What Changing Global Markets Mean to US

John N. Doggett, Senior Lecturer

International Entrepreneurship, Management and Sustainability McCombs School of Business Senior Research Fellow, IC2 Institute University of Texas at Austin john.doggett@mccombs.utexas.edu June 25, 2007

Can You Name This Country?

Australias 1960s ghost mines now run 24/7 to feed this countrys demand for raw materials. Its trade surplus will increase by 80% this year It became the largest source of greenhouse gases in the world last year It will light up two new coal-fired plants a week. It makes all of the fireworks for our 4th of July It puts 24,000 new vehicles on the road every day If it had the same oil per capita burn as the US, it would consume 20% more than the worlds supply The country is CHINA and your world has changed!
2

Zero Sum Math?

Today, China consumes: 40% of the Worlds cement, 30% of the Worlds Iron ore and 34% of the Worlds Coal By 2031 if China equaled US consumption rates: China would consume billion more tons of coal than the entire world produced in 2004 China would consume 20 million barrels per day more than the entire world produced in 2004. Chinese would own 1.1 billion cars compared with the current global total of 800 million.
Asia Times - Too Much for Mother Earth - May 25, 2005 3

Something Has to Give

Chinas meat consumption would equal 80% of the worlds production in 2004 Chinese steel production would equal the steel production of the entire western world in 2004 Chinas paper products consumption would be almost double the entire worlds production in 2004 This is impossible, right? Try telling the emerging BRIC middle class that they must give up their dreams of having an American lifestyle so that we can keep ours.
Asia Times - Too Much for Mother Earth - May 25, 2005 4

What Happens There Matters Here

The world changed while you were sleeping Most of your assumptions about the way things are; the way things should be are wrong The Cold War is over . . . And we won! Now, everyone wants what we have The problem is that there is not enough mother earth to go around Food imports from China have developed a reputation for alarmingly high levels of health risks Grizzly Bears and Track Shoes
5

The American Dream?

WSJ - June 25, 2007, Page A1

Who Are These People?

BRICs Dominate Emerging Markets

Population BRICs 2,703,640,100 57.77% Emerging Markets 1,976,020,266 42.23% Land Area (square kilometers) BRICs 38,498,440 51.21% Emerging Markets 36,679,540 48.79% Gross Domestic Product BRICs $3,808 trillion 42.63% China = 52% This # grew by $500 billion in 2005 Emerging Markets $5,124 trillion 57.37%
8

Source: Franklin Templeton BRIC Fund Prospectus - June 2006

Inflection Point
Japan - Total Trade
$300 $250 $200

China - Total Trade

$350 $300 $250

$ Billion

$ Billion

$200 $150 $100 $50 $0

$150 $100 $50 $0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

1964-70

1989-94

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

India - Total Trade

$100 $90 $80 $70

2000-2005

B illions

$60 $50 $40 $30 $20 $10 $0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2000

Dr. P. Konana, McCombs Business School, University of Texas at Austin

China-India Cell Phone Subscribers

700

China
600

India
520 550

Projected
600 580

620

500

480.5 460 408.5

Millions

400

391 335 330.5 246.5 162.5 145 118 70 1.88

2000

300

263 210

200

100

85 40 15 0.34
1997

20 0.88

1.2
1999

3.58
2001

6.43 12.69
2002 2003

33.6

1998

2004

2005

2006

2007

2008

2009

2010

2011

Year
Dr. P. Konana, McCombs Business School, University of Texas at Austin 10

Some Interesting Data

Number of Computers
180 164.1 160 140 120

23 million sold in 2006 By 2010-12

Millions

100 80 60 40 20 0 United States Japan Germany United Kingdom France Italy Canada China Australia 49.9 30.6 26

India

21.8

17.5

16

15.9

10.6

10.6

South Korea

Dr. P. Konana, McCombs Business Data: 2003 School, University of Texas at Austin

11
Source: OECD

Indian IT Sector
2004 IT Services ITES-BPO Engineering services Hardware Total IT & ITES $10.4 $3.4 $2.9 $5.0 21.7 2005 $13.5 $5.2 $3.9 $5.9 28.5 2006 $17.8 $7.2 $5.3 $7.0 37.3 2007 $23.7 $9.5 $6.5 $8.2 47.9

Dr. P. Konana, McCombs Business School, University of Texas at Austin

Source: Nasscom, India

12

Chinas IT Sector

Dr. P. Konana, McCombs Business School, University of Texas at Austin

13

They Have Tons of Money

US, Japan, Germany, France, Britain, Italy & Canada (G7) used to be the largest economies in the world
G7 FOREX holdings = $1,253,900,000,000 (2006) BRIC FOREX holdings = $1,292,200,000,000 (2006)

