Economic Forum - Global Economic Analysis & Reports

III.  Rising Importance of Emerging Markets

(i)  Resurgence of Emerging Economies

As overall business in traditional markets will unlikely go back to pre-crisis levels in the foreseeable future, Hong Kong exporters are advised to look to emerging markets around the globe to sustain sales expansion, although the emerging economies should exhibit slower rates of growth than before.  Developing Asia, in particular, remains the most promising region.  While the impact of the world recession on developing Asia has been surprisingly enormous on the back of the region’s heavy export reliance, sound fundamentals of some economies, not least current account surpluses, large exchange reserves and high domestic savings, should put them in a better position to bounce back.  Spurred by a convalescent global trade environment, economic growth of the region should strengthen gradually in the rest of 2009 and more quickly in 2010.  Efforts to rebalance growth from external to domestic sources are another positive factor.


Source: International Monetary Fund, World Economic Outlook Update, July 2009

In developing Asia, the Chinese mainland, the first to recover from the global downturn, will again be the axis of growth, thanks to aggressive monetary and fiscal efforts, especially the RMB4-trillion stimulus package, to bolster domestic demand.  Of interest to Hong Kong suppliers vying for sales opportunities over the longer term, this stimulus package, despite its investment focus, provides a tonic to consumption, with a loosening in credit and a recent rebound of the stock market offsetting in part the negative impact of higher unemployment.  Exports will also be on the mend as global demand recuperates.  As such, the recovery trend of the Chinese economy will likely continue in the remainder of this year, and accelerate further in 2010.

Elsewhere in developing Asia, expansionary monetary and fiscal policies are largely in place too.  These relief initiatives, plus rekindling overseas demand, especially stronger demand from the mainland, should lead to a pick-up of the regional economies in the latter half of 2009 and further in 2010.  Within ASEAN, Vietnam, with its resilient exports, will likely post the fastest growth over the medium term.  Malaysia, which possesses better economic fundamentals, and Indonesia, aided by sturdier investment inflows, are among other brighter spots.  Outside ASEAN, India, which is less affected by the global recession due to its large domestic market and smaller reliance on trade, is also expected to grow faster.  Although India is a difficult market for many Hong Kong suppliers, its sheer size provides them with considerable export opportunities over the longer term.

While developing Asia will lead growth in the emerging world when world trade recovers, other fledging economies will be gradually out of the woods by mid-2010.  In Central and Eastern Europe, economic growth, in general, looks set to benefit from a nascent recovery of the EU economy, although the outlook for Hungary is less promising due to its fragile financial position.  Outside the EU, Russia will once again take advantage of reviving oil and commodity prices as the world economy bottoms out and, likewise in the Middle East, firmer crude prices will strengthen the economic health of the region.  Regarding Latin America, most countries, such as Mexico and Brazil, will benefit from a better-off US economy and higher commodity prices, but weak financial conditions will likely remain a poser to Argentina.
 
(ii)  Main Features of Emerging Markets

Notwithstanding the relapse stemming from the global downturn, the middle class in emerging markets should continue to expand in the post-recession era, and little wonder that this rising middle class will present greater opportunities for Hong Kong products.  For instance, ASEAN as a group has an estimated middle-income class of more than 75 million.  In the wake of the financial crisis, the rejuvenating middle class, aided by easier access to personal credit, will bring about a stronger demand for competitively priced consumer goods that are stylish, safe and fit for use.

Due to the rise of the middle class, stylish and quality products selling in mature markets are increasingly sought after in emerging markets.  Paradoxically, the purchasing power in emerging markets will still be low when compared with mature markets, and value-for-money remains the tenet.  In this regard, quality products similar to those offered to mature markets, but with simpler designs and less functionality, are more adaptable to the fledgling market situation.  In addition, warranties and after-sales services, especially for technically complicated products like electronics and electrical appliances, are required as quality assurance and extra purchase incentives.

In the meantime, there will be an increasingly mature brand culture among consumers in the emerging markets.  But even with the rise of the middle class, only the higher-income groups can afford high-end international brand products, and value-for-money products are therefore chosen in most cases.  It follows that the emerging markets are more receptive to new brands with value-for-money attributes, characterised by reasonable product quality at affordable prices.  To be sure, as the retail market is now more organised, brand promotion is expected to become gradually more feasible in emerging markets.

