11 December 2015, Stockholm, Sweden | News
It is the middle of the night when I step off the plane in Mumbai, and just a moment later I recognise the aromas I associate with India. My annual trip to emerging markets started in mid-November, taking in India and Singapore.
We began our meetings in the city of Pune, around 150 km south of Mumbai, and the bus trip took over 5 hours. It is easy to see that the infrastructure is still significantly underdeveloped. Our bus, with no suspension and AC that stopped working sometime mid-journey, ambled along at 30-40 km/h, partly because it was uphill most of the way and partly because the engine in the cab became so overheated that the temperature for the driver must have exceeded 50 degrees and must have been over 40 for the passengers. After we stopped to top up the radiator and pour water over the engine, we finally reached our hotel.
Our packed schedule started at Tetra Pak in India, where we were informed of a number of important factors in understanding the potential of India over the coming years. Demographically, around 65 percent of the population is aged 18-35 and food safety is growing extremely strongly among the large and educated middle classes. Only 5-10 percent of all milk sold is packaged in modern durable packaging, and then there is juice, ice tea and a variety of other beverages that require the same packaging, which benefits Tetra Pak, as well as Alfa Laval and ABB, operating in food processing. On the downside we are told about the non-harmonised taxation system that varies greatly between the different states. Infrastructure is also a major challenge. The big problem is a law that protects landowners who do not want to release their land, which tends to make rail and road projects difficult to implement to the necessary extent.
Bharat Forge, a large industrial conglomerate owned mainly by one of India's wealthiest families, was the next stop. The company was represented by father and son, with Mr Kalyani Snr having sat on SKF's board. The company has about 60 percent exposure to the automotive sector and 40 percent to other industries. Its distribution between the various parts of the world is 25 percent USA, 40 percent Europe, 23 percent India, and the remainder in Asia Pacific and the rest of the world. Industrial growth in India is currently 7 percent, while automotive is growing by 20 percent. At the global level, it envisages 6-8 quarters of strong growth in the sector, and expects annual sales of 100-120 million cars. The company is pleased that the central bank has moved from using wholesale prices to estimate inflation, leaving behind this consumption-driven measure, and has instead opted for the norm among the world's major central banks, namely CPI. This has made it possible to cut interest rates, since the old measure was 4-5 percent higher, leading to stronger growth and higher investment. The Made in India programme aims to transform Indian industry from having largely been about assembly to using at least 20 percent of parts made in India, which in turn naturally leads to more jobs. It has also led to major investment from abroad, and imports of about USD 80 billion in industrial equipment. It is interesting to note that the cost of a manufacturing engineer in India is about EUR 10-14 thousand per year, while the cost in China has risen to EUR 40-50 thousand per year. In Europe, the cost of an equivalent engineer is around EUR 80 thousand per year. Research and development engineers are about 50 percent more expensive, but since Bharat Forge offers its own engineering training, it can shape its workforce into specialists. It is interesting that 3D printing is growing strongly, and will take market share in industry, mining and medical implants.
Atlas Copco is growing vigorously (double digits) in India, in all areas except industrial technology. Sales are strong in India, and the distribution is now 80 percent India and 20 percent exports. This is partly because India is opening coal mines that have long been closed. Kone Cranes is seeing some slowdown of government investment, but increasing investment by private interests. The need for high-tech solutions is substantial. Wages are not a problem and, as they say, 50 percent of nothing is nothing. There is a considerable need for automation, which is good for companies like ABB.
We arrive in Bangalore, after getting up at a refreshing 3:00 am and having been woken by the porter calling at 2:00 to say that the airport transfer bus was waiting. Our first meeting is with Volvo India. Volvo reiterates that local content will drive investment in India, but that buying land to expand infrastructure is still a problem. A Land Acquisition Bill is under discussion, which should help, but it will be a long time before Volvo and Scania trucks fill the roads since the domestic market is entirely dominant. Volvo is once again selling trucks to the mining industry as old mines are brought back into production. Mining accounts for 95 percent of Volvo's sales in India. Volvo manufactures trucks in India for export, but domestically it has a market share of 3 percent, mostly because Indian trucks are 20 percent cheaper than Volvo's discount brand. It is also because, unlike in more mature markets, there are no road haulage fleets and most drivers are independent. Volvo Financial Services is now active in the financing of trucks, which is an advantage since lending is usually relatively sluggish and the Indian banking sector is under pressure as it already has a lot of very bad loans. Volvo expects growth of 20 percent next year. Scania has even lower market share, and mostly manufactures for other markets. Although it has sold some buses in India, the company believes it will be many years before there are any substantial volumes of trucks. We end the day's meetings and go into Bangalore to eat dinner, before heading to the airport to take the four-hour 11:00 pm flight to Singapore. No sleep tonight either. Once we add the 2.5 hour time difference after landing, we head directly to our first meeting.
