Insight

Chinese and Indian Companies Gain from Recession


The Great Recession has hit everyone hard, but it has been less severe in China and India than elsewhere, boding well for many of the growing and aggressive companies the two countries have spawned in recent years. Not all of China and India's "New Global Challengers," as we call such companies, will emerge unscathed from the economic earthquake. Some took on too much debt in the months leading up to the recession. Others made bad choices. But some challenger companies will do remarkably well, taking advantage of the opportunities recessions create. When the crisis is over these companies will be stronger and more formidable than ever, reordering the global pecking order. For their U.S., Japanese, and European competitors, this would be the worst time to underestimate the challengers. In general, 20/20 hindsight will show some day that countries that were growing rapidly before the recession—China and India in particular—fell less far and rebounded more quickly than the developed economies. The comparative resilience of the rapidly developing economies (RDEs) is reflected in the MSCI Emerging Markets Index, measuring equity market performance in 26 emerging economies, which has increased 65% since the start of the year. The Standard & Poor's 500-stock index, by comparison, has risen just 18% so far this year. While total global gross domestic product is expected to decline by 1.1% this year, according to International Monetary Fund projections, output in China and India is expected to grow 9% and 6.4%, respectively, the IMF says. Others project higher growth rates: The Reserve Bank of India, for example, is predicting 6.5% GDP growth. Regardless of the exact numbers, China's and India's growth will be below 2007 and 2008 levels, but still impressive in the midst of a punishing global recession. Deploying Government Stimulus FundsThis will not translate into boom times for every Chinese and Indian company on the 2009 BCG 100 New Global Challengers list, which the Boston Consulting Group published early this year. Companies that were highly leveraged prior to the start of the meltdown have been severely strained and are having to reduce costs, restructure their debt, and sell off assets in some cases to improve cash flow. Others highly dependent on exports also have been hard hit. Some of these companies may not survive or will emerge severely weakened when the recession ends. Other challengers, however, are benefiting from the recession. Companies with healthy balance sheets when the downturn began are growing through mergers and acquisitions and partnerships with other companies. Consumer-goods companies have continued to expand by selling new products designed specifically for their domestic markets. While the outside world is reeling, many challengers are taking advantage of home-based growth opportunities, especially in areas where government stimulus funds are available. China's $586 billion in stimulus spending, which started pouring from the government spigot almost immediately, helped spark a 7.9% jump in second-quarter GDP and an 8.9% surge in the third quarter. Although the "outbound" M&A activities of BCG's 100 global challengers understandably have decreased since the economic crisis began—down from an average of 20-30 per year to 10 per year—the crisis has created a opportunity for companies to make important acquisitions at favorable prices. Chinese home appliance manufacturer Galanz, for example, now has a group of senior executives scouring the world looking for distressed companies with strong research and development capabilities and complete, advanced production lines. CNPC, China's largest oil company, also sees the financial crisis as an opportunity for strategic acquisitions, setting aside several billion dollars for that purpose. In April, CNPC formed a joint venture with the Kazakh state oil company, KazMunaiGas, to purchase another Kazakh oil company, MangistauMunayGas. The price: $3.3 billion. Other companies are expanding during the downturn through partnerships, which they use to gain access to necessary capabilities or markets. Investing in InnovationWhile many companies wisely are cutting costs and preserving cash during the downturn, some global challengers are doing the opposite: spending. They are making large investments in innovation and technology, for example, in the hopes that this will springboard them to another level. One of the world's largest battery makers, China's BYD Auto, has invested some $300 million in research since 2003 to create the first mass-produced plug-in electric hybrid car, the only one of its type not requiring specialized charging stations. BYD executives believe the hard times facing the leading global auto companies, particularly in the U.S., has reduced competition and that expansion at this time will put them in a good position when the U.S. and global economies rebound. Reva Electric Car, based in India's information technology capital of Bangalore, has great electric car ambitions, too, having teamed up with General Motors to develop electric car technology for the Chevrolet Spark Electra. Many global challengers have turned inward, tapping their home markets for growth during the recession. Wipro (WIT) and Infosys (INFY), two of India's top IT service providers, had expanded their businesses in recent years by providing IT outsourcing services to U.S. and other Western companies. Now they are focusing more on India's domestic market for growth—a good bet with the Indian government's plans to increase investment in e-government initiatives. Infosys recently signed a business process outsourcing contract with the government's Income Tax Dept., for instance. Stimulus funds and investment and incentive programs also are helping many global challengers thrive, not just survive, during the downturn. The Chinese government's efforts to help domestic automakers have included sales tax cuts, discounts, and China's own version of cash for clunkers, where rural residents who replace old 3- and 4-wheeled vehicles can receive subsidies of $300 to $440 to buy small, fuel-efficient cars. India also has introduced a variety of measures to help the domestic automotive industry, including tax cuts and lowering gas prices. The RDE global challengers' rapid growth is far from over. If anything, they will play an increasingly important role in the world economy in the years ahead. As in the past, recessions help separate winners from losers. Not only the strong will survive, but the wise as well. Many challengers are using the Great Recession to put themselves in that enviable position.
David_michael
David C. Michael is a senior vice-president and director with the Boston Consulting Group's Beijing office. He started in BCG's Shanghai office in 1992 and has more than 13 years of China and Asia experience. He is the leader of BCG's operations practice in Asia.
Jim_hemerling
James W. Hemerling is a San Francisco-based senior partner of The Boston Consulting Group (BCG) and co-leader of its Global Advantage initiative.

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