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| 6/16/2008 |
THE SEISMIC SHIFT UNDERWAY
By Stephen Jennings, CEO, Renaissance Group |
Renaissance Capital 12th Annual Investor Conference
Good morning ladies and gentlemen and welcome to Renaissance Capital’s 12th Annual Investor Conference. For several years now, Renaissance Capital and I have been talking about a new global economic paradigm. Our central thesis has been that we are living through an age of accelerating economic convergence; that the world’s new economies — with Russia among the leaders — will drive global growth and value creation in the early decades of this new century. That tectonic shift is now firmly underway, and widely accepted. But the implications for global business are not yet fully understood.
There is acceptance that new world economies can grow more quickly than the mature markets. There is an understanding on the part of business that goods for the developed world can be produced more cheaply in the new world economies. There is even an appreciation that new world markets offer a better source of growth and profitability.
But has the world even begun to understand the implications for business, finance and industrial organization? That the world’s largest businesses will be from new world economies? That the world’s most influential business people will be Russian, Chinese, Indian and African? That new world investment funds will dwarf their Western counterparts? That the dollar will become only one of many reserve currencies? That Moscow, Singapore, Shanghai, and Dubai, will, alongside London, be where the majority of wealth is managed and traded.
We are entering a brave new world, where economies, financial institutions and private companies from emerging markets are the dominant force not only behind global growth, but also increasingly behind global business, wealth management and finance.
To date, we have talked about this shift at the 10,000-foot level. But today, in this closed-door session, I want to drill more deeply into the implications of the global economic reordering.
This is an off-the-record, interactive session — the first time we have had such a panel at what is now our 12th Annual Investor Conference. I want to encourage a lively discussion, both among our distinguished panel and among you, our invited guests.
But first, I would like to share a few of my own observations.
The most obvious is the sheer scale of the economic changes. In 1980 2.8 billion people lived in countries that were growing faster than the G7; today there are over 5 billion people benefiting from this convergence. However, the 10% of the world’s population that lives in the G7 today still produces 42% of the world’s output, consumes 44% of the world’s oil and controls 60% of its wealth. By almost any measure, the transformation of the global economy has barely begun. Assuming only that Chinese consumption patterns follow the same trend as that mapped out earlier by Japan, Korea and Taiwan, China alone will consume the equivalent of all the oil produced globally today by 2040.
The second is the speed of the economic changes. At the beginning of the 20th Century, what are now the G7 controlled roughly 60% of world output. By 1980, according to the IMF, their share had fallen to 51.5%. Today it is just 42%. Over the last 30 years the positive differential between non-G7 and G7 growth has tripled. In the next 20 years — one generation — there will be a bigger shake up in the global economy than in the previous century of economic change, which itself was the fastest period of global growth in history.
Third, is the question of what is driving the economic change? The economic growth and reduction in poverty are being driven by private businesses investing private capital to meet the demand of private sector consumers. And increasingly, the world’s most dynamic companies are coming out of the world’s most dynamic economies. Cross-border M&A, for example, is being increasingly driven by companies from the High Growth Countries. According to Thomson Reuters, emerging-market mergers and acquisitions this year are up 17 percent, while they are down 43 percent in the rest of the world.
Evraz, Norilsk Nickel, Base Element, Mittal, Gazprom, Severstal, CVRD, Tata, Vale and Lenovo are the companies that are looking to expand overseas in the way Exxon, Shell, IBM, Unilever and Toyota have done in the past. Russian companies alone have been involved in cross-border M&A transactions totaling an approximate $13 billion so far this year, up four-fold over the same time last year.
Emerging market companies are also growing in terms of their global profile and stature. A report just issued by the Reputation Institute in the U.S. has 35 BRIC companies on the list of the World’s Most Respected Companies in 2008, many rising rapidly during the last year. Russian companies making the list of the top 200 include Lukoil, Gazprom, Sberbank, MMK, Norilsk Nickel, Evraz, Rosneft and TNK-BP.
In fact it’s clear that the emerging market countries have already emerged. I would suggest that it is more accurate to call them High Growth Countries or HGCs.
And, it’s not just the companies from High Growth Countries that are buying abroad. Much of the world’s net savings are being generated in Asia and in the oil producing countries. Increasingly, those savings are being invested more innovatively than simply being parked in US Treasuries. Sovereign wealth funds are becoming some of the largest net buyers of financial assets globally. ADIA, GIC, the Kuwait Reserve Fund and the Chinese Investment Corporation all exceed 200 billion dollars and will soon rival Fidelity and its peers in size. Less dramatically, but no less important, hedge funds, QDIIs, private equity funds, mutual funds and pension funds are investing savings back into their own ballooning asset markets. Just as these funds are the fastest growing, so are the domestic asset markets to tap those funds. The largest IPOs were from HGCs last year. PetroChina’s $9 billion IPO followed by VTB’s $8 billion listing topped the global IPO charts in 2007.
Companies and financial institutions from High Growth Countries are clearly benefiting from the growing importance of their home economies. But they have other critical strengths as well. The business environments in HGCs demand new business solutions and forms of organization to those that evolved in the relatively stagnant markets of the G7 and which, until recently, have been widely exported by Western multinationals. In fact, the HGCs are the ideal breeding ground and are producing many of the best leaders and business models for the exciting new world. Let me elaborate.
