Unlocking global value

GLOBAL INVESTOR 2.07 Lead — 15
decades, which are based, among other things, on just-in-time
delivery, consumer credit, and use of the Internet. As a result, selected
EM mirror companies are likely to develop faster than, for
example, Ford did in the USA in the 1920s, or Metro in Germany
after World War II.
Selected sectors expected to benefit
As credit and mortgage availability grows, banks that operate in the
consumer credit area in EMs could be viewed as growth stocks.
There is a notable lack of leverage across EMs, especially in the
domestic consumer sector, and investors can anticipate a strong
boom in consumer credit cycles. We believe this new trend is likely
to be particularly pronounced in Asia, where domestic demand remains
weak compared to exports, and external surpluses are huge.
Finally, the recent access to wealth usually induces a spending
spree on some prestige items as a way to highlight personal success.
Further opportunities in the credit business remain in several
countries, such as Kazakhstan, which is discussed in detail in a
separate article in this publication.
Another sector significantly geared to the emergence of a local
middle class is consumer staples. As incomes rise in EM countries,
there is often a move toward branded food and beverages, focusing
on international brands like Danone, Coca-Cola or Nestlé but
also on famous local brands such as Ambev in Brazil, Will-Bill-
Dann or Kalina in Russia or Tsingtao in China. Since the middle
class is mostly urban, it needs access to organized retailers, which
carry the largest number of branded products. Retail chains and
specialized retail, pharmacy chains for instance, have grown rapidly
in recent years and are currently preparing for even higher demand,
usually adapting the Western model of just-in-time delivery,
size and customer loyalty. We would also highlight sectors like local
media, which are benefiting from a greater appetite among the
middle class for information flow, higher advertising fees and higher
subscription rates.
Figure 4
Per capita income growth
Per capita income growth in EMs is high compared to G5 countries,
and such a rapid pace of growth is likely to continue into the foreseeable
future. Widening income distribution suggests that the higher-income
population will likely grow at an even faster rate.
Source: International Monetary Fund, The Economist Intelligence Unit, Credit Suisse
%
6
5
4
3
2
1
0
96 97 98 99 00 01 02 03 04 05 06
07 08
China France Japan United States
Russia Germany United Kingdom
09 10 11
Emergence of potential EM national champions
As mentioned earlier, the national champion model is no longer the
reserve of small countries looking for a niche. It has become the
priority of large emerging markets wishing to increase their share
of added value in the world economy. This is illustrated in the progressive
up-market moves of Chinese, Indian and other firms, away
from competing merely on price and toward own brand and distribution
network development, backed by leapfrogging technology.
China was the first EM country to endeavor expanding its product
mix and selling higher-value-added items, as the country had already
reached a significant size in labor-intensive electronics and textile
exports, and growth momentum in those low-value-added items
appeared limited for the future.
A Chinese initiative for national champions has therefore started
in recent years and has focused on several sweeping measures:
—A—Strong public research and development (R&D) efforts: R&D
rose from 0.7% of GDP in 1997 to 1.3% in 2002, with 2.0% targeted
for this year. The OECD estimates that China has become the world’s
third largest investor in R&D, after the USA and Japan, spending 18
billion euros in 2005. Close to 12 million Chinese students are currently
enrolled in post graduate scientific education, which could
make China the biggest source of researchers in the coming decade.
—B—Growing international investment: 70% of Chinese companies
currently have capital expenditure plans in foreign countries.—C—