Phenomenal growth in emerging markets is causing a fundamental structural shift in the global economy. Are British companies well placed to take advantage?

By 2025, nine of the top ten cities generating the fastest GDP growth globally will be in China†. By 2030, 23 per cent of global middle class spending is set to come from India and 18 per cent from China, with the US’s share falling to seven per centΔ. And by the same year today’s emerging economies will account for nearly 60 per cent of global GDP#.

The global economy is undergoing a fundamental transformation. Growth in the developing world has outstripped that of advanced countries for the past decade. And that has been accelerated by the financial crisis and recession. ‘We’ve had a two-speed global economy – and that has been reinforced because the Western economies have slowed to an anaemic crawl,’ says Jan Randolph, Director of Sovereign Risk at IHS Global Insight.

That’s not to say emerging markets aren’t facing their own difficulties: Chinese growth has slowed and it, along with countries including Turkey, Vietnam and Brazil, faces inflationary pressures. But as Professor Kate Phylakatis, Director of the Emerging Markets Group at Cass Business School, says: ‘These countries will be encountering problems but they will be less severe than those of the developed world over the next few years.’

The fast-growing middle classes in emerging markets are becoming an ever-more important source of consumer demand. The OECD estimates that the Asia-Pacific region, for example, will make up 59 per cent of global middle class spending, which is predicted to reach US$56trn by 2030 (up from US$21trn in 2009).

These trends are particularly important for the UK. With domestic demand subdued by the government’s deficit reduction plans and squeezed household incomes, the government is keen for a rise in exports to help the economy recover. But currently the EU and US account for more than two-thirds of UK exports by value. With the eurozone in turmoil and the US struggling, UK businesses need to look further afield.

Target markets

So which markets should businesses be focusing on? Edward Oakden is Managing Director of the sectors group at UK Trade & Investment. He says the government trade promotion body is in 96 countries worldwide – but is targeting resources on around 20 which are the fastest-growing.

‘They are the ones you’d expect – China, India, Brazil, South Korea, Indonesia, Malaysia, Singapore; then moving back through the Middle East – the Gulf, Saudi Arabia, the UAE, Qatar; into Africa – Egypt, Nigeria, South Africa; to Turkey and Russia; and then across into Brazil and Mexico.’

These markets share a key characteristic: the growth of the middle classes and an increasing desire for Western products.

Much has been written about the BRIC countries (Brazil, Russia, India and China) over the past few years. And with their growing middle classes driving consumption, they continue to offer enormous opportunities. Randolph notes that China’s growth has ‘been head and shoulders above everyone else’ (though he’s hesitant about prospects in Russia).

But he adds: ‘There’s another tier of what you could call medium-sized emerging markets that should not be ignored, particularly those with large internal demand drivers.’ He throws another acronym into the mix – ‘VISTA’: Vietnam, Indonesia, South Africa, Turkey and Argentina. ‘Indonesia is a genuine emerging market and has demonstrated resilience,’ he says. ‘Ratings agencies have moved it into investment grade and there has been a slow, and incremental reduction in political and economic risks.’

Randolph also points to ‘pools of growth and stability’ in Africa – a view echoed by Kah Chye Tan, Global Head of Trade and Working Capital at Barclays. ‘Africa and Asia are very strong,’ he says. ‘Africa is coming from a smaller base, so we expect to see an exponential increase in demand there over the next few years.’

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Sectors of strength

While different economists may focus on different markets and use different acronyms, the same countries continually crop up in conversation. And they share a key characteristic: the growth of the middle classes and an increasing desire for Western products. It’s a phenomenon that is already benefiting UK brands such as Burberry, Johnnie Walker and Aston Martin.

Randolph says demand for consumer goods from laptops and mobile phones to motorbikes in emerging markets kicks in at income levels much lower than in the West – typically around US$5,000-US$8,000 a year. And that means companies need to think carefully about their strategies. ‘We may have to re-engineer our products to suit lower incomes,’ he says.

Away from consumer goods, UKTI’s Oakden highlights enormous and ongoing investment in infrastructure by emerging economies as a significant source of opportunities. ‘It’s not just whether you have decent roads, ports and railways, but whether you have health and education systems that are consistent with your population’s aspirations and can create jobs that will provide your young people with respect,’ he says.

Britain’s expertise in engineering, architecture and design plays well in the early stages of major infrastructure and transport projects, as the work of businesses such as Arup, Mott MacDonald and Benoy have shown. And that extends to its experience in hosting large international sporting events; UK businesses are currently exploring what role they can play in preparing for the 2016 Rio Olympics, for example.

‘We will increasingly be at the top of the value chain,’ Oakden says. Other areas that he highlights include: advanced manufacturing and engineering – from building aircraft wings to sophisticated deep sea-drilling and renewable energy; life sciences, pharmaceuticals and healthcare, where UK intellectual property and knowledge of the NHS and public-private partnerships is valued in many markets; defence and security; and IT.

Then, of course, there are the UK’s service industries. Oakden says the UK is ‘undoubtedly in the top three in the world’ in financial and legal services, but emphasises other strengths, too. ‘Educational services, the creative industries, media, design, fashion, broadcasting and music – all these are areas that are really innovative and in many ways Britain is uniquely good at them.’

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Room for improvement?

Yet despite these strengths, there’s a sense that the UK is underperforming in key emerging markets. When David Cameron and Premier Wen Jiabao unveiled US$2.2bn in trade deals between Britain and China in June, for example, it was trumped by the announcement of US$15.5bn in Sino-German deals the following day. And as the emerging markets themselves develop and trade flows become more global, the competition ratchets up.

As Trade Minister Lord Green said in an interview earlier this year, ‘there’s no doubt that our market shares in some of the most exciting, fast-growing countries in the world are some of the smallest we have anywhere. Even in India, where there are all sorts of historical relationships, we can be accused collectively of having taken the trade relationship for granted.’ While he noted that ‘the trade numbers show we are making some progress’, he warned it would be a long haul.

Trade figures for August from the Office of National Statistics offered signs of hope: exports of goods reached £25.5bn, the highest level since monthly records began in 1998. But a month later, the eurozone crisis contributed towards a rise in the trade deficit from £8.6bn to £9.8bn – the worst performance ever recorded.

In the end, perhaps, it comes down to a question of confidence. Kah Chye Tan at Barclays moved to the UK from Singapore in spring 2011. He says that the UK banking sector is ‘very well regarded internationally’ – but also that his family has been impressed by the quality of British products.

‘UK companies make a lot of good products – we just have to promote them a lot better internationally,’ he adds.

 

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This article was first published in a special report 'A Question of Confidence - How British companies can break into emerging markets' by Business Voice in November 2011.
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March 2012.