Challenges of the 2-Speed Economy

Global economic and political leaders have a major problem on their hands: how to balance the differing growth rates of developed and emerging economies. The first group is steeped in the doldrums of high unemployment, slow growth, banking crisis and a deepening search for relevance; while the second is overheating, suffers from limited local demand, and high dependence on exports and lacks both the expertise and the sophistication to navigate a looming inflationary crisis.

The electronics sector isn't immune from the problems facing the larger economy. Certainly, as Malcolm Penn, CEO at Future Horizons points out, the semiconductor market in 2011 should post healthy growth, albeit more slowly than the forecast 30 percent-plus expansion from 2010. (See: Stop Agonizing: 2011 Will Be a Strong Year.) As we saw during the last banking and real estate crisis of 2008, whatever ails the global economy will crimp demand and hurt sales in the electronics industry.

Here are the unfolding dynamics as the International Monetary Fund sees it: Developed economies are still hurting despite efforts by regulators and politicians to revitalize their systems. In Europe, a slow-spreading debt crisis was initially warded off with billions in bailout loans by governments and central bankers; but several countries, including Greece, Ireland, Portugal, and Spain, are still in danger.

Will further bailouts help? The Economist does not think so . It took the unusual action of saying the debts of some of these countries should be renegotiated. In other words, they should move towards bankruptcy to limit the inevitable negative impact on other EU member nations. Better, it seems, to sacrifice the bad apples in the bunch. Right?

The following is how The Economist argues its case:

    This mess leads to a depressing conclusion: Europe's bailout strategy, designed to calm financial markets and place a firewall between the euro zone's periphery and its center, is failing. Investors are becoming more, not less, nervous, and the crisis is spreading. Plan A, based on postponing the restructuring of Europe's struggling countries, was worth trying; it has bought some time. But it is no longer working. Restructuring now is more clearly affordable than it was last year. It is also surely cheaper for everybody than it will be in a few years' time. Hence the need for Plan B.

That position is very close to the one being advocated by the IMF. “The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally,” the world body said in a Jan. 25 update to its World Economic Outlook and the Global Financial Stability Report.

The IMF arrived at its own conclusion by reviewing current growth forecasts for developed and developing economies. The data shows “advanced economies are projected to grow by 2.5 percent in 2011, with emerging and developing economies seeing growth of 6.5 percent, against 7.1 percent last year,” the IMF said.

The average growth rates for developed and developing nations mask some important distinctions on a country-by-country basis. US economic growth rate for 2011 is forecast at 2.5 percent versus 3 percent in 2010, while the Euro area is predicted to expand a piddling 1.5 percent this year versus last year's 1.8 percent. By contrast, China is seen dropping slightly to a still sizzling 9.6 percent vs. 10.3 percent in 2010; India 8.4 percent compared with 9.7 percent; and the Association of Southeast Asian Nations (ASEAN) region 5.5 percent, down from 6.7 percent.

World Economic Growth

The two-speed growth rate is generally not good for the global economy. While regional and national economies are unlikely to expand at the same rate, lack of growth in one region and unsustainable expansion in another is bad news for everyone. China, for instance, is still a major exporting nation despite rising local consumption, and a slowdown in demand from the West will eventually hurt its economy.

Reports today that the US economy performed even worse than expected in the fourth quarter should offer a cautionary warning for electronics manufacturers who are expecting strong growth for 2011. Real gross domestic product in the US increased 3.2 percent in the fourth quarter compared with expectations for 3.5 percent, according to the Commerce Department.

In such a climate, it would make sense for electronics manufacturers to ramp up sales to developing economies while keeping a close eye on numbers in developed nations. It won't hurt, also, to keep a tight leash on costs and prepare for all possible scenarios, best case and worst case, included.

10 comments on “Challenges of the 2-Speed Economy

  1. Jay_Bond
    January 28, 2011

    These are some very valid points. On the positive side, economies are still growing, of course not as much as the previous year. Growth is still growth and that’s a good thing. On the other side of things there is still a lot of uncertainty out there. The European Union is going to have a challenge figuring out the best way to handle the collapse of multiple economies without hurting the rest of Europe.