This is a 40% increase for BRICs since 2004 China holds 68% of the BRIC total; Russia is #2 China has $1,300,000,000,000 in FOREX holdings China just created a $300 billion VC Fund China used $3 billion to buy into the Blackstone Group China will use more to buy parts of 6 European AIRBUS Plants
14

Sovereign Wealth Funds

Russia, China, Singapore and other countries have created Sovereign Wealth Funds to diversify away from US Treasuries and other traditional investments. Buying corporate bonds, stock, derivatives and real estate Estimated size is $1.5 trillion to $2.5 trillion out of global foreign asset holdings of $7.5 trillion
15

WSJ - June 21, 2007 - Real Time Economics Blog

Goldman Sachs Says . . .

16

Shifting of Economic Power

$50,000

U.S
$45,000

China

India

Japan

China overtakes U.S

$40,000

$35,000

U.S $ GDP Billions

$30,000

$25,000

China overtakes UK Germany

China overtakes Japan

India overtakes Italy, France, Germany

India overtakes Japan

$20,000

$15,000

$10,000

$5,000

$0

2005

2010

2015

2016

2020

2025

2030

2032

2035

2040

2045

2050

Dr. P. Konana, McCombs Business School, University of Texas at Austin

17
Source: BRICs Report, Goldman Sachs, 2003

Is This Your Image of Brazil?

18

Brazil is More than Just Soccer

Brazil is the Worlds Largest Citrus Grower and Orange Juice Producer World Production of Orange Juice 2005/2006
Brazil = 1,400,000 tons (65 degrees Brix) Florida = 709,000 tons

2005/2006 Exports
Brazil = 1,400,000 tons
Brazilians prefer to squeeze fresh oranges for juice

US = 75,000 tons
Situation and Outlook for OJ, USDA, February 2006 19

Imagination & Innovation

20

8,000,000 Gallons of OJ

21

Embraer Brazilian Jet Company

Third Largest Commercial Jet Manufacturer in the World $3,830,000,00 in net sales (2005)
Net Profit = $446,000,000

Web Site in English, Chinese and Portuguese Has a $24,000,000,000 Financial Backlog
Firm Orders = 1,331, Deliveries = 990, Firm Backlog = 341

Largest Customers (US = 61% of total)

ExpressJet with 275 American Eagle with 217 Republic with 133 units JetBlue with 101 US Air with 85 units

22

The World Leader in Regional Jets

23

Imagination and Innovation

24

If You flew Jet Blue, you flew Brazil

25

Brazilian Executive Jets

26

27

Is This Your Image of Russia?

28

Russia is an Energy Giant

Russia is its own OPEC. It holds:
The world's largest natural gas reserves, The second largest coal reserves, and The eighth largest oil reserves.

Russia is also:
The world's largest exporter of natural gas, The second largest oil exporter, and The third largest energy consumer.

29

Russian & Iran May Create Natural Gas OPEC

30

From Russia with Love?

Europe must import 220 billon cubic meters of gas a year by 2015, 60% more than today. Gazprom has agreed to build a 558-mile pipeline for 30 billion cubic meters of gas a year by 2011.

WSJ - June 25, 2007, Page A11

31

Have you heard of LUKOIL?

1.3% of global oil reserves 2.1% of global oil production 18% of Russian Oil Production 18.3% of Russian oil refining 2nd largest oil company worldwide by proven reserves of hydrocarbons 6th largest oil company worldwide by production of hydrocarbons Largest Russian oil business group with annual sales of $30 billon The largest trading volumes among foreign companies traded on the London Stock Exchange 32 (IOB) in 2005

Goodbye Getty Oil; Hello LUKOIL

33

Is This Your Image of India?

34

This is Infosys

35

India = BrainPower, Inc.

