Emerging countries benefit at expense of industrial ones - study

The world's newly industrialized countries (NIC) are the focus of the majority of today's growth, especially among major industries, according to global trade credit insurer Euler Hermes. Meanwhile, the so-called already industrialized countries (AIC) are seeing either very weak growth (Europe) or growth that's artificially sustained by a fall in household savings and a gigantic current account deficit (United States)...

PARIS, Nov. 16, 2005 -- The world's newly industrialized countries (NIC) are the focus of the majority of today's growth, especially among major industries, according to global trade credit insurer Euler Hermes. Meanwhile, the so-called already industrialized countries (AIC) are seeing either very weak growth (Europe) or growth that's artificially sustained by a fall in household savings and a gigantic current account deficit (United States).

A recent international forecast by market sector shows that the AIC only owe their growth to a few industries that are protected from global competition, such as the aeronautics and automotive fields. In other industrial sectors, Euler Hermes sees a rapid migration toward the NIC.

The following is a market sector breakdown produced by the Euler Hermes Group:

Textiles & Electronics: Migrating to emerging countries with low wage bills
Having topped 4% in 2004, world growth is expected to drop back to 3% this year and 2.8% next year. This slowdown remains controlled and has affected geographic regions and sectors to differing degrees. The emerging countries, chiefly China, are continuing to grow at a very steady pace. This growth is especially underpinned by very rapid expansion of the local consumer goods industry, whether traditional (textiles) or more technological (mass market electronics). It is responding to rapid growth in demand due to the maintenance of strong consumption in the United States and large market share gains by the NIC, especially in Western Europe. Thanks to ever easier global trade, investment in capacity is being channelled from western countries to regions with low wage costs (the hourly industrial wage in China is around $1.17 compared to $21.03 in the United States and $29.21 in Europe).

Iron, Steel & Cars: AICs just as weakened in downstream manufacturing
-- Prices backtracking, re-deal of international steel market cards favor NICs.
The emerging countries are developing a significant industry in intermediate goods, especially in iron and steel, and they have established production capacities that exceed local processing industry needs.

The unprecedented explosion in steel prices in 2004 enabled all producers to increase their profitability, and restructure and consolidate their business. A relaxation of prices in the first half of 2005 (down 25% compared with the highs of 2004) provided the opportunity to a number of steelmakers to relocate production to the highest growth areas where raw materials are more accessible (mainly Asia or South America). But can the current reduction in prices be sustained? The answer to that will probably come from China, the world's leading producer but also -- and this is a new feature -- a net exporter of steel since the end of 2004, which has generated a back-track in steel prices (an annual average fall of 17% from 2006 is now anticipated).

-- Despite sector's healthy state, main EU, U.S. car manufacturers face ever-increasing competition from NICs.
The AIC -- the United States, Western Europe, and Japan -- are maintaining a dominant position in the car manufacturing sector, but this is being increasingly challenged by new low-production-cost regions (Latin America, Asia, Eastern Europe). U.S. carmakers and equipment manufacturers are mired in difficulties, while the situation of French and German manufacturers, which even last year was still good, is deteriorating. Japanese carmakers are the principal beneficiaries, but so are sub-contractors in emerging countries. By 2011, global automobile production is expected to see growth of 23% compared with 2004, 80% of which will be due to emerging countries (China, India, Indonesia, Iran, Malaysia, the Philippines, South Africa, Taiwan and Thailand).

Aeronautics, Construction & Pharmaceuticals: Underpinning AIC's resistance
Strongly destabilised upstream (intermediate goods) and downstream, the AICs only owe their survival to good performance by the pharmaceutical and aeronautical industries (better protected by the entry barrier created by their past investment in research), capital goods, and sectors protected from international competition (distribution and construction).

"Germany, Japan, and to a lesser extent the United States, France and Italy are posting steady growth in industrial goods which are their principal export drivers. This nevertheless poses a question for the medium term: Isn't the dynamic performance of industrial goods, largely destined for emerging countries, the direct consequence of the delocalisation of the AIC's own industry? Isn't it ultimately digging the grave of the western consumer goods industry?" suggests Philippe Brossard, Research Director at Euler Hermes SFAC.

