinvestors' home markets or to the BRICs.

Vietnam

Vietnam’s sizeable population and its very low wagesmay attract investors seeking an export base for the restof the Asia-Pacific region. IT and electronicsmanufacturers are already establishing plants. ButVietnam’s appealing story inevitably comes at a price –reflected in the country's relatively low score in theEconomist Intelligence Unit’s Business EnvironmentRankings (BER), which rank markets on a range of tax,regulatory, macro-economic, labour-related andinfrastructure criteria deemed essential for doingbusiness. The economy has struggled with rocketinginflation, which hit 28 per cent year on year in August(although the Government has recently acted firmly tostabilise prices), while progress in trade and financialliberalisation has been slow, corruption remains prevalent,and there are severe long-term problems in terms of poorinfrastructure and improving skills and education levels.

11 Tomorrow’s Markets Tomorrow’s Markets 12

THE GENTLE PULL OF THE NEXT WAVE

Priority marketfor expansion(no. ofcompanies)*

Population (m) GDP/head (US$) #2007

Real GDPgrowth 2008-12(%)†

FDI 2008-12(% of GDP)†

EIU BusinessEnvironmentRanking(2008-12)**

Vietnam 51 85.9 823 7.2 8.5 5.87Mexico 48 108.7 8,219 2.9 2.0 7.18UAE 46 5.2 37,895 7.2 3.9 7.62Ukraine 32 46.2 3,056 6.2 4.5 5.51Indonesia 30 234.7 1,845 5.8 1.1 6.23Singapore 30 4.5 35,956 4.8 14.0 8.72Poland 26 38.1 11,068 4.4 2.8 7.11South Africa 25 47.6 5,943 4.0 1.5 6.86Argentina 25 39.4 6,669 4.3 1.6 6.08Saudi Arabia 23 24.3 15,708 5.9 2.9 6.54

Source: Economist Intelligence Unit* of a total 557 survey respondents ** Score out of maximum of 10 # at market exchange rate † Average annual forecast

The next wave: priority markets for expansion

Country

Page 8: Emerging Markets

Mexico

Mexico boasts a large domestic market, although growthhas been lacklustre for much of the past decade.Proximity to the USA and integration into US supplychains, coupled with a virtually unrivalled network offree-trade agreements (encompassing countries thattogether generate 80 per cent of global GDP), have beena major boon for investors. But its heavy dependence onthe US market (which accounts for over 80 per cent ofexports) places the country on the front line of a USdownturn, although Mexico should be a primebeneficiary of a US recovery. The Government hasadopted a responsible fiscal and monetary policy stance,including a flat corporate tax, but progress in liberalisingkey industries and cutting red tape has been slow.

The UAE

The UAE presents a different matrix of factors. It hasdemonstrated the benefits of liberalisation in the non-oil economy. Incomes are close to Western levels, butthe market is small. The UAE has achieved success as anexport base and – despite a 49 per cent cap on foreignownership of onshore companies – its low taxes,minimal restrictions on trade and foreign exchange, andexcellent location have enabled the Government toproject a business-friendly image in its quest for high-tech investment, and also to promote the UAE as a hubfor traders in the region and worldwide.

Ukraine

By contrast, Ukraine’s “Orange revolution”, whichbrought pro-Western parties to power at the end of2004, changed investor perceptions of the country asthe new Government embarked in earnest onprivatisation and economic liberalisation, culminating inWTO entry in mid-2008. The country’s high level ofeducation and skills, its low wages and its position asthe most populous market between Russia and Germanymakes it highly attractive as a cheap manufacturingbase for export as well as a sales market in its ownright. However, persistent political differences betweenUkraine's pro-EU parties has hampered reform efforts,while the pull of pro-Russian forces and the growingdetermination of the Russian Government to preventfurther Westernisation occurring next door will heightenthe risk environment.

Indonesia

The largest non-BRIC emerging market by population,the political turmoil afflicting Indonesia in recent yearshas subsided, and the economy has stabilised, withannual GDP growth forecast at 5-6 per cent in comingyears. International banks have shored up the financesector, and foreign investors are starting to takeadvantage of opportunities in infrastructure andnatural resources. However, trade unions fiercely resistliberalisation of labour laws that guarantee a highminimum wage and make firing workers expensive,depriving investors of a vast pool of unskilled labourfor low-cost manufacturing. Moreover, decentralisationthat gives taxation and licensing powers to localgovernment has merely added an additional tier ofbureaucracy and corruption.

