Emerging markets dependent on exports may see developments such as 3D printing challenge their economic models, argues Paul Krake, founder of investment advisory firm View from the Peak.
He spoke of the particular challenges facing China as a result of the march of technology, during a panel titled ‘Is the emerging market story over?’ at Asia’s Independent Research Summit in Hong Kong last week.
China's largest banks are all state-controlled and receive state funding. While local branches make decisions on which companies to loan to, ultimately they are heavily influenced by the government, notes Krake.
Hence mainland growth is largely dependent on government support – its quick recovery from the 2008/2009 crisis is a direct result of the local banks offering loans to infrastructure projects.
Yet the government is lending to industries that are non-competitive, such as steel producers, which are eating up money yet operating at a loss, adds. In order for businesses to become competitive, the government needs to stop handing out subsidies.
Steel producers will shut, and millions of Chinese will lose their jobs, but this would ultimately lead to the mechanisation of industry and allow companies to become competitive, Krake says. That said, the odds of this happening are extremely unlikely, he acknowledges.
“To have a true reform in sectors like steel [manufacturing] and to have to fire 7-9 million people [would be difficult],” Krake said. “Beijing does not want to have 9 million rather annoyed [unemployed] steel workers with access to the internet. Therefore China cannot truly reform this sector.”
As such, Europe and the US will continue to replace labour with technology, leaving China as a high-cost producer, because it “flatly refuses, because of central policy, to fire people they need to”.
He points to Alibaba as a successful private company, but says loans to such companies will be minimal until banks have the freedom to allocate capital efficiently.
“A banking model that efficiently allocates capital will allow the next hundred Jack Mas to raise money for the next 100 Alibabas,” says Krake. “Alibaba employs hundreds of thousands of people. Steel mills employ millions of people. There is a disconnect there and that is the structural problem for China long-term.”
Meanwhile, turning to export-focused emerging markets in general, he argued that cheap manufacturing could eventually shift back to Europe and the US as a result of 3D printing.
3D printing creates an object by stacking one layer of material – typically plastic – on top of another. It can be used to make a variety of objects and applications for dozens of industries.
US aircraft manufacturer Boeing has started to use it to produce parts used in some of its newer models, including the 787 Dreamliner, notes Krake.
3D printed products still lag traditionally made parts in terms of quality. However, industry participants are speculating on how this technology will affect global markets in the future.
“How long before I can get a decent pair of jeans or shirts [using 3D printers in the US]?” Krake asked the audience. “What does that do to low-end manufacturing bases in Vietnam, Cambodia and Bangladesh?”
Cheap labour is also gradually becoming a thing of the past, Krake says, particularly after the collapse of a garment factory in Bangladesh in April, in which over 1,000 workers died and hundreds were hospitalised.
New labour standards will put cost pressures on Western companies. These higher costs will increase the price consumers pay for clothes by as much as 20%, Krake estimates.
“If I can make those jeans in Louisiana and have them distributed through a series of smaller centres that focus on customisation, which happen to be close to an Amazon distribution centre, why do I need to manufacture in Estonia or Bangladesh?” he says.
Separately, Americans, many of whom still have high levels of debt racked up from the 2008/2009 financial crisis are not spending as much as they previously did as a result. (Total US consumer debt stood at $11.15 trillion as of June 30, according to the Federal Reserve Bank of New York.)
The effects of the world’s largest consuming nation sitting on the sidelines cannot be understated, agreed another panelist. Freya Beamish, economist at Lombard Street Research, added that there is no other ‘consumer of first resort’.
“A lot of [Americans] are still in negative equity. So [they are] not really going on spending sprees because they’ve just got over the hangover from the last [recession],” Beamish said. “[And] there isn’t really anyone out there to take on this role as consumers of first resort.”