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As the U.S. emerges from the recession, American investors often wonder where the growth is going to come from. Perhaps they should talk to Ruben Bisi, international operations director for Marcopolo, Brazil's biggest bus maker. It's having a banner year, with revenue up 47 percent so far. You won't see Marcopolo buses in the U.S., though. They're cruising the highways and city streets of Argentina, Colombia, Mexico, Egypt, India, China, and South Africa. Brazilians often have a better relationship with these customers than big multinationals do, says Bisi. "We are from an underdeveloped country as well," he explains. Almost 40 percent of Marcopolo's sales of $1.1 billion come from outside Brazil: It sold 460 buses to South Africa for the World Cup.
Marcopolo is a traveler on what Stephen King, chief economist of HSBC (HBC), has dubbed "the new Silk Road"—a 21st-century version of the trade routes that crisscrossed Asia almost 2,000 years ago, linking merchants in China to their counterparts in India, Arabia, and the Roman Empire. The new Silk Road spans the globe, connecting companies and consumers in Latin America, the Mideast, Asia, and Africa, and generating some $2.8 trillion in trade, according to the World Trade Organization.
King says emerging markets will grow about three times faster than rich nations this year and next. "There are now massive trade connections within the emerging markets," he says. "It means in one sense the emerging world is protected from the worst ravages of the developed world." The WTO estimates intra-emerging-market trade rose, on average, by 18 percent per year from 2000 to 2008, faster than commerce grew between emerging and advanced nations.
The developed world will increasingly compete with these fast-rising countries for resources like oil and iron ore. The established multinationals will also encounter new pressure from emerging-market rivals, many of them state-supported. Yet for Western and Japanese companies that are the best in their industries, the opportunities are great. One example: Caterpillar (CAT), the world's largest maker of construction equipment, raised its full-year earnings forecast last month on higher demand in developing countries for mining, energy, and rail equipment.
While the U.S. and other developed countries hope to find their place on the Silk Road, the central player is China. Chinese exports to the emerging world accounted for about 9.5 percent of its gross domestic product in 2008, compared with 2 percent in 1985, King figures. Last month the Saudi Railways Organization awarded a contract to China South Locomotive & Rolling Stock to supply 10 locomotives. The Mecca-Medina rail contract went to Beijing-based China Railway Group (CRWOF). Shenzhen-based Huawei Technologies, China's top maker of phone equipment, is investing $500 million in its research center in Bangalore. China Mobile, the world's biggest phone carrier, may soon invest in Africa.
India and Brazil are stepping up their efforts, too. India's Tata Group was one of the largest investors in sub-Saharan Africa in the six years through 2009, according to the Organization for Economic Cooperation & Development. Many Silk Road companies are becoming aggressive acquirers. "We saw the same phenomenon with American and European companies 50 to 100 years ago as they went global," says Shane Oliver, head of investment strategy at AMP Capital Investors, which manages about $95 billion in Sydney. Brazilian mining company Vale (VALE) has invested in three copper projects in Zambia and the Democratic Republic of the Congo. In April the company agreed to pay $2.5 billion for iron ore deposits in Guinea.
Such trade used to be conducted in dollars and euros, even when the deals did not involve U.S. or European companies. Today companies in emerging markets are more willing to take reals, rupees, and, above all, yuan as the Silk Road economies prosper. "If emerging-market fundamentals continue to be superior," says Kieran Curtis, who helps oversee $2 billion at Aviva Investors in London, "there is the potential for serious currency appreciation against old-guard currencies."
With trade comes competition. About a third of the order book of Brazilian plane maker Empresa Brasileira de Aeronáutica (ERJ), or Embraer, comes from emerging-market customers, up from 1 percent in 2005. Yet Embraer doesn't have the field to itself. The Brazilians are bracing for a fight from Russia's Sukhoi and Commercial Aircraft Corporation of China, which are both developing airliners. Traffic on the Silk Road is getting pretty heavy.
The bottom line: Trading ties among developing nations are intensifying fast and may eclipse emerging-market ties with the West.