The Indian Institutes of Technology are the most selective universities in the world. Students who are rejected by IIT go to MIT, Cal Tech and Berkeley as their backup schools India is home to over 100 R&D Facilities for Fortune 500 Firms Since 2003, Indian firms won 10 of the 17 of Deming Application Awards for Quality Nearly 250 Indian centers teach courses on Japanese language and culture
36

Energy per Capita Rising with Incomes

Energy Consumption and GDP per Capita: 2002
Energy usage per capita (oil equivalent litres per person per year)

9,000 8,000 7,000 6,000 5,000 South Korea 4,000 UK 3,000 2,000 1,000 India 5,000 10,000 15,000 20,000 25,000 Source: GGDC, BP, GSJBW 30,000
GDP per capita (1990 US dollars per person per year)

US

Australia

Japan

China

Dr. P. Konana, McCombs Business School, University of Texas at Austin

37 Source: Roopa Purushothaman, Goldman Sachs, BRICs Report 2003

Energy Consumption
OECD versus non-OCED Energy Usage
450 400 350 Quadrillion BTU 300 250 200 150 100 50 0
19 19 20 20 20

OECD

Non-OECD

Projected

2000
Year

90

20

80

10

30

Source: Energy Information Administration 2006

Dr. P. Konana, McCombs Business School, University of Texas at Austin

OECD: Organization for Economic Cooperation and Development

38

Why Focus on China?

Chinas Economic Performance from 1978 to 2004 has been unprecedented in world history. Real GDP growth has averaged 9.4% per year. Real GDP per capita has risen by 6X+. The number of Chinese living in absolute poverty has declined significantly. If Chinas economy grows @ 7% between now and 2027, Chinas GDP will be 4X larger. China has 80-100 million middle to upper income families Chinas middle class is growing at the rate of a new Scandinavia every year

39

Chinas Growing Power

The Three Gorges Dam
the largest & most expensive dam ever constructed @ $25,000,000,000 +

Chinas Output
About 30% of worlds PC output Approx. 89% of worlds digital camera Approx. 60% of worlds LCD output

Chinas Consumption - Approximately

34% of worlds 1.04 billion steel output
(10% increase in 2005; 7-10% in 2006)

47% of worlds cement output 40% of worlds cotton output 20-25% of other metals (e.g., copper, aluminum) 8-10% of oil output
Dr. P. Konana, McCombs Business School, University of Texas at Austin 40

Take Apples, for example

Chinese apple juice producers drove prices down from $153 a ton in 1995 to $55 a ton in 1998. More than of imported concentrate is from China Chinese apple pickers make $2 a day. Washington state pickers make $14 an hour. US Apple farmers want to develop new technology to reduce harvesting costs They also have decided to find new overseas markets
AP - June 24, 2007 41

Chinas Aviation Industry Soars

China is the fastest growing commercial aviation market in the world Boeing says China will need 2,880 planes worth $280 billion in the next 20 years Today, Chinas commercial aviation market is 1/5 of the US. By 2027, it will grow to be more than 50% of the size of the US market. China has made an offer to buy all or part of 6 AIRBUS assembly plants in France, Germany & UK Making the Wing Assembly in China Starting their own Aircraft Company
WSJ - June 21, 2007 42

Chinese IPO's for Chinese

China Construction Bank will sell 9 billion Class A shares on the Shanghai Stock Exchange for $5.6 billion ($.62 a share) China COSCO Holdings, Co. will sell $1.9 billion

WSJ - June 18, 2007, Page C9

43

China Is Exporting Inflation

Export prices from China went down for years Not anymore
The Yuan has risen 6% and domestic prices are rising

WSJ - June 19, 2007, Real Time Economics Blog

44

How Will China Affect You?

China has seen the low cost labor movie and doesnt like how it ends. She is focused on labor productivity. China is developing a vertically integrated economic development strategy that is unprecedented for a third world country. Chinese factories can make products and ship them to the US for less than many Mexican Maquiladoras can make the same product on the US border. How China is growing is will affect everyone.
45

Key Chinese Growth Characteristics

Pragmatic, not ideological Gradual, not shock therapy Focus on getting the state out of the business of making things Focus on improving the lives of the rural poor . . . And keeping them out of the cities Continued industrialization frees up rural labor One child policy has rapidly improved labor quality Chilean approach to entrepreneurs
Getting rich is OK Being political is not
46

Is This Your Image of China?

47

Welcome to the New China

48

Making a Statement Buildings

49

Just Like Magic

50

The Peoples Republic of Communist China?