There is plenty of talk of China here in Singapore, but there are obviously many other rapidly growing countries in the region. We meet with OCBC Bank, which begins, like most commentators these days, by saying that it is meaningless to look at the official Chinese GDP. Investment is declining, but they are seeing an improvement in tier 1 cities, the largest cities such as Shanghai and Beijing, which continue to attract new residents. There is also movement in smaller cities with 1-5 million inhabitants, where empty new buildings, known as ghost buildings, are largely being bought up by the state for social housing. Since housing and the stock market have been the assets Chinese people have had the opportunity to invest in, this money is now seeking new paths. One of the hottest investments in large cities right now is, not surprisingly, parking spaces. There is a large shortage as the number of motorists has completely exploded in recent years. Like so many others we meet, they highlight the fact that the economy is undergoing a major transformation from manufacturing to the growing service sector, which now accounts for over 50 percent of GDP. The focus of the new Five-Year Plan is on urban planning and health care. Despite the fact that interest rates have been cut, many companies are not willing to borrow and increase their debt, although there is some credit growth. Government revenue is falling, partly because land prices in outlying regions have fallen, but also because many state companies in the engineering sector are losing big money, mainly due to overcapacity. Companies are now actually being allowed to go bankrupt, which is positive and contributes to the consolidation of certain vulnerable sectors. China has now ticked all the boxes required to join the IMF's basket of reserve currencies, and this was recently approved. The yuan will weigh as much as 23 percent of the reserve currency basket, and this is naturally a form of recognition and is extremely prestigious for China. When we discuss areas of future growth, the digital economy is highlighted, but also exports in areas such as high-speed trains, with the know-how of Siemens from the construction of Shanghai's high-speed rail now being used for exports. Parts of the Chinese engineering industry are now seriously competing with companies such as Atlas Copco and Sandvik, primarily because the quality is now so much better than 5 years ago. This is also confirmed by LKAB, which is buying more and more equipment from China.
We met with one of the major real estate/construction companies in the region, Singapore-based Capital Land Real Estate, which has a yield of around 4-5 percent. In the major metropolitan areas of China, such as Shanghai, the yield is 5-6 percent. The company has now started to invest in Vietnam, which it says is like China 20 years ago. Investments are being made with local partners. In China, it is now mainly shopping malls being built, and CL owns the Raffles mall brand, which is well known and attracts the best big brands to lease premises. The company mentions in passing that internet shopping by the Chinese is now as much as 40 percent of the market, which is more than four times as much as in the West. This shows why there is so much confidence in the future of digitalisation.
The next stop is Neste Oil. Its NEXBTL biofuel, made from palm oil, has had an impact in Asia. Its main production plant is located right here in Singapore because of its proximity to Malaysia, from where the majority of the palm oil is imported. It has other refineries in Finland and Holland, and it also has plans to eventually open one in the United States. Countries in the region are not quite ready to pay the premium for NEXBTL over regular fuel, but the company is very optimistic as environmental awareness is growing and controls on emissions will be introduced, which will drive the conversion to biofuel. The company's focus will be on marketing to taxi fleets, car rental companies and others. Customers that currently use the fuel include Google, in its US shuttle busses, and Lufthansa, which is now the first airline to test it. In the short term, the low price of oil is not so positive. Licence sales are a possible opportunity to boost revenue, and Preem has bought a licence for Scandinavia.
Cargotec describes the market in the Asia region as relatively strong. The new port in Singapore, to be opened in 2027, will become the world's second largest port and will be entirely automated. The cost of equipment for the port is estimated to be USD 2 billion. It is being automated partly because labour costs have increased, but perhaps even more because the technology has advanced tremendously. Australian ports are automated, and are a model for many new facilities being built. It is interesting that Cargotec also stresses that Internet commerce is growing rapidly, and major distribution centres will be built.
At Stena, we are greeted by the charismatic Björn Linder, who presents the potential and the threats in the Asia region. Before he gets started, we chat about how it is for a Swede to live and work in the region. What Björn mentions in particular was how tough his children found it in school, with the rapid pace and the high level, and he underlined that we have a major problem in Sweden when it comes to educational attainment.
Stena's shipping arm is run from Singapore, and has only 20-30 percent fixed contracts with the remainder through the spot market. The market is described as tough, but they are still making money in this intense environment. Now to the region. Demography is a recurring theme with most people we meet. The large proportion of young people will create strong growth in the future, provided there is political stability. It is especially countries like India, Indonesia, Thailand, as well as others, that are predicted to be the engines of growth for the next 10 years. Vietnam, Cambodia, Myanmar and Laos are named in particular, and these countries are improving from a very low level but are growing incredibly vigorously right now. There are also countries that do not have the same prospects going forward, including Korea, Japan, Taiwan and, to some extent, China. The broad theme for investment is consumer-related, such as household products, mopeds/motorcycles, insurance, education, tourism and food. Naturally everything for the large and growing middle class that has emerged in the past decade. Other areas attracting investment are sectors such as tech, services, IT and health care. The construction industry will be helped by low interest rates and QE, but heavy engineering will still have a tough time since there is substantial overcapacity, particularly in state-owned companies. Consolidation has actually begun, but this will take time. One thing of concern that Björn mentions is the growing nationalism making itself heard in the region, and important collaboration concerning free trade and stability in the region is sluggish.
Summary
- Asia is still on a long structural growth trend, albeit at a slightly slower pace.
- China is growing, but at a slower pace. Its trade surplus is increasing, and is now around 3 percent of GDP. China is undergoing economic change, from manufacturing to the service sector, and from infrastructure investment to domestic consumption.
- Commodity prices will remain low for a long time to come.
- Global trade is decreasing, mainly because of lower growth in developed countries, which is harming developing countries.
- Continued low inflation in most countries and low interest rates for a long time.
- Salary increases and rising consumption growth. The middle class is growing.
- ASEAN cooperation is tough because of geopolitical tensions that may impede free trade agreements.
- Nationalism is increasing and military spending is rising sharply.
- The overall impression from the trip is basically positive. It was very much about the growing middle class being the driving force in the coming years. It is beneficial and exciting to get into the area and meet people who work in the different regions. We end the Thursday with a very pleasant dinner at the Swedish Embassy in Singapore. When the charming ambassador, Håkan Jevrell, welcomed us and talked about what it was like to live in Singapore, we were once again told about the difference for his children starting school here. Just as Björn at Stena pointed out, this is one of our biggest challenges at home if we are to continue to compete in the world, as education is priority number one for the new middle class.