As the global economy emerges from the depths of the Great Recession, a lot of attention naturally focuses on trying to anticipate the speed and strength of the rebound. Some forecast a quick snap-back, driven by years of pent-up demand. Others see a more grudging recovery, defined by deep unemployment and persistent credit issues.
India is witnessing strong economic expansion, but global issues—weak growth in Europe, sluggish US consumer confidence, concerns over weaker growth in China, and still-recovering consumer demand—are ones that business leaders and economic policy planners should watch out for.
For anyone running a business, however, success is unlikely to get easier irrespective of how fast the turnaround happens. The tectonic plates have shifted beneath the global economy, and only the most agile will emerge winners. Bharti Airtel’s acquisition of Zain’s African business is a case in point.
Economic conditions remain challenging, especially in developed countries. In the US, for instance, no matter how strong the coming cycle, borrowing costs will be at least 200-300 basis points higher than during the last period of robust growth. The crisis demonstrated that pre-2007 risk premiums were perilously low and would have to adjust upward across financial markets. Other factors, however, have added upward pressure.
Massive government borrowing, for instance, will increasingly crowd out private borrowers in the developed world. And the credit markets are still on edge due to unfolding trouble in the US commercial real estate market, the Greek tragedy in Europe and the concern that China and other developing markets may be awash in bad loans. In the US and Europe, uncertainty about the outcome of financial regulatory reforms has further constrained lending. In India, there is the double challenge of inflation and a short-term shortage of liquidity as telecom companies borrow heavily to pay the government around Rs1 trillion for third-generation and broadband spectrum. This liquidity crunch comes on top of heavy government borrowing from the market, further reducing the amount of capital available to companies.
For managers, the end of the easy-money era means a fundamental rethinking of how to finance investment. Funding projects from internal cash flow will be more reliable, but may constrain growth and will favour businesses with ample cash and strong balance sheets.
Financial flexibility will be especially important. Globalization has continued to erode pricing power as competitors in emerging markets such as China and India move further up the value chain to produce high-end items like cars and sophisticated electronics. On the other hand, the voracious appetite in the developing world for everything from copper to oil is driving up commodity prices.
In India, there is widespread expectation that second-quarter profits will be hurt by rising input costs. How can managers build customer loyalty without resorting to more discounting? The answer will likely involve a tighter focus on core businesses and capabilities to add value to products and services that customers will pay more for. That’s going to require segmenting customer groups and figuring out how to serve both high-value and low-value customers profitably. Leading Indian telcos are beginning to do this better, as growth slows in urban markets and competition on non-price factors becomes necessary, given the declining profitability of the sector.
Firms must also keep driving costs out of their operations without cutting into muscle. In many cases, that will require radically simplifying entire business systems and supply chains.
In the US, there‘s little doubt that the loss of eight million jobs during the recession will hold back consumer spending and is likely to dampen demand through the first half of the new decade. Besides, low home and falling stock prices have decimated household balance sheets. And though stocks have recovered from their 2008 lows, shrinking home values, a stronger driver of consumer spending, will continue to weigh heavily.
Globally, the shock of lost wealth is likely to change behaviour, and savings rates should head higher. Some US consumers may revert to their old free-spending ways, but for an aging population facing imminent retirement, rebuilding savings will be a necessity. Though demand from the developing world could help offset some sluggishness in the US, these markets will take time to pick up the slack.
The continuing troubles for the US economy need to be factored in by Indian information technology (IT) and IT-enabled services firms, which still depend significantly on the US for their business, as well as by exporters for whom US and European Union markets have historically been important.
All of this, of course, has been fundamental to competing in a global economy over the past decade. What’s changed is that competing globally has become that much harder. Indian companies may have more opportunity at home than their Western counterparts, given the strength of the domestic economy, but they need to become more competitive globally. There is one thing that the last two years have taught us: One can never be prepared enough.
Ashish Singh, Andrew Schwedel and Dunigan O’Keeffe are all Bain & Co. executives. Singh is its managing director in India; Schwedel is leader of its financial services practice in the Americas and of the Bain Macro Trends Group; and O’Keeffe is a partner in the firm’s Mumbai office and member of its strategy and telecom practices.
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