51

This was Farmland in 1975

52

Chinese Infrastructure Explosion

China will spend $1,100,000,000,000 between now and 2020 Airline passenger travel has increased from 2,350,000 in 1978 to over 100,000,000 in 2004 China built $100,000,000,000 in next fixed assets in the first half of 2005
27% increase from 2004

China built 2,100,000,000 sq. m. of new construction

133% more than 1995 and 491% more than 1985
Dr. P. Konana, McCombs Business School, University of Texas at Austin 53

Cars and Smog

Cars are the #1 symbol of having arrived. 24,000 new cars, trucks and buses hit Chinas streets every day.
1,000 new cars hit Beijings streets every day

Beijing went from a few thousand to 3,000,000 cars since 1976 China is trying to clean up its act, but doesnt have enough low-sulfur fuel to meet its automotive needs
WSJ - June 21, 2007 Page A10 & June 23, 2007 Page A4 54

Vehicle Stock and Oil Demand for Road Transport in China

IEA, World Energy Outlook 2004

55

China is the Worlds #1 Polluter

The Netherlands Environmental Assessment Agency said that soaring demand to produce electricity and cement with coal-fired plants pushed recorded CO2 emissions past the US in 2006
China = 6,200 metric tons US = 5,800 metric tons UK = 500 metric tons

These figures do not include other CO2 sources

Ag methane, Industrial NOX, Aviation, shipping, deforestation, gas flaring and underground coal mine fires

The Guradian - June 20, 2007

56

Filthy, Dirty Air

The Guardian - June 20, 2007 Peter Parks/AFP

57

China and Energy

China is 2nd largest consumer of primary energy China buys 10% of worlds total primary energy Chinas oil demand grew by 14.6% in 2004 China is the third largest importer of oil in the world after the US and Japan China had zero imports before 1990 McKinsey says China will consume 32% of the worlds total end-use energy demand growth from 2003 to 2020 vs. 9% for the US and 4% for India.
IEA, World Energy Outlook 2004 & McKinsey & Co. 58

Chinas Electricity Generation

59

Chinas Oil Products Consumption

60

Chinas Total Energy Production

61

Chinas Total Primary Energy Supply

62

What Fuels China

63

Projected gap between oil demand and production in China

IEA, World Energy Outlook 2004

64

China Imports 3.5 million barrels of oil a day

China imported 48% of its crude oil needs in April

US imported 61.9% of our crude oil needs in 2006

China exported 289,000 barrels of oil equivalent a day of coal in 2006 This year, China has imported 118,000 barrels of oil equivalent a day of coal As more firms move manufacturing to China, Chinas thirst for crude and electricity will continue to soar. China already is a major consumer of Sudan and Ethiopian oil and is talking with Iraq
WSJ - June 20, 2007, Page A3 65

Chinas Sources of Crude

WSJ - June 20, 2007, Page A3

66

Projected gap between natural gas demand and production in China

140 30 120

25

Billions of cubic meters

100 20 80 15 60 10 40 5

20

0 1990 2000 2010 2020 2030

production

Net imports

Import dependence (right axis)

67

IEA, World Energy Outlook 2004

Percent

China and Energy, cont.

Chinas oil consumption is growing by 7.5% annually, or 7x as fast as the United States By 2010, China will have 90x more cars than it did in 1990. Adding 1,000 new cars a day in Beijing alone. 19% vehicle growth means that China could pass the US as the #1 car market in 2030. It passed Japan as #2 in 2006. Chinas gasoline prices are 11.8% lower than US and 67.8% lower than Japan and 73.5% lower than UK price for gasoline
Institute for Analysis of Global Security 68

China and Energy, cont.

China will use 406% more natural gas by 2030 Chinas 2030 gas imports will almost equal USs today China will double its use of coal by 2010 China has twice the coal reserves of US
Coal meets 69% of Chinas current energy vs. 60% by 2030 China emits 14% of the worlds CO emissions today

IEA, World Energy Outlook 2004

69

China and Energy, cont.

From January 2004 to July 2005, China approved 168 primarily coal-fired power plants. This was enough to light all of Italy China is the #1 producer of hydro power in the world @ 12.6%. The US is #4 @ 9/7%. China gets 16.1% of her electricity from hydro compared to 6.5% for the US

WSJ - March 3, 2006

70

China and Energy, cont.

China is the second largest producer of petroleum products @ 7.1% of the worlds total.
US is #1 @ 22.6%. Japan is # 3 @ 5.4%

China has the third largest Crude Distillation Capacity @ 7.5% of the worlds total.
US is #1 @ 20.5% Russia is #2 at 9.5% India is #8 @ 2.7% Saudi is #9 @ 2.5%
IEA, World Energy Outlook 2004 71

Electricity Production from Fossil Fuels

Coal
#1 US 2,090 TWh #2 China 1,713 TWh #3 India 461 TWh #8 Russia 161 TWh 2,519 TWh
Gas
US Russia Japan UK Italy Iran Thailand Mexico Saudi Egypt ROW 732 421 244 160 130 125 89 87 79 72 1,280

ROW

Oil
US 139 TWh Japan 133 TWh Saudi 81 TWh China 72 TWh Mexico 70 TWh Italy 47 TWh Indonesia 36 TWh India 36 TWh 556 TWh

