China, The EU and Latin America: A Changing Global Landscape

SIS International Custom Research THE CHANGING GLOBAL LANDSCAPE USING CI TO UNDERSTAND THE “BEHIND-THE-SCENES” MARKETS IN CHINA, THE EU AND LATIN AMERICA” Presented by: Ruth Stanat President and CEO, SIS International Research May 2007 1

RISING POWERS: THE CHANGING GEOPOLITICAL LANDSCAPE • 19th Century – the rise of Germany • 20th Century – the rise of the “American Century” • 21st Century – the rise of the developing world [e.g. China and India] Trends: • Europe and Russia will decline dramatically in relative terms vis-à-vis China, India, Brazil and other developing countries e.g. Indonesia • Only an abrupt reversal of the globalization process or a major upheaval in these countries will prevent their rise Using CI Behind the Scenes: – Apply a “macro socio-geo-political framework” to all CI analysis 2

THE POWER OF CHINA, INDIA AND OTHER EMERGING MARKET ECONOMIES • China’s population 1.4 billion and India’s population 1.3 billion • China, the world’s third largest producer of manufactured goods – 12% of the world’s market share; can easily surpass Japan in a few years • China’s and India’s need to access energy suppliers • The global impact of the rise of Brazil, South Africa, Indonesia and Russia Using CI Behind the Scenes: – Continue to monitor the shifts in emerging markets and global economic conditions to ensure that our clients have a framework for short and long term planning – Continue to monitor the demographic shifts in these countries as a “competitive landscape” for CI analysis 3

THE POTENTIAL “FAULT LINES” OF CHINA’S GROWTH • Fragility of the financial system and state-owned enterprises • Economic effects of corruption • Water resources and pollution • Possible shrinkage of foreign direct investment • HIV/AIDS and epidemic diseases • Unemployment, poverty, and social unrest • Energy consumption and prices • Taiwan and other potential conflicts Using CI Behind the Scenes: • Incorporate these strengths and weaknesses of the Chinese economic landscape into the CI analysis for Chinese companies • US -beware of local Chinese companies as emerging competitors • Track their “copying” patterns of international brands and products • Continue to develop a SWOT analysis by China’s cities, regions, industries and product sectors 4

LONG TERM PROSPECTS – INDIA VS. CHINA • India may overtake China due to: Its working-age population will continue to increase well into the 2020s – compared to China’s one-child policy which will diminish – India’s well-entrenched democratic institutions – less vulnerable to political instability vs. China will continue to reconcile an increasingly urban and middle- class population with an authoritarian political system – India’s working capital markets and world-class firms in some important high-tech sectors, which China has yet to achieve 5

LONG TERM PROSPECTS – INDIA VS. CHINA • China’s ability to sustain its current pace and is probably more at risk than India’s. Should China’s growth slow by several percentage points, India could emerge as the world’s fastest growing economy in 2020. Using CI Behind the Scenes: – Researchers should benchmark their CI Analysis in competing emerging countries [BRIC – Brazil, Russia, India and China] – Forecast a long – term perspective – Consider potential competitors entering other low-labor cost countries [e.g. Vietnam, Cambodia, Laos, etc.] – Consider the energy constraints in these markets 6

POTENTIAL GROWTH OF OTHER COUNTRIES AND REGIONS • US vs. Other Regions of the World: Over the last 60 years, manufacturing employment in the US has plummeted as these industries went abroad – yet average American incomes have risen to the highest in the world. • Latin America: During the past three years, the Latin American economies have improved. • Brazil: viewed as a “pivotal state” with a vibrant democratic and diversified economy and an entrepreneurial population, and solid economic institutions. • Brazil must balance pro-growth with an ambitions social agenda that reduces poverty and generates income inequality. • China has been aggressively “courting” Brazil as a trading partner. • The Brazilian ;president hopes that China and Russia would join the “G3” group of emerging nations formed by Brazil, India and South Africa, to counterbalance US and EU dominance of global trade. • Argentina: has recovered from its “financial meltdown’ earlier this decade, however, must monitor its inflation. 7