(iii)  Sourcing Pattern and Characteristics

In emerging markets, an increase in income among consumers will continue to bring about the advent of modern retailing.  Traditionally, the retail sector of emerging markets has been disorganised, marked by a large number of individuals and small retailers.  With the growing attractiveness of emerging markets, however, many international retailers, including chain stores, luxury stores, department stores and supermarkets/hypermarkets, are establishing a direct presence there.  Local new players are also springing up, while old ones are either undergoing dramatic changes to survive the foray of modern retailers or becoming extinct in the distribution scene.  In many instances, retailers operating in emerging markets are growing in size, and they tend to place orders for value-for-money products from foreign suppliers directly to reduce costs.  Even smaller retailers may form buying cooperatives for collective sourcing from overseas suppliers.

Evidently, import channels in emerging markets will continue to evolve in tandem with the modernisation of the retail sector, as importers and distributors will further increase their value-added by enhancing their function and efficiency.  A significant development is the emergence of regional distributors, which serve not only their home markets, but also neighbouring markets, aiming at business expansion and enhancing their competitiveness through economies of scale.  Spurred by continued trade liberalisation, meanwhile, new traders and distributors, which are usually small in size, may mushroom in some emerging markets.  While the number of potential buyers will likely multiply, many do not have a proven track record, and their capabilities and financial backgrounds remain unknown.

As a matter of fact, many buyers in emerging markets are increasingly sourcing from the Chinese mainland, as the cost of mainland-origin products is still competitive.  But while some large distributors and importers, such as those dominating in Latin America and India, plus an increasing number of large retailers, usually have direct connections with sources on the mainland and in Hong Kong, some others may not have the knowledge of locating and dealing with suppliers in the region.  For the large buyers with better financial resources, participation in major international trade fairs and exhibitions is likely preferred.  For the small- and medium-sized buyers, more cost-effective sourcing channels may be favoured, as it is not justifiable to travel due to small business volumes unless subsidies are available.  Not unexpectedly, buyers from emerging markets, as compared with their counterparts in developed markets, are more inclined to use trade magazines, both printed and electronic, as their sourcing channels.


Source: HKTDC International Buyers Research

Regarding sourcing practices, buyers in emerging markets will continue to be more conservative than their counterparts in traditional markets.  Given the comparatively small market size and limited affordability of consumers, they are more concerned about costs, willing to accept lower but reasonable quality standards, and inclined to place small orders.  As for payment, letters of credit are not yet common for imports into emerging markets, as it is difficult for buyers to secure trade financing from banks, although credit conditions will ease after the financial turmoil.  For purchases from the mainland and Hong Kong, upfront deposit payment terms are expected to remain common.  In the extreme, this can be 100% payment upon order confirmation.  But partial deposits, commonly 50% deposit upon order confirmation and the balance before shipment, are also feasible.

(iv)  The Vibrant Mainland Market

Above all, the mainland market holds particular promise.  Although the mainland has not escaped unscathed from the global economic downturn, the performance of its consumer market can be described as outstanding as compared with both traditional overseas markets as well as other emerging markets.  If anything, a slew of measures aimed at boosting incomes and consumption are able to inject the much needed vitality into the mainland market.  Consumption-related measures span from tax and interest rate cuts, wage rises for civil servants and retired workers, increased incomes for the poor and increased spending on healthcare to improved rural incomes and subsidies for the purchase of electrical appliances.  While some of these are stopgap measures to counter the world recession, some others, such as healthcare reform and rural development, are seen to sustain private consumption growth in the longer term.

In the post-recession era, therefore, the mainland’s conducive policies, alongside the recuperation of the middle class that comprises more than 200 million citizens, should continue to create enormous demand for a wide spectrum of sophisticated consumer goods.  But it should be noted that the mainland will continue to be a diverse market.  In the main, coastal regions, which have been seriously affected by the recession because of their export orientation, will probably continue to be dragged by weak demand from traditional markets.  Inner regions, on the other hand, are expected to remain beneficiaries of the mainland’s continued rural development efforts.  That said, the coastal regions, albeit only expanding at a moderate pace, will still outshine inner regions in terms of breadth and depth, so their ability to take in consumer goods of different types and different grades should not be overlooked.

While opportunities abound, there also exists a large number of difficulties in selling to the mainland market.  According to a recent HKTDC survey on difficulties for Hong Kong companies on the mainland, inadequate IPR protection is the main concern.  Other major operating difficulties include fierce local competition, high payment risks, a lack of legal knowledge, cumbersome administration procedures, unclear laws and regulations, a heavy tax burden, as well as a lack of local sales experience.  A lack of personal connections, the intricacies of establishing own sales channels, fierce overseas competition and difficulties in identifying suitable sales channels or agents are among other possible hiccups when entering the mainland market.


Source: HKTDC Survey on Difficulties for Hong Kong Companies on the Mainland, 2nd Quarter 2009