First, business leaders in HGCs tend to be risk-takers because of the speed and magnitude of change surrounding them. Almost by definition, to have been successful at building a business in one of these markets, an entrepreneur has to have thought more ambitiously, built faster and handled far greater risk than business people in mature markets.
Second, the ownership and decision-making structures of HGC companies are better suited to the business environments in which they operate. To be successful, it is critical to be able to move quickly and take big decisions. For that, you need concentrated ownership and focus from key decision makers who are totally locked into the long-term risks and rewards of their actions. The model of privately or semi-privately owned business with a core of strong, talented shareholders, which has developed in Russia, Latin America, India and South East Asia, is tailored to achieve this.
This is not to say there is no role for multinationals with their tremendous management depth and technology. However, in this new world the most successful Western multinationals will be those that are most adept at melding their strengths with the natural advantages of strong local players and adapting their decision making and internal incentives to the highly dynamic opportunities within HGCs. This will be challenging — organizationally, culturally and sometimes politically. But an even bigger threat will await those multinationals that sit on the sidelines hoping that the new business world will somehow adapt to their business models — these dinosaurs will be left far behind in the race for establishing new global champions.
Third, business people in HGCs tend to have developed their personal expertise within challenging and dynamic operating environments. As I often say to my team, the biggest hidden asset that Renaissance enjoys is the mistakes that we’ve made along the way. Although we’ve achieved great returns in our new markets, it has not been easy. We’ve learned many lessons setting up businesses in markets like Ukraine, Nigeria and Kenya. Those scars are invaluable in identifying the opportunities and pitfalls as we move into new high growth, high opportunity markets.
So increasingly, it is not just the fastest growing economies, wealth creation and markets that are emerging among HGCs, but also the people and the companies best placed to take advantage of them. The hegemony of the HGC economies is becoming self-fulfilling. According to Forbes, in 2000, 14 of the top 25 richest people on the planet were American, and 2 were from the HGCs. In 2008, four were from America and 15 were from HGCs, including 2 Chinese, 4 Indians and 6 Russians.
Of course, there are still large risks. One of the biggest is of a global economic downturn caused by the large-scale structural adjustment being forced on developed world economies.
HGC economies face a painful transition. They cannot rely on developed markets to continue to provide the growth in demand for their exports. The future growth markets will be the HGCs themselves. The question is how quickly that transition will take place, and whether it is spurred more by increased demand from new economies, or a decrease from the developed countries. The current turmoil in the G7 suggests the latter, and potentially on a much accelerated basis, with potentially serious short-term consequences for the HGCs.
Another challenge is the stage of development of the HGC’s financial markets. In the near-term these markets are simply not large enough to intermediate the flood of global and domestic capital headed their way. Clearly this provides an amazing medium-term growth opportunity for the financial services industries of the HGCs, including the opportunity to take market share away from less dynamic global financial institutions. This process will involve the emergence of new localized reserve currencies and much deeper and more sophisticated local capital and banking markets. There will also be an explosion of financial flows and integration between the HGC’s themselves — the regions with the greatest savings flows and the highest investment returns in the world.
With the HGC’s growing economic and financial power their political clout will expand as well. As is perhaps inevitable, the bureaucracy of global finance and economics has failed to adapt at anything like the speed at which the global economy is changing. The current global institutional framework remains a rich country club, which is increasingly anachronistic. Take the G7. They recently met to discuss, among other things, the future value of the dollar. But they failed to invite any of the major net buyers of the currency. This is a little like the oil consumers meeting to determine the price of oil without inviting OPEC. The operations and make up of multilateral institutions like the United Nations, G7, World Bank, WTO and IMF have either to adapt to include the newly important global economies, or will be superseded by much more relevant institutions.
But perhaps the greatest set of challenges relates to the rapid evolution of institutions within the HGCs themselves. Just as these countries are benefiting from unprecedented growth and wealth creation, so will they face unprecedented domestic pressure for improved public services, more effective institutional checks and balances, and greater political pluralism. Political changes that evolved over hundreds of years in the west will happen over decades in the HGCs with inevitable speed bumps along the way. Those HGCs whose leaders tackle these changes proactively and pragmatically, while recognizing the realities of historical, political and institutional circumstances will have major advantages over those countries whose leaders are inward looking and reactive.
We are living in a world that is going through a fundamental and profound realignment. To conclude, what does this specifically mean for Russia?
- Russia’s political and economic clout will only be increasing — not diminishing — in the future.
- Russia, and Moscow specifically, will be growing in stature as a financial capital. Moscow will become one of the six or seven top financial centers in the world in the next 10 years or so, playing a key role in intermediating capital throughout the CIS, Europe and Asia.
- Russian companies will become increasingly more influential in the global economy. With strong domestic growth, excess cash flow and rapidly developing management capabilities, there will be a multitude of Russian cross-border acquisitions and many multinationals with head offices in Moscow will emerge.
- The nature of investment in Russia will also change, with increased capital coming into the country from investors in Asia, the Middle East and other HGCs.
- And, finally, the quality of life for Russians — and their economic and social freedoms — will continue to improve.
Fareed Zakaria, the editor of Newsweek International, in his new book, “The Post-American World,” says we have seen such profound power shifts only three times in the past 500 years. The first occurred with the rise of the West, which brought the world science, technology and the industrial revolution. The second was the rise of the United States in the 20th century. And, now, we have what he calls “the rise of the rest.” It is becoming increasingly clear that the rise of the High Growth Countries, with Russia featuring prominently is on a scale and at a speed, which dwarfs anything that has come before. |
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