POTENTIAL GROWTH OF OTHER COUNTRIES AND REGIONS [cont’d.] • Mexico: After experiencing many years for cyclical crisis, the Mexican economy has proved to be the most sound and reliable in Latin America. • Indonesia: may revert to a growth rate of 6-7 percent, along with its population growth to 250 million, would make it one of the world’s largest developing countries. Using CI Behind the Scenes: – Companies must have “on the ground” CI contacts in these countries to conduct the research – Test the “credibility factor” in these local markets as the information may be conflicting and/or inconsistent – Hire a local consultant to “test the validity” of your team’s findings 8

POTENTIAL GROWTH OF OTHER COUNTRIES AND REGIONS [cont’d] • Russia: Russia’s energy resources will give a boost to economic growth –yet low birth rates, poor medical care, and potential explosive AIDS situation. • Northeast vs. Southeast Asia: • Northeast Asia [Non-Islamic – e.g. Japan, China and South Korea etc] will become wealthier and powerful. • Southeast Asia [Islamic fundamentalists e.g. Indonesia, Malaysia, and parts of the Philippines] will face deep ethnic and religious cleavages. • Bottom Line: The roles of China, Japan and the US will undergo significant change by 2020. Using CI Behind the Scenes: – The CI analysis must be researched within a global context including North America, EU, Asia and Latin America – Competitors must be research and analyzed on a global, regional and country by country basis. – Matrices must be develop to benchmark competitors on this basis. 9

THE “DRILL DOWN ON CHINA” Why China? • Number 1 FDI in 2003; No 6 trading nation, No 2 by 2009 • 50% of it its imports are destined for exports • 230+ mobile phone users and rising • Will be the No 2 car market by 2007 • Manufacturers 37% of the world’s disk drives; 70% of the world’s photocopiers and 80% of the world’s Christmas trees • China is one of America’s chief creditors; America will continue to fuel China’s growth by buying Chinese goods The Challenges • Communist party struggles • Private sector lacks funding • Tax hikes • Economic disparity • Taiwan issue 10

THE “DRILL DOWN ON CHINA” [cont’d] Using CI Behind the Scenes: – Research the risk of the intellectual property issue in China [short, medium and long term] – Research the long term economic environment of China for remitting profits back to North America or the EU – Quantify the long term financial gains vis-à-vis the potential for a potential “domestic market share” in this fast growing, dynamic market. 11

The CI Challenges of China • Market Research – 1999: “Only SSB is able to release government statistics” – 1999: Non governmental and local survey organizations are unauthorized to conduct national market research and are not authorized to release national statistical information. – 1999: Each market survey’s scope; and content had to be pre-approved by the SSB. 2002: All of the above was rescinded by WTO entry. • Intellectual Property • Legal System • Corruption • Cultural The Bottom Line: “Piracy of ideas in China is rampant. If we can make it, they can fake it.” - Robert Zoellick, US Trade Representative, February 27, 2004 Using CI Behind the Scenes: – Conduct “due diligence” in terms of Intellectual Property CI research – Secure bi-lingual experts – Provide a “realistic” CI analysis for clients in terms of the potential IP threats in China 12

INDIA RISING • According to Goldman Sachs, over the next 50 years, India will be the fastest growing of the world’s major economies [because its work force will not age as fast as the other economies]. • By 2040, India will become the world’s third largest economy. • Indian companies are growing at an annual rate of 15-25%. • India’s growth is perceived to be “bottoms up” rather than “top down and planned.” • India’s growth is “in spite of the government” – not because of the government. • India’s companies use their capital more efficiently than Chinese companies. • In India, the “individual is king.” 13

INDIA RISING [cont’d] • Indian consumers are “gearing up for action” and are beginning to take on mortgages rather than savings. • Personal consumption represents 67% of GDP in India vs. 42% in China. [Only the US is higher at 70%]. • Credit card industry in India growing at 35% a year. Using CI Behind the Scenes: – Conduct “on the ground” research in this market – not desk research – Conduct “talk to the customer” research in this market – Formulate local contacts to execute the BI/CI research – Consider the governmental/ political barriers to market entry in this country and a realistic timeframe 14

