Figure 4New car registrations show the divergence of emerged/emerging markets
The global economy may now finally be approaching escape velocity. Major developed economies, most recently the Eurozone, have exited recession, global consumer confidence seems to be picking up and financial markets have generally been on an upward trend despite periodic bouts of volatility. But if this is the start of a sustained economic recovery, what will be the key driver of this growth?
Our view is, with governments still cutting back, private consumption will need to lead the way in most economies; car sales may be one useful indicator of broader trends.
This reflects the fact that, after housing, cars are the next big-ticket items that consumers buy. New car registrations are therefore a potential bellwether of industrial production and consumer confidence. Trends in car registrations in emerging and developed markets (Figure 4) demonstrate the divergence between consumption growth in emerging and developed markets since the financial crisis.
Figure 5The Chinese car export market has become vital for German car producers
The evolution of China’s trade relationship with Germany is a useful guide to wider economic trends. The German car industry is one of the largest in the world. Its output was around €280 billion in 2012, of which about 70% was accounted for by exports.
Figure 5 shows how important the Chinese consumer has become to the German car industry. China is now the third largest individual export market for German cars, accounting for a 10.7% share of export value (compared to 0.2% in 2000). Over the past five years, the value of imported German cars has grown at a compound annual rate of 37%. So far, this growth has been generated by the fast-growing newly affluent population for whom brands like Mercedes Benz, BMW and Porsche are major status symbols. This is shown by the fact that the average value of a German car exported to China is significantly higher than in the UK and US markets (Figure 6).
Figure 6The average value of an imported German car in China is double that in the UK
As discussed in this month’s focus box (opposite), Chinese households will take an increasingly prominent role in driving global economic growth. In the longer run, this is also likely to be true for other emerging Asian markets, where consumption remains relatively low by international standards.
There are wider lessons for exporters to emerging markets. So far, consumer goods imports have been driven by ‘luxury’ items, as noted above. But as wealth spreads, the ‘mass affluent’ middle class in emerging markets will become more important in shaping the global consumer spending story over the next 20 years.
Financial liberalisation and internationalisation of the Renminbi will be important catalysts for Chinese consumers. These changes are likely to lead to increasing purchasing power within Chinese households and greater ability to buy foreign goods and services.
Ambitious companies should be looking to take advantage of this emerging market consumer growth story. However, they will have to make difficult decisions. One is often deciding whether to export from home, or produce in the local market.
While the global economy is moving towards greater trade liberalisation, trade barriers will be a hurdle for some time. Production in ‘gateway’ locations, in or close to the local market (‘build where you sell’), can be a cost effective mitigation strategy.
But companies shouldn’t turn their back on developed markets yet. The effects of the financial crisis mean that labour is relatively cheap and there is excess capacity in many economies, making them a good base of production. For example, several global car firms have brought production back from the Far East to Europe. Fierce domestic competition, as well as challenging regulatory regimes, may also cause some Western companies to focus more on lower growth, but also lower risk markets, nearer to home.