2004 data from Key World Energy Statistics, 2006, IEA

ROW

72

Nuclear Reactors
China Current - 9 nukes that generate 6,587 MW of power Under Construction 2 for +1,900 MW Planned 4 for +3,800 MW Proposed long-term 22 for +13,160 MW Total planned capacity will be 25,447 India Current - 14 small nukes that generate 2,403 MW Under Construction 9 for +4,128 MW Proposed long-term 24 for +13,180 MW Total planned capacity will be 19,711
IEA, World Energy Outlook 2004 73

Chinas Thirst for Electricity is Staggering China

1973 2004 2.8% worlds total 12.8% of worlds total

2x world growth rate

China is the second largest producer of electricity in the world @ 12.6% of the worlds total.
US is #1 @ 23.8% Russia is #4 @ 5.3% Brazil is #10 @ 2.2%
74

IEA, World Energy Outlook 2004

Energy Investment in China (billions $)

2001-2010 Oil Gas Coal Electricity
Generation renewables Transmission Distribution

2011-2020 41 31 40 675 285 122 119 254 787

2021-2030 39 45 43 761 311 79 136 294 888

2001-2030 119 98 123 1,913 795 270 345 723 2,253

75

39 22 40 478 199 68 90 175 578

Total

IEA, World Energy Outlook 2004

Implications for Raw Materials

Demand for steel will continue to go up by 5-6% worldwide
Demand in India and China to remain at 8-10% each year Any slack in China may be offset by other economies Iron ore price expected to surge by 20% this year

Demand for cement, oil, copper, etc. will continue to be at record levels. Chinese expected steel consumption in 2025 will be approximately 780 million tons (currently 300 million tons) Per Capita Steel consumption in China and India is expected to triple in next 15 years!
Dr. P. Konana, McCombs Business School, University of Texas at Austin 76

The Beijing 2008 Olympics

2008 Beijing Olympics is a weve arrived event
The government will spend $20,000,000,000 on infrastructure The private sector will spend $180,000,000,000 on hotels, offices, housing and other capital investments

The goal is to create Shock and Awe of the This cant be China type.

77

The Birds Nest Stadium

78

This will not be another Athens

Olympic Swimming Stadium started in December 2003

79

Rebuilding an Ancient City

80

The Shanghai World Expo

2010 Shanghai World Expo
Shanghai City Government will spend $10,000,000,000 First 3rd world country to host world expo in 153 years The expect at least 70,000,000 visitors They are turning the warehouse district next to Pudong into a world class global business center.

81

Building on an Unprecedented Scale

82

Best Prospects for US Firms in China

Coal Mining Equipment 75% of electricity is generated by coal, will be going up to 85% in the next 7 years Commodities Minerals Agriculture Scrap Construction Equipment

2008 Olympics, 2010 World Expo & 2010 Asian Games

US Commercial Service, Beijing, March 2007 83

Best Prospects for US Firms in China

Cosmetics and Toiletries As income has risen, so have sales Education and Training 10% of income is spent on education E-learning Environmental Protection and Clean-Up Water, solid waste, medical waste Scrubbers, de-NOX, de-SOX Renewal Energy Products
US Commercial Service, Beijing, March 2007 & E&Y, May 9, 2007 84

Best Prospects for US Firms in China

Financial Services Banking, Insurance, and investment vehicles open up to foreign investment Credit Cards Franchising Food and beverage are doing well: Starbucks, KFC, McDonalds, Schlotskys Medical Equipment 70% of medical devices are imported
US Commercial Service, Beijing, March 2007 85

Best Prospects for US Firms in China

Nuclear Power Start building 30 new reactors over the next 15 years Oil & Gas Exploration & Processing Equipment Pipeline and Storage Compressors Offshore Exploration Equipment Retail Wal-Mart, Office Depot, Home Depot, Best Buy
US Commercial Service, Beijing, March 2007 86

Best Prospects for US Firms in China

Software Specialty software is 70% imported Telecom 3G applications Equipment Wireless LAN On-Line Gaming

US Commercial Service, Beijing, March 2007

87

Two Books (Past, Present & Future)

China: Alive in the Bitter Sea, by Fox Butterfield, Bantam Books, 1982 China Shakes the World: A Titan's Rise and Troubled Future -- and the Challenge for America, by James Kynge, Houghton Mifflin (September 27, 2006)

88

In China, Everything is Possible Nothing is Easy

US Commercial Service, Beijing, March 2007

89