Profiting from the Rise of the Rest

11/24/2009 10:51 am EST

Focus: MARKETS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Stock Investor, says the rise of China and other new powers will present a lot of opportunity to US and European multinational companies.

The inevitable decline of the United States is now firmly part of conventional wisdom. The profligate-spending Obama Administration—the $1.42-trillion US budget deficit in 2009 is bigger than the entire economy of India—and its efforts to transform the United States into a European-style socialist democracy marks the death knell of what was once a great country. The future belongs to China and the rest of Asia.

Yet, the future is likely to turn out very differently from the way we expect. After all, over 70% of the predictions in John Naisbitt’s classic book Megatrends were wrong.

But the tectonic shifts in the global economy were better described by Fareed Zakaria in his book The Post-American World as the “rise of the rest.” Economics is not a zero-sum game. Selling new members of the global middle class General Motors cars, Coca-Cola, and McDonald’s hamburgers offers US companies their greatest profit opportunities in 50 years.

The “rise of the rest” is a shift of historic proportions. Thirty percent of the world’s population resides in emerging markets. China, India, and Brazil have a combined population of more than 2.6 billion people, many of them young and increasingly affluent.

Twenty years ago, emerging markets produced cheap goods to sell to Americans. Today, they are potential customers for American products and services. The rise of the global middle class may be the savior of American manufacturing.

And this isn’t just a pie-in-the-sky prediction. China’s car market today is bigger than that of the United States. GM, once the very icon of American manufacturing, produces more cars in China than in the US. Imagine what happens when China becomes the world’s biggest consumer of Coca-Cola, Apple computers, and Microsoft software. China’s consumption will unleash a boom for US multinationals.

Jeffrey Immelt, [chief executive officer of General Electric], argues that this shift in the balance of consumption power calls for a new business model. The products of the future will be designed, built, and marketed in local markets. Yes, GM’s car sales in China are booming. But the vehicles are made there with a Chinese partner. Spoiled by one huge domestic market, many US companies are behind the curve. (GE itself is an exception.)

European multinationals like Nokia, whose market share of global cell phones stands at over 37%, are global from day one. How can you not be when your home country of Finland has a population roughly that of Manhattan?

Ditto for others, like Swedish-Swiss infrastructure giant ABB, which expects to make more money in China than it ever could have imagined in tiny Switzerland. US companies are catching on. S&P 500 firms already make 48% of their sales abroad. But a similar number for UK companies is 80%. The “rise of the rest” may offer the source of an unexpected boom for increasingly global-minded US companies.

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