The U.S. economy slowly appears to be regaining its footing. The unemployment rate declined for the first time since the recession began, sliding from 10.2% in October to 10% in November and holding steady in December. Although the fourth-quarter 2009 statistics weren't yet in as I wrote this, some predict that the U.S. economy may have expanded in the second half of last year by more than 3%. Europe appears to be lagging, but the economies of China, India, Singapore, Indonesia, and South Korea, among others, are growing robustly again. The Great Recession of 2008 and 2009 may be over in most of the world.
What this also means is that U.S. companies struggling to regain momentum will pay higher prices for commodities and other raw materials. Some experts still predict a double-dip, or W-shaped, recession, with a further downturn coming later this year.
While it's still too early to know how the U.S. economy will perform, be assured that our competitors will not be standing still. U.S. companies will be competing with companies from all over the globe—for markets, customers, talent, and the materials needed to produce whatever they sell. Recessions and recoveries don't change the laws of supply and demand; they magnify them. As Chinese and Brazilian companies increase production, they will heighten demand for certain commodities, which will put upward pressure on prices for everyone, even companies whose domestic markets remain in a slump.
It's also important to remember that there's more at play here than simple inputs and outputs. Several other factors will also contribute to the prices companies pay for seed, feed, fertilizer, pesticides, oil, coal, cotton, natural gas, iron ore, copper, zinc, tin, nickel, bauxite, potash, gypsum, rubber, and virtually everything else. The three most important factors are: 1) the continuing growth of the middle class in the rapidly developing economies of Africa, Asia, Latin America, and Central and Eastern Europe; 2) the large-scale infrastructure investments that are taking place in those countries; and 3) the emergence in Africa, Asia, Latin America, and the former Soviet empire of a huge low-income-consumer cohort.
bicycles to scooters to small cars
Approximately a billion people, one-seventh of the world's population, have moved out of poverty in recent years and entered the marketplace en masse as consumers. These new consumers—still poor, but no longer merely surviving, as in the past—come mostly from China and India, but also from Brazil, Mexico, Poland, Russia, Bangladesh, Indonesia, Malaysia, the Philippines, Vietnam, Egypt, Turkey, and many other countries. If these low-income people were a nation, that country would have the world's third-largest population and tenth-biggest gross domestic product.
Until recently, many of these consumers struggled to put enough food on the table. Now they're working in factories and in call centers, purchasing food and beverages, and spending on such items that do more than fulfill basic subsistence needs as cell phones, consumer electronics, appliances, clothing, cosmetics, and personal transportation. Some are moving up from bicycles to motor scooters and from scooters to small cars. They're advancing from manual farming to mechanized farming, buying small tractors for the first time.
Prior to the global recession, for example, purchases of tractors by India's 306 million farmers—equal to the entire population of the U.S.—were increasing at an astounding rate of 20% per year. This increases demand for steel, rubber, fuel, seed, and fertilizer. The trends will continue.
Some of the new consumers have been moving from the countryside to cities, others from their countries of origin to countries with better job opportunities. In China alone, the demand for laborers was so great prior to the slowdown that some 140 million to 150 million migrant workers—more than Japan's entire population—were constantly on the move, crowding the cities with the most jobs. That stretched many cities' capacity beyond the breaking point.
developing infrastructure: trillions
This leads to the second point: infrastructure. Such migration, along with the urbanization and industrialization of the rapidly developing economies, has prompted increased investment in housing, roads, railways, electricity, and other infrastructure projects. To whatever degree this may have increased or decreased in specific countries during the recession, infrastructure investment is sure to rise in the years to come.
It has been estimated that developing economies alone will invest as much as some $2.25 trillion annually over the next three years to meet infrastructure needs. While decreased consumer demand in the U.S. and Europe will offset some of this, trillions cannot be poured into new infrastructure projects in developing economies without affecting the demand for—and prices of—the commodities and raw materials needed for those projects.
China, for example, has a voracious appetite for steel, which it needs both for the growth of such key industries as automaking, appliance manufacturing, and shipbuilding and for infrastructure projects. It has become the world's largest importer of iron ore, accounting for as much as 40% or more of the world's intercontinental iron-ore trade in recent years.
China will need steel long into the future as it modernizes and expands infrastructure and becomes a major producer of automobiles and consumer durables. Remember: The build-out of the U.S. Interstate Highway System took 35 years. It took 16 years for Japan to build its New Trunk Line railway. Even with China devoting a reported 9% of gross domestic product per year to infrastructure, it will take decades to bring the country's roads, ports, airports, power-generation capacity, and other infrastructure systems up to speed.
The third critical element in the commodities story is the rapid growth of the global middle class. According to a July 2008, Goldman Sachs (GS) analysis, as many as two billion people may join the ranks of the world's middle class by 2030. As the report points out: "This dwarfs even the 19th-century middle-class explosion in its global scale."
opportunity: the "next billion" market
All of these factors—the emergence of an unprecedented low-income consumer cohort, increases in infrastructure expenditures, and the growth of the global middle class—will keep pushing commodity prices higher.
So what should you do?
First, realize that recessions come and go, but the forces driving the global economy are ongoing and inexorable. U.S. executives need to focus less on commodity prices, which they can influence only marginally, and more on how to benefit from globality. A billion new consumers around the world are hungry for goods and services as the middle class expands. For many companies, this demographic shift will define the future.
Second, focus on the desires and needs of these consumers. Selling to the "next billion" market is not necessarily a matter of scaling back versions of products previously designed for U.S. or European consumers. They may need entirely new products or designs. In our book, Globality: Competing with Everyone from Everywhere for Everything, we provide several examples of prominent global companies that have successfully reinvented products for entry-level consumers.
Third, if your company can afford to do so and you think you can anticipate future demand, purchase commodities that you will need for future growth while prices are still relatively low. As economic growth increases globally, prices for raw materials and commodities have only one way to go: up. Buy now if you can, while the global economy is still recovering from recession.
Emerging multinationals in China, India, Brazil, and other developing economies—what we at BCG call the "Global Challengers"—are on a mission to convert the growing middle class, new entry-level consumers, and governments in the developing world into loyal customers. That's what U.S. companies need to do as well. Commodity prices will go along for the ride.