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The Crisis, the BRIC, the Companies

By Marcos Fava Neves (Chinadaily.com.cn)
Updated: 2009-08-12 17:04

The economic crisis of 2008/2009, in a very simplistic view is the crisis of the 3 C’s.

The first C is of credit. Credit was given to consumers in the last years in a very irresponsible way by financial institutions in several countries, an artificial market was built. It was an era of financial leverage, financial strategy, and financial dominance. Several companies entered on this festival, building up very risky positions, paying salaries and dividends out of reality, and neglecting costs. This festival started eroding. Adjustments were needed.

The second C is the consumption. Consumption was done in an irresponsible way by society, also in several countries. The abundant offer of credit took a large amount of consumers to buy what they cannot afford, with loans for houses, cars, equipments and others. Anyone could see that this consumption would not fit the monthly budget of families. But the festival was there. Now, it is time to reduce leverage, to sell what was bought, with a lot of loss, since prices of assets (houses, cars, and others) went down.

The third C is confidence. The first two C’s made society lose confidence in the system, in companies, and even in Governments. Economic recovery is related to confidence. This will not be easy and will be different from country to country. Due to the crisis, where at the beginning and end couldn’t be seen, several consumers who can consume, lost confidence, and stopped consuming. With lower sales, markets reduce, employment reduces, and this takes to lower consumption, lower sales, unemployment with a negative cycle effect, bringing deeper crisis. The speed of “confidence recovery” is what is going to take economy out of this crisis. Economic situation will get better far before the financial situation, since it is not know yet what is still to come in terms of bad credits.

It is very important to know that the 2009 world crisis cannot be generalized. It had very different regional, country and industry impacts. Some industries, like heavy equipment, are suffered the worst crisis in 20 years. Some areas of countries, some cities, suffered more, and others less. Some countries suffered more (Germany, with a 5 per cent decrease in GDP) and some, less (China, with a 6per cent increase). US will still suffer due to a high leverage of its consumers. Predictions for European recovery are worst than the Americas and Asia.

The emergent economies in some way already changed the world. The BRIC (Brazil, Russia, India and China) group is expected by Goldman Sachs to have a higher GDP then the G7 in 2027. Between 2000 and 2005 the BRIC GDP went from US$ 3.6 trillion towards almost $ 5 trillion. Brazil had an average growth from 2000 to 2009 of 3.1 per cent/year, and a accumulated variation of 36.3 percent in the period (2000/2009). China had a incredible number of 9.6 per cent of average and 151 per cent accumulated. India comes with 6.9 per cent of average and 94.6 per cent accumulated and finally, Russia had 5.5 per cent of average growth (2000/2009) and 71.2 per cent accumulated (FMI).

The GDP of emerging nations was 11 per cent of the world in 1991, was 30 per cent in 2008 and expected to be 50 per cent in 20 years. Population in 2050 is expected to be 9 billion people, and only 10 per cent will be at the developed nations. In 2009, there were around 200 million people at emerging nations having an income of $3,000/year, and this will move to 2 billion people in 15-20 years. So there is no discussion that a huge shift happened in the last 10 years. New consumers and new markets diversifying the world. The GDP in large food consumers like China and India continues to grow, contributing to a maintenance and even increase in consumption. Almost 60per cent of the world’s economic growth in the period 1999/2009 was in the developing nations, being 30 per cent at the BRIC. World Bank estimates that in 2009 the world economy will reduce in 2.9 per cent, a growth of 2 per cent in 2010, and 3.2 per cent in 2011. Half of this growth will come from the emerging nations and markets.

To finalize what are the messages for companies? Companies will need to focus more again, to return to their core business, have a very efficient use of capital and resources, and work even more on planning, collective actions and cost structure. Companies will also need to have a very close look to risk monitoring. It is an era of establishing global and more competitive supply chains and an area of strong value proposition for human talents in companies. Finally, it is an era of more conservative leverage and financing, and to take advantage of opportunities of consolidation, acquisition, mergers and other, like several opportunities for cheap asset acquisition in the world. The ones that have capital are faced in 2009 an outstanding window of opportunity.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil. The article is an excerpt from his speech at the Global Think Tank Summit Beijing 2009.