New aeronautics operators want to share in strong growth, despite technological and financial entry barriers put up by historic players.
The good state of the global aeronautics industry largely benefits the United States and Europe, which account for 80% of global sales. Nevertheless, the heavy competition that airlines are currently indulging in (cost reductions, aggressive sales policies) are pushing sector players to become increasingly international in the context of a sharp upturn in orders and deliveries (a 40% increase in Airbus and Boeing deliveries through to 2007), which is benefiting a number of countries like Japan, China and even Russia, and could further feed their ambitions in this area.

Construction is essential growth driver in Spain, the United States and France, but having difficulty picking up in Japan and Germany.
In Europe, the construction sector is enjoying its third consecutive year of growth. Eastern Europe is the driver of this growth but is still of little proportionate weight (4%) among the leading lights of Europe, the biggest of which, Germany, is still ensnared in a long recession. In the last 7 years, Germany has lost 7% of the European construction market and now accounts for no more than 19% of it. France, the second-biggest, represents 14.6%.

Thus, even though construction is in a healthy state in the industrialized countries -- with the USA, Japan and major European countries remaining the principal markets overall -- the sector's growth vectors are primarily in the emerging countries: Asia (excluding Japan), Eastern Europe, the Middle East and Africa are expected to record over 3% annual average growth for the period from 2003 to 2010.

Between buoyant international context and shrinking market, pharmaceutical sector undergoing profound changes.

The historic economic model of the laboratory has changed: it is no longer that of a totally integrated group with a critical mass across the whole range of therapeutic classes. The big international pharmaceutical laboratories have recently been faced with a new scenario: the growing competition of generics, the upcoming expiry in 2006-2007 of various patents protecting their flagship drugs, the increased risk of litigation associated with dangerous side effects from new drugs on the market, and their pipelines drying up, reflected in a smaller number of product launches based on innovative molecules.

Consequently, a movement towards consolidation of the sector coupled with the defence of leadership positions in clearly identified niches (e.g. Novartis in generics), and the intention from now on to focus on individualised drug treatments. Lastly, the emergence of new epidemiological risks on a universal scale -- the avian flu virus is a prime example -- has had the knock-on effect of giving a dramatic boost to sales of core anti-flu vaccines distributed by GSK and Sanofi Aventis.

Just about everywhere in world, retail sector being subjected to erosion of margins under effect of heightened competition and/or changes in local regulations.
Consumers in Western Europe and the USA are very sensitive to changes in their purchasing power, placing paramount importance on low prices and discount formats, and switching brands to the detriment of food retailers. So much so that the major food supermarkets have engaged in a major price war to try and maintain their market share: a policy of driving prices down, development of retailers' own brands and the inclusion of low-price leaders in their selection. This phenomenon is taking its toll on turnover and operating margins, and is pushing the major players to seek international growth opportunities, especially in emerging countries. However, since 2005, in order to preserve their profitability and improve their return on investment, the main food companies have been targeting key markets where they are consolidating their positions, e.g. Casino with CBD, the leader in Brazil. On the other hand, these same operators are pulling out of countries where they are maki ng a loss (Auchan has quit Argentina and Carrefour disposed of its business in Mexico).

Although shielded from international competition, leading players in food processing restructuring sector.
The food processing industry, which has generally well-structured markets within a national and intra-region trading framework, is enjoying relatively favourable circumstances. Nevertheless, the weak rise in consumption of food products in OECD countries, combined with the dollar's sharp depreciation in 2003-2004 and a fall in prices in real terms, have prompted a move towards consolidation in the food manufacturing sector.

Euler Hermes (www.eulerhermes.com/usa) is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 40 countries, Euler Hermes offers a complete range of services for the management of customer receivables and posted a consolidated turnover of 1.9 billion euros in 2004. The North American subsidiary (Euler Hermes ACI) is headquartered in Owings Mills, Md. Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris.


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