What a difference a GFC and recession can make

It wasn’t that long ago that China and India were seen as big markets for Western powers: China was the world’s factory, India was its call centre and services provider.

But the financial crisis changed all that. Both China and India are now being seen not as providers but as equals in the post-meltdown, post-recession climate. The financial crisis has created a power shift because the emerging economies, especially China and India, managed to avoid the worst of the crisis. It was not a complete decoupling as both still depend heavily on the United States and Europe for exports, but the trend is moving in a key direction. In 2010, China expects to hit double digit growth this year and India is expected to grow 8.75 per cent. Indian Supreme Court advocate and tax expert HP Ranina recently told a conference that India is on track to upstage the US as the planet’s economic superpower by 2025 with a predicted annual growth of above 14 per cent from 2014. That’s assuming of course that India gets its infrastructure in place. It’s not there yet; try driving from Delhi to Agra.

China and India will be important centres for innovation and manufacturing in the decades ahead. China is likely to become the world powerhouse for intellectual property. China has the world’s third largest patent office and over one million patent applications are filed in China every year.

Australian born director general of the World Intellectual Property Association Francis Gurry last year told The Australian: “China's strength in intellectual property was apparent from the differential impact the global financial crisis had had on international patent applications.”

According to the latest figures, China became the world’s fifth largest patent filer with a strong growth rate of 29.7 per cent, representing some 7,946 international applications. This was in contrast with a sharp decline in filings from industrialised countries including the United States, United Kingdom and Australia. China wants to move away from being the world’s work bench: it wants to be the world’s brains.

Gurry predicts that the global financial crisis will accelerate the rise of China, and other economies such as Japan and South Korea. For Australia’s advanced manufacturers, it’s a clear indication of where the future lies.

This is most evident in the automotive industry. Indeed, China and India seem to be holding up the industry globally. According to the Korea Automobile Research Institute (KARI), global auto sales are expected to grow 4.3 per cent in 2010 to 66.1 million units. But that will be driven by China and India. China is already the world’s biggest auto market and it’s set to expand even further with Chinese auto maker Geely Holding Group seeking to take over Ford’s Volvo brand. KARI expects an estimated 11.8 per cent growth in Indian auto sales this year and an expected 9.9 per cent increase in China. India and China have created the growth engine for the global automotive industry.

There are many conditions to encourage innovations and growth is one of them. When an economy is growing at 8 per cent or more, the environment for risk taking becomes easier and more forgiving if mistakes are made. It’s a case of rising with the tide.

Another condition is the immense populations of both countries. The growth of the telecommunications industry is one example of how the population drives change. In India, for example, the number of mobile-phone subscribers rose from 28m in 2003 to 472m in September 2009, driven by rising incomes, greater competition, falling rates, prepaid options and aggressive marketing campaigns.

The potential for growth in India is enormous. The middle class - as defined by India’s relatively low-income standards - is big and it is growing rapidly. In 2009 over 109 million households had an annual income in excess of US$3,000 ($A3,339). This is the aspirational demographic segment that is driving mobile phone ownership. Demand is exploding in rural areas, where coverage is low. In November 2009 Manoj Kolhi, the chief executive of a domestic telecoms firm, Bharti Airtel, told a conference that “achieving a billion plus (Indian mobile users) by 2015 is possible”.

In China, the number of mobile phone subscribers increased 106.14 million in 2009, taking the total number of mobile phone users there to 747.38 million. Last year witnessed the largest expansion of mobile phone users in history. The incremental monthly growth of new mobile phone users in March 2009 reached 10.55 million. In China today, 56.3 per cent of the total population have mobile phones, up 7.8 per cent since the end of 2008. As with India, we are likely to see one billion Chinese mobile phone users.

Because the people in these markets earn relatively less than their western counterparts, it is difficult to make money using western business models. This is where Chinese and Indians produce innovative business models with relatively low capital outlays. In India, for example, IBM is developing a new “spoken Web”’ technology that allows users to browse the Internet and access information by speaking in their local language without having to type or otherwise use the computer keyboard. An IBM India lab is now developing the technology and testing it on rural dairy farmers in India. Potentially, this can open a large market selling ERP software to companies that source dairy and other foodstuffs from rural Indian farmers at a low cost. The ICICI Bank in India runs a highly profitable business using mobile ATMs and simple Internet banking. It undercuts Western Union fees by 70 per cent.