Special Report
FORTUNE Global 500
The
new new world order
Skyrocketing
oil prices. Double-digit inflation. Is the great global economic boom finally
coming to an end?
By Barney Gimbel,
writer
Last Updated: July 14, 2008: 12:04 PM EDT
Fortune Magazine)
-- What may be the world’s busiest grocery store is a Carrefour “hypermarket”
in the Gubei area of Shanghai’s Changning District.
Seven days a
week, from 8:30 A.M.to 11 P.M., customers jam the aisles of this
126,000-square-foot market and fill their baskets with a dizzying array of
produce, meats, and electronics from around the world. Last year six million
people - more than twice the population of Chicago- shopped here and dropped
$155 million
along the way.
There are no
signs of a global slowdown in these aisles. Carrefour’s sales in Chinawere up
25% in the first quarter of this
year. Sales in places like Braziland Romaniajumped more than 50%. Polandis hot.
So are Argentina, Turkey, and Colombia.
But the picture
isn’t the same in Carrefour’s home country: Francegrew an anemic 2.6% last
year. “If you’re a
consumer sitting in Parisand you’re reading newspapers or watching
TV, it looks like the world is coming to an end,” says Carrefour executive
David Shriver. “But consumers in places like Chinaand Brazilsimply don’t see it
that way.”
Welcome to the
new, precariously bipolar world.
While gross
domestic product growth is cooling a bit in emerging markets, the results are
still tremendous compared with the U.S.and much of Western Europe. The 54
developing markets surveyed by
Global Insight will post a 6.7% jump in real GDP this year, down from 7.5% last
year. The 31 developed countries will grow an estimated 1.6%.
The difference in
growth rates represents the largest spread between developed and developing
markets in the 37-year history of the survey. “The fact that the U.S.is no
longer the locomotive of growth it
was a few years ago,” says Nariman Behravesh, Global Insight’s chief economist,
“doesn’t seem to be that important anymore.”
Put another way,
the American consumer is still hungry, but the world consumer is voracious.
Consider the
growing middle class in China, which is expected to multiply sevenfold by
2020, to 700 million people, according to Euromonitor, and India, where the
number of middle-income folks
will grow more than tenfold, to 583 million, says consultancy McKinsey &
Co. First they want new homes with electricity - witness the quadrupling prices
since 2000 of steel, oil, and copper. Then, as incomes rise, so does demand for
everything from toothpaste to telephones, from automobiles to airplanes.
At first blush
this sounds like great news for Global 500 companies: Chinese and Indian
consumers essentially offsetting belt-tightening by Americans and Western
Europeans. And indeed, overseas growth has been a bright spot - so far - for
many of the world’s largest corporations. Wal-Mart’s (WMT, Fortune 500)
international sales grew 17.5% this year - triple what it saw Stateside - and
now constitute 24% of the company’s total revenue, up from 8.9% a decade ago.
Roughly half of GE’s (GE, Fortune 500) gas turbines produced in Greenville,
S.C., end up in Saudi Arabia, which is building four new cities; rival Abu
Dhabiis spending $200 billion on attractions,
including a Guggenheim museum.
“There is still a
lot of double-digit growth out there,” says John Rice, GE’s vice chairman. “The
clearly tougher financial markets in the U.S.don’t appear to be impacting
global demand
for everything.”
But double-digit
growth is also creating double-digit inflation. Americans whine about $4
gasoline and $5 Cheerios, but elsewhere in the world the reaction is much more
serious. Truckers in South Korea, France, and Spainhave blocked highways to
protest high fuel
prices, and angry Egyptians barricaded roads after a cut in flour subsidies. In
Indiainflation rose to above 8% in May from
below 4% last August. Chinese inflation was 7.7% in May, up from 1% in early
2006.
It’s worse in the
smaller markets: Inflation now exceeds 30% in Ukraineand Venezuelaand 25% in
Vietnam. This translates into some pretty
jaw-dropping price increases: Rents are up 82% in Dubaiin 12 months, and rice
prices in Indiahave nearly tripled since January. Such
rapid inflation can stifle growing economies, and many analysts think the great
global boom eventually will flame out - or at least dramatically slow.
And let’s not
forget that many of the countries experiencing strong growth today depend on
exports to the U.S.to keep their economies humming; a slowdown
in U.S.spending surely will have ripple effects in
places like India, China, Vietnam, and Mexico.
The problem is
how to fix it. Most experts believe that to break the back of double-digit
inflation, central bankers have to raise interest rates dramatically, which can
result in higher fuel prices, rising unemployment, and eventually a recession.
“This kind of
situation always ends in tears,” says Global Insight’s Behravesh. “If you let
inflation get out of control, it hurts. If you try to clamp down, it hurts.”
For the rest of
the planet, a slowdown in the emerging world would be a double-edged sword:
Once-hot markets for, say, L’Oréal lipstick or Tide detergent would cool,
hurting corporate growth prospects. A less ravenous Chinaor India, though,
would surely lead to a drop in the
price of many commodities, including oil, offering much-needed relief to
pocketbooks worldwide.
What is the CEO
of a Global 500 company to do? Listen to the doom-and-gloom economists and act
cautiously, or keep pushing into fast-growing but fragile economies?
Smart executives
are doing a bit of both, seeking new growth markets with the full understanding
that their plans will be shaped and changed by global forces. Some of those
trends are huge and long-lasting, like the rise of the global middle class.
Others are not: Carrefour, for example, almost had a disaster on its hands when
Chinese consumers threatened to boycott the chain over an event it could not
foresee or control: A pro-Tibetan protester in Parisassaulted a
wheelchair-bound Chinese Olympic
torchbearer.
Robert McDonald,
Procter & Gamble’s (PG, Fortune 500) chief operating officer, has borrowed
a military term to describe this new business world order: “It’s a VUCA world,”
he says - volatile, uncertain, complex, and ambiguous. “The idea that a
butterfly flaps its wings in Africaand an earthquake occurs somewhere else in
the world is our reality. It’s no longer just a nice book that Thomas Friedman
wrote,” he adds, referring to the New York Times columnist’s book on
globalization. “It’s my life.”
First Published: July 14, 2008: 5:20 AM EDT
[Non-text portions of this message have been removed]