13 Tomorrow’s Markets Tomorrow’s Markets 14

Page 9: Emerging Markets

Perceptions of all emerging markets also vary betweencompanies from emerging markets (ie thoseheadquartered there) and those from developed markets.In many respects that difference is being eroded – bothtypes of company show equal appetite to expand intoemerging markets – but differences persist.

According to the survey, executives from companiesheadquartered in developed markets highlight wagepressures, recruitment and increased competition athome as reasons to shift operations into emergingmarkets. Executives from developing-market companies,by contrast, appear more concerned with the tax burdenand onerous regulations of developed markets asreasons to focus on developing markets. Risingprotectionism, including in Western economies, isanother major worry for 42 per cent of emerging-market companies.

As regards the BRIC markets, executives from companiesheadquartered in developed markets worry mainly aboutrising labour costs; their counterparts from emerging-market firms, while also concerned about this, fret moreabout poor infrastructure and difficulties in recruitment.Contrary to many expectations, companies fromemerging markets are also more distressed than theirdeveloped-market counterparts about corruption.

Developed-market companies are also more likely toleave the BRICs for other emerging markets: only 39 per cent say they are content to stay, compared with 56 per cent of companies headquartered indeveloped markets. Similarly, almost half (49 percent) of companies headquartered in emergingmarkets see opportunities in neighbouring markets,while only 38 per cent of developed-market firms seesimilar possibilities. This may in part be explained bythe fact that many BRIC-based companies may findit easier to operate in similar business environmentsfound next door.

The current downturn in developed-marketeconomies is fuelling interest in emerging markets.

The BRICs will dominate future trade and investmentin emerging markets, as investors explore lesser-known regions of these countries.

But investors are increasingly warming to theattractions of Vietnam, Mexico, the UAE, Ukraineand others.

Next-wave markets present a varied mix of prosand cons, but policy reforms remain a crucial factorin all of them.

None of these markets, whether BRICs or the nextwave, will be immune to the global slowdown.

China and India, and to a lesser extent Russia andBrazil, will dominate investor thinking for theforeseeable future, although the focus will shift to theirlesser-known cities and regions. At the same time,increasing numbers of investors – mainly those withsome operating experience in the BRIC markets – willconsider a new wave of emerging markets such asVietnam, Mexico, the UAE and Ukraine.

How fast this process plays out will depend onnumerous, often conflicting, factors: whether inputcosts or consumer demand are the main concern ofinvestors; how fast costs rise in the more popularinvestment centres relative to their skill levels; whetherfrontier markets are able to continue with marketreforms, ensure an open trading regime, protectinvestors and achieve low-inflation economic growth.

The outlook for emerging markets is generally positive,but there are risks. Many still struggle with inflationarypressures, unsustainable credit expansion, poorinfrastructure and inadequate governance. But perhapsthe biggest threat comes from contagion fromeconomic difficulties in the USA and the EU, whichtogether account for over half of global consumerdemand. Although the downturn there has helped tofuel trade and inward investment in emerging markets,a severe downturn or recession in coming years wouldinevitably drag down emerging-market growth too. Thenotion of “decoupling" is not only misplaced but isundesirable for investors, since it suggests that a pick-up in Western markets would also have limited impactelsewhere. That said, emerging markets are moreresilient to external crises than they were a decade ago.

15 Tomorrow’s Markets Tomorrow’s Markets 16

DUAL VISION CONCLUSION Emerging-market trends

Page 10: Emerging Markets

18 Tomorrow’s Markets

When Intel decided to build a new semiconductor plantin China to complement its existing operations inChengdu, Beijing and Shanghai, the company embarkedon a painstaking search to find the best location. Itneeded to get the decision right first time – chip plantscost US$2.5 billion and take three to four years tobuild, so there was no room for error.

