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JUNG Moo-Sup

All Eyes are on the NEXT China

JUNG Moo-Sup

Dec. 6, 2011

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Who will replace China to become the next global economic engine? The answer will be vitally important to Korea’s exporters and policy makers as they plot long-term strategies. With Korea’s low birth rates and rapidly aging population, the nation’s growth potential faces constraints. Investment in the “next China” will be a way to strengthen growth engines and sustain expansion in the coming decades. As of now, China’s role as a global economic engine is secure. But during its rapid growth, China raced past certain key advantages such as cheap labor, which together with the population aging problem, will serve to severely attack the Chinese economy after 2015.

The current betting on who will replicate China is on India, Brazil, and economies in Southeast Asia, and Africa. Although Brazil and India are grouped with China in the “BRICs” acronym that has symbolized the rise of emerging markets during the past decade, they are not quite in the same league as the Chinese economy. In 2010, China replaced Japan as the second-largest economy after the US in terms of GDP, leaping from sixth place in only 10 years. During the same time frame, India and Brazil rose to ninth and seventh place from 13th and 10th, respectively.

However, the past decade was just a preview of what is in store in the next 10 to 20 years. Global Insight, an economic forecast organization, predicts that India will overtake Japan to become the world’s third largest economy after China and the US by 2021, and Brazil will rank in the top five by 2020. And by 2037, India will overtake the US to rank second after China and in 2029, Brazil will overtake Japan to rank fourth after China, the US and India.

Indonesia is expected to be close behind the blistering pace. Citigroup recently predicted Indonesia’s economic scale will surpass Germany in 2030 and Boston Consulting Group has even added Indonesia to BRICs, creating the acronym BRICI. As a single bloc, Indonesia and four other members of the Association of Southeast Asian Nations (ASEAN) are expected to top Japan by 2033 and in 2040, rank as the world’s fifth largest economic power. As for Africa, if it is also regarded as one big market, it will account for 3.4% of the world market, also surpassing Japan, which will see a further acceleration of its population aging in this decade.

The favorable demographics, economic uptrend and attendant increases in disposal income seen in second-tier emerging markets have naturally caught the attention of long-term corporate strategists. A case in point is India’s mobile phone market, which grew at an annual rate of 68% from 2003 to 2010. At the end of August 2011, India had 866 million mobile phone subscribers, second in the world after China. The top selling phones include models from Nokia and Samsung. Furthermore, the automobile market in India, like Brazil, is seeing rapid growth with the entrance of global automakers, including those from Korea and Japan.

Multinational companies that have gained a firm foothold in India and other fast-growing emerging markets have enjoyed long-term growth and sustainable revenue. This is because customer loyalty is not easily changed after the initial stages of marketing to first-time buyers of products. In the case of Samsung and LG, who entered India’s electric appliances market in the mid-1990s, they rank first and second respectively, and have maintained their unrivaled leading positions and are enjoying continuous growth.

Indigenous companies in the “next China” markets are naturally expanding. The diversification of India’s business groups such as Tata and Reliance and the rise of Brazilian companies such as Gerdau and food companies are accelerating the growth of their respective markets. Additionally, low-income consumers, who have been untapped thus far, are now becoming more visible to local companies. They are also raising the demand for related parts, facilities, materials and services. These trends bear watching by global companies that seek more opportunities in the emerging markets.

China’s economic ascent and the expansion of Seoul-Beijing relations have ballooned Korea’s dependence on China in a broad array of sectors. In 2010, China was Korea’s top export destination, taking in 25% of Korean shipments, compared to 11% in 2000. This has filled the coffers of many Korean companies, and there is no doubt the Chinese market will continue to be a pillar to Korea’s economy going forward. However, the over-weighted reliance makes the Korean economy more and more vulnerable to any turmoil in China, strain in Sino-Korea relations and macro-economic negatives.

Wage inflation in China is already changing economic dimensions. The era when China was the world’s workshop, doing cheap, final assembly for Korean companies and its global peers, is quickly coming to an end. This has forced many manufacturers to rethink their presence in China. Some have returned production back home or shifted to Southeast Asia. In addition, Chinese companies such as shipbuilders have greatly increased their competitiveness and, backed by the government, aim to climb the value ladder to challenge Asian neighbors. Thus, it is increasingly important for Korean companies to trim their dependence on China while expanding the relationship with the next China countries.

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