    Electronics suppliers would definitely want to consider alternative plans to protect themselves in case of a downturn. Focusing on the strongest economies, while still not forgetting the established economies, should help to provide a good year of growth.


  2. Himanshugupta
    January 30, 2011

    Bolaji, you started the article with problems that both developed and developing nations are facing during these times. I do agree with most of them as developed nations are facing slow growth while developing nations are facing problem of high growth related problems such as inflation. In conclusion, you point out that the electronics companies should ramp up sale to developing economies but did not say how? Should they change their product strategy and marketing to suit the needs of developing economies? Also isn't it too much defensive strategy and waste of resources to be prepared for all possible scenarios?

  3. Taimoor Zubar
    January 30, 2011

    I think if electronic companies need to target the developing countries, they will have to change the product designs and marketing strategy. It would be a completely new experience for them and a lot of revamping would be required. However, the critical question for them would be to decide if incurring all the additional costs in bringing about the change would be justified with the additional revenue.

  4. Anna Young
    January 30, 2011

    I agree with the conclusion of the article and comments made so far.

    However, if the electronics industry is to advance their business transactions in the developing economies, there might be a need to rebrand the product in order to suit the needs of the developing economy. Of course, this might involve additional costs to the industry. Now is the electronics industry prepared to take such risk particularly in the present global economic crisis?

  5. prabhakar_deosthali
    January 31, 2011

    One of the key sale strategies that has become very successful in the developing economy like India is a buy back of the customers old gadgets. Most of the  white goods companies in India have successfully adopted thiis stratgey to push their products in the market. In india , you normally don't throw away your old appliance ( it may be your TV, washing machine or refrigerator) to buy a new one. You will continue using it even if it is outdated, partly malfunctioning , as long as it can be repaired and is doing the basic functionality.  To lure these cutomers, the companies show their readyness to buy the customers old appliance. The buy back price is attractive enough ( much more than what the customer would get if the applinace is sold to the scrap dealer). These old appliance are sold by the company in the rural markets after minor repairs. So this becomes a win-win situation for the customer as well as the company

  6. Himanshugupta
    January 31, 2011

    I think Anna has a valid point. The electronics industry will need to shell out some money to modify and market their products in the developing countries. Does it make sense in this risky ecomonic scenario is what Bolaji tried to analyze in his article. If i read into the statement that companies should prepare themselves for all risk scenarios then it does make sense to spend some more money and try to neutralize the risk.

  7. Himanshugupta
    January 31, 2011

    I know what you are talking about Prabhakar, buying back old appliance attract more attention than otherwise. But i did not know what these companies used to do with them. Now i know that they repaire them and resell them. Even if they do not sell them, i think the profit margin should be more than enough to take care of any risky scenario. Having a Diwali sale when the prices can be upto 20% lower is as good as buying back option for companies.

  8. prabhakar_deosthali
    February 1, 2011

    The Automotive industry has well understood what is required to push their products in the developing economy. Most of the Europian car companies have suitably come out with compact car models which sale the most in developing economy while they also have their luxury models to cater to the select class in these developing countries. Even Mercedez which is known for its most luxurious and costly cars has decided to introduce a compact car for the middle class in India , to push numbers.

  9. Mydesign
    February 1, 2011

        Rich, you are very much true. From early 2000 onwards we all are hearing about future growth of Chine’s and India economy. Some of the famous economist also predicted about this economic growth during early 90’s and these countries marketed it in a big way. That was one of the reason many of the big brands and MNC’s shifted their base either to China or India.

         I think the latest IMF prediction report also motivate companies to start their own development centers in these countries. Since everybody wants to grab the advantage of this economic growth, this will end up in winding up or cut down some of their other centers.

  10. t.alex
    February 6, 2011

    Anna, quite agree with you. When expanding the products to developing countries, companies may need to go through the whole cycle again to identify, package, price the product specifically for the developing markets. This is a real challenge.

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