“We had an exhaustive assessment done, with 28people involved in the site selection,” recalls KirbyJefferson, Intel’s General Manager of the new plantproject. “We went around various locations, coveringeverything from infrastructure – including the ability ofthe power grid to support our business – to local wastetransportation, to the local school system.”

The company eventually chose Dalian, a port city of 6.5 million inhabitants in Liaoning province in China’snorth-eastern region. Several factors influenced thischoice. While the north-east is generally viewed as arustbelt, it does have a number of cities, includingDalian, that are viewed as centres of growth.

The national Government’s efforts to regenerate thenorth-east initially brought the region to Intel’sattention, as did the capability and experience of thelocal political leadership in attracting outside investment.

Also important were cultural factors, such as whetherthe final location would appeal to Intel’s workforce. “Itwas important to have a location where Chinese peoplewanted to live, but as we were also bringing in asubstantial number of expats and their families weneeded a community where Westerners would feelcomfortable,” says Mr Jefferson.

The ability to work with local government, and whetherpoliticians would deliver on what they promised, wereother important criteria. China’s north-east, along withthe country’s western interior, is predicted to attractsubstantial amounts of foreign investment over the nextdecade, but both regions are currently the poor cousinsto more developed areas – namely Beijing, Shanghaiand cities in the Pearl River Delta.

No dallying in Dalian

Dalian itself has a reputation as a boom town. Incommon with other regions of China undergoingsubstantial capital investment, it exhibits its prosperity inthe form of luxury-goods retailers and newly built high-rise buildings, including a number of five-star hotels.

While the city does not have a background in high-technology manufacturing, it is a major centre forsoftware development and has attracted Westerncompanies involved in light-industrial manufacturing.Intel will join an array of foreign companies, particularlyfrom Japan and Korea, that are already located in thecity, such as Canon, Ericsson, GE, Hyundai, LG, Pfizer,Sanyo, Toshiba and Volkswagen.

Intel’s own plant will start production in the second halfof 2010. The company is building a fabrication plantthat will manufacture silicon wafers, the first suchfacility Intel has opened in China. The wafers will be cutup into actual semiconductors at separate assembly andtesting plants. The company already has two suchfacilities in China that have been open for some years –one is based in the Shanghai area, and the other is inChengdu, in the western province of Sichuan.

17 Tomorrow’s Markets

CASE STUDY Intel in China

UK Trade & InvestmentUK Trade & Investment is the Government organisationthat helps UK-based companies succeed in an increasinglyglobal economy. Its range of expert services are tailored tothe needs of individual businesses to maximise theirinternational success. We provide companies withknowledge, advice and practical support.

UK Trade & Investment also helps overseas companiesbring high quality investment to the UK’s vibranteconomy – acknowledged as Europe’s best place fromwhich to succeed in global business. We provide supportand advice to investors at all stages of their businessdecision-making.

UK Trade & Investment offers expertise and contactsthrough a network of international specialiststhroughout the UK, and in British Embassies and otherdiplomatic offices around the world.

For further information please visitwww.uktradeinvest.gov.uk or telephone +44 (0)20 7215 8000.

The Economist Intelligence UnitThe Economist Intelligence Unit is the businessinformation arm of The Economist Group, publisher ofThe Economist. Through our global network of 700analysts, we continuously assess and forecast political,economic and business conditions in nearly 200 countries.As the world's leading provider of country intelligence, wehelp executives make better business decisions byproviding timely, reliable and impartial analysis onworldwide market trends and business strategies.

Page 11: Emerging Markets

TOMORROW’S MARKETS

Whilst every effort has been taken to verify the accuracy of thisinformation, neither the Economist Intelligence Unit Ltd nor UKTrade & Investment (including its parent Departments theDepartment for Business, Enterprise & Regulatory Reform, and theForeign & Commonwealth Office) can accept any responsibility orliability for reliance by any person on this report or any of theinformation, opinions or conclusions set out in the report.

Published September 2008 by UK Trade & Investment© Crown Copyright URN 08/1238

The paper in this document is made from 50 per cent genuinewaste pulp and 50 per cent ECF pulp from sustainable forests.The inks are vegetable oil-based and contain resins fromplants/trees and the laminate on the cover is sustainable,compostable and can be recycled.