Reuters Magazine: Wheatley: What's going right

Thu Jan 26, 2012 10:10am EST
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By Alan Wheatley

(Reuters) - With the British economy flat on its back, the Jaguar Land Rover (JLR) factory in Birmingham, the second largest city in England, is doing something unusual: hiring. The company is doing well. With exports to China and other big emerging economies rising strongly, Britain's largest automotive manufacturer recently said it would hire another thousand workers and build a new engine plant, creating a further 750 fifty jobs.

The Jaguar plant, which manufactured Spitfire fighter aircraft and Lancaster bombers during World War II, is an amalgam of state-of-the-art robots and old-fashioned craftsmen intent on their work. Electric carts laden with parts buzz across the factory floor, passing beneath big screens that flash the number of cars completed that shift. It takes 48 hours to process the top-of-the-line XJ model. As sedans roll off the assembly line, each customer's specifications are given a final check, and the cars are driven away to be shipped everywhere from Australia and Azerbaijan to the United States and China. The company, bought by India's Tata Motors from Ford Motor in 2008, exports 75 percent of its output. Britain and the United States remain JLR's biggest markets, but China has sped into the third spot and now accounts for 14 percent of the company's sales, which reached 232,704 vehicles last year.

That the luxury tastes of newly rich Chinese are generating employment in the birthplace of the industrial revolution is a powerful expression of Asia's rising clout and a reminder that the West's protracted debt crisis has not sucked all life out of the global economy. JLR's sales to China have risen by more than 750 percent in the past five years. "Nearly everybody's cutting back because of the recession, but China is still an expanding market," said Jim Kearns, an experienced assembly-line worker at JLR's Castle Bromwich plant in Birmingham. "They've got their heads screwed on over there."

Europe's debt malaise is prompting talk of a lost decade for the economy, like Japan in the 1990s. In the United States, deadlocked debt reduction talks, high unemployment, and long-stagnant incomes are sapping confidence. But many less affluent countries, though not immune to the West's woes, have displayed remarkable resilience. While advanced economies are likely to expand just 1.6 percent this year, emerging and developing countries should notch up growth of 6.4 percent, according to the International Monetary Fund. For the past five years, developing countries have contributed as much as 65 percent of world growth and 70 percent of the growth in global imports, the World Bank estimates. Nor is this growth purely a function of final demand in the West. South-South trade - for instance between China and India or Brazil and Africa - now makes up 45 percent of developing country imports, up from about 23 percent in the early 1990s.

The BRIC countries are in the vanguard of this reordering of the world economy. Brazil, Russia, India, and China accounted for just 8.5 percent of global GDP at market exchange rates in the period between 2000 and 2004, according to the IMF. Between 2005 and 2009 that share rose to 13.1 percent, and by 2015 it will have overtaken that of the euro zone to reach 20.7 percent, just shy of the United States at 21.1 percent. "We're in the early days of the rise of the BRICs," said Jim O'Neill, the Goldman Sachs economist who coined the concept a decade ago. Trade tells a similar story. Over the past two decades, the share of world exports among the BRIC countries has nearly tripled, while their share of global imports has nearly doubled. At the same time, the gulf in productivity between industrial and developing economies - what economists call the "convergence gap" - remains very large. Hundreds of millions of people have been lifted out of dire poverty thanks to the 10 percent annual growth China has enjoyed since the late 1970s, but an estimated 300 million Chinese still do not have access to clean water. Measured at purchasing power parity, annual income per head in China is just 16 percent of that in the United States. In India, the figure is just 7 percent. It's this catch-up potential that has businesses salivating.

"I'm still optimistic. We will continue to see hyper growth in these markets," said Yang Yuanqing, the chairman of Lenovo, the world's number two personal computer maker. In China, for example, many people in the biggest cities already own a computer, Yang said, but the penetration rate in smaller cities and townships remains very low. His confidence is broadly shared by the man in the street in China even if there is resentment towards officials suspected of having acquired their wealth through connections or corruption. Zhu Lijun, a postgraduate student in Beijing, said he was satisfied with his standard of living. "As a college student, I feel optimistic about my future," Zhu said. "What matters is not whether other people get wealthy faster than me, but the way they get wealthy."

Economic growth in China is slowing but incomes are still rising fast; the government is committed to boosting household consumption's share of the economy so that growth relies less on investment and exports. HSBC reckons 40 percent of China's urban households now fall into the middle-class category, with annual income of 60,000 yuan to 500,000 yuan ($9,450 to $78,600). Five years ago, the proportion was just 10 percent. "This group has both the capacity and the desire to buy branded products and more expensive consumer durables as well as spend money on travel and culture," said HSBC's chief China economist, Qu Hongbin. That's good news not only for Jaguar Land Rover, Lenovo, and the thousands of other companies currently flogging their wares in China, it also bodes well for other companies, and entire countries, that would like to feed China's voracious demand for components, energy, and minerals.

Australia owes much of its long economic expansion to sound policy-making, but credit is due as well to China's hunger for iron ore, coal, and other natural resources. China accounted for 27 percent of Australia's exports in the first nine months of 2011, up from just 5 percent in 2000. Because the price of natural resources has soared while the cost of manufactured goods has fallen, a shipload of iron ore from Australia in 2010 could buy about 22,000 flat-screen television sets, 10 times more than just five years earlier.   Continued...