INDIA RISING [cont’d] The Pros: • Has a sustained democratic government for over 60 years. • Current government is committed to economic reform. • India’s middle class is 300 million strong. • One million elected woman in villages in India. The Cons: • The United Nations Human Development Index [e.g. Income, health, literacy, etc.] ranks India 124 out of 177 countries in the world. • While the Indian entrepreneurs and consumers are confident, the Indian state is perceived [by the press] to be hesitant, cautious and suspicious of the changing world around them. The Bottom Line: • India’s society is “open, eager, and confident” to take on the world. • The US may be “happy” to join forces with India for global dominance. Using CI Behind the Scenes: – Benchmark Indian firms vis-a-vis Chinese competitor firms for a realistic assessment of the future competition on Asia – Conduct competitive pricing scenarios vis-à-vis these countries 15

SHIFTS IN GLOBAL FOCUS • Global Aging and Migration: Approximately one-half of the world’s population lives in countries whose fertility rates are not sufficient to replace their populations. [e.g. Australia, North America, East Asian countries such as Taiwan, Singapore, Hong Kong and South Korea, etc.]. • Japan’s Economic Interests in Asia have shifted from Southeast Asia toward Northeast Asia [e.g. especially China and the China-Japan-Korean triangle]. • An “Enlarged Europe” will have the ability to increase its weight on the international scene. • The EU’s declining fertility rate [1.4 vs. the 2.1 replacement level] over the next 15 years, will force the EU to import several million workers, chiefly from Muslim countries]. 16

SHIFTS IN GLOBAL FOCUS (contd.) • The EU’s growing diversity of its population provides it with an ability to forge strong bonds both to the south with the Muslim world and Africa and the east with Russia and Eurasia. • EU’s challenge: Unlike finding Ireland, Spain, Portugal and Greece, the EU has lesser funds to bring up countries in Central Europe and Turkey to the economic levels to the rest of the EU. • Migration has the potential to resolve the problem of a declining work force in Europe and to a lesser degree, Russia and Japan. Using CI Behind the Scenes: – Benchmark competitors on a global basis: North America, Europe, Latin America, Asia Pacific – “Weight the risk/reward” trade off factors by region and country – Always incorporate a CI – Global Perspective in your analysis 17

THE FUTURE SUPERPOWERS THE EU: depends on whether it under takes major economic and social reforms to deal with its aging workforce problem. The EU must initiate: • More legal immigration and better integration of workers coming from North Africa and the Middle East • Increased flexibility in the workplace; e.g. encouraging young women to take a few years off to start families in return for re-entry into the workplace in the EU • A solution to avoid its being “dragged down” by Germany’s restrictive labor laws • A streamlined decision making process to enable collective action CHINA and INDIA: • China will need to boost its energy consumption by about 150% and India will need to nearly double its consumption of energy by 2020 to maintain a steady rate of economic growth. China will strive to be less dependent on the US. • Chinese firms are investing overseas projects in the Caspian region, Russia, the Middle East, and South America in order to secure more reliable energy sources. 18

THE FUTURE SUPERPOWERS RUSSIA [CONT’D] • Russia, as the largest energy supplier outside of OPEC, could be well-positioned to marshal its oil and gas reserves to increase its supply of the EU demand from 27% to 31% by 2010. • Algeria, which has the world’s eighth largest gas reserves, is also seeking to increase its exports to Europe by 50% by the end of this decade. US UNIPOLARITY – HOW LONG CAN IT LAST? • Growing numbers of people around the world, especially in the Middle East and the broader Muslim world, believe that the US is “bent on regional domination. • In the future, growing distrust of the US could discourage support of US interests and the formation of asymmetric military capabilities as a hedge against the US. 19

CONCLUSIONS • Not only is the “world not flat” it is “convex” • CI analysis must be conducted in this “fast paced and rapidly changing world” • CI information gathering methods must differ from “region to region” and “country to country” • The challenge is to conduct “short term research” in a rapidly changing long-term “balance of power global environment” 20

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