Global GDP Growth Research Articles

Form an orderly line

It's been a few years since anyone heard a vendor talk about it. But, if the recovery continues as projected, a lot more customers will be told how they're on allocation. Amid a punishing recession, it seems bizarre that anyone should be talking about putting their chip-buying customers on allocation. But several companies have acknowledged that some, if not all, of their product lines are already being affected. The canary in the coal mine is the historically volatile market for memories, particularly DRAMs and flash. Micron Technology supplies both technologies. Steve Appleton, its chairman and CEO, said this while announcing the company's Q4 financials late last month: It appears that industry supply growth and capital spending are at extremely low levels, leaving many products on allocation. We remain optimistic that these trends will continue.That the supply situation will get worse is not a given. According to the International Monetary Fund's (IMF) latest World Economic Outlook, the possibility of a 'double-dip' recession cannot yet be discounted even if current data show the world economy beginning to recover. The IMF's main concern is that private demand, including consumer spending, is not showing enough strength to restore consistent global GDP growth by replacing public sector stimulus spending. In this context, it seems almost perverse to raise the prospect of severe product shortages in key technology sectors nevertheless, they now look certain for semiconductors. Generally, it is a looming problem. 'Allocation', for those unfamiliar with the term, is chip-speak for'rationing'. Appleton added that the $750m-$850m that Micron has set aside for capex in the current financial year will be focused around getting more out of existing facilities. No new lines and certainly no new fabs will be added as the supply crunch intensifies.

Just How Capitalist is China?

In 2004, Lenovo, a computer maker based in China, acquired the manufacturing division of IBM. This event, coming off the heels of the news that China had contributed more than the United States to global GDP growth, took the world by storm. Richard McGregor (2004), a reporter for the Financial Times , captured a widespread sentiment when he wrote that the purchase was “a symbol of a new economic era, of how a fast-rising China had suddenly grown powerful enough to subsume an iconic American brand.” Princeton economist and New York Times columnist Paul Krugman (2005) had not been alarmed with Japanese acquisitions in the 1990s but he was about Chinese investments. He believed that the Chinese corporate acquisitions posed a great threat to the United States. There are even those who hailed the Lenovo acquisition as heralding a new world order with China at its center (Shenkar 2006). Business-school academics are particularly enamored with Lenovo. For them, Lenovo is proof positive of China's fertile entrepreneurial environment and rising competitiveness. In his book, The Chinese Century , Oded Shenkar, a professor at Ohio State University, rejects the notion that China lacks its own homegrown corporate giants. Lenovo, he argues, is just as homegrown as the best of the Indian corporations, such as Wipro or Infosys (Shenkar 2005). Lenovo is also featured prominently in Made in China: What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs , a book by Donald Sull, a business professor at INSEAD (Sull 2005).

Private Equity in China and India

In the last decade, China and India have attracted an increasing number of private equity investments and dedicated funds because of their respective strong economic development. China and India have grown at average rates of 10% and 8%, respectively, over the past 10 years. This accounts—on a PPP basis—for 30% of global GDP growth in 2006. China9s particularly impressive growth has been powered by manufacturing exports, while India9s development has been driven by its current lead in IT, services and global leadership in basic industries (e.g., aluminum, steel). According to BusinessWeek, companies in both countries are experiencing increased profitability, although Indian companies have been doing better in recent years: between 2000 and 2004, ROIC increased from 9.8% to 12.6% for Chinese companies, but jumped from 6.9% to 16.5% for Indian companies. Lower labor costs and the increasing size of domestic markets have produced attractive opportunities for private equity funds, although valuations have been driven up to record-breaking levels because of the increasing number of investors jostling for business. Nonetheless, there are considerable risks to investment in both countries. There may be difficulties in conducting proper due diligence, challenges regarding government limitations on foreign ownership in some sectors, and issues relating to the rule of law. Moreover, once the investment has been made, it may be difficult to find properly qualified managers capable of improving operations, and exit routes may be limited due to the limited depth of capital markets. There also may be challenges arising from currency instability, and tax haven loopholes may be lost. <b>TOPICS:</b>Private equity, emerging, legal/regulatory/public policy, portfolio construction

At a Glance…

• Global GDP growth will slow from 5.1 per cent in 2004 to 4.2 per cent in 2005; world trade growth will slow from 9.1 per cent to 6.3 per cent.• The oil price is expected to remain above $50 a barrel, although in real terms it is well below the highs of the early 1980s.• Nearly 25 per cent of the deterioration of the US current account since 1997 can be attributed to net trade in petroleum products, and reflects the oil price.• A 10 per cent revaluation of the Chinese renminbi would have little impact on the US current account deficit.• Rapid real house price growth will continue to support US housing investment in 2005 and 2006.

The World Economy

Global economic activity strengthened considerably in the first half of this year, helped by a rebound in trade volumes and a marked recovery in industrial production. Although the rapid growth experienced in the early part of the year has faltered, there was still broadly-based, if somewhat subdued, growth in activity in all the major economies in the second quarter of the year, with GDP rising by between 0.3-0.6 per cent in the US, the UK, the Euro Area and Japan. For the year as a whole we continue to expect global GDP growth (measured at Purchasing Power Parity exchange rates) to be around 2¾ per cent, which whilst below long-term trend levels, would be a welcome improvement on the growth of under 2¼ per cent seen in 2001.