|»5 Minute Wrap Up by Equitymaster|
On This Day - 1 JUNE 2010
Will this help India overtake China's growth?
In this issue:
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All this has been made possible by this one big competitive advantage that the dragon nation possesses - ultra-cheap labour. No wonder then that Chinese goods are some of the cheapest in the world. And this is one of the biggest reasons for their extensive popularity. But this may all be about to change soon.
Foxconn is the world's largest contract manufacturer of electronics that supplies to companies like Apple, Sony, Dell, Nokia and HP. It has recently been finding itself struggling to manage the rising expectations of younger workers at its 300,000 worker factory in China. Worker protests demanding wage hike have marred the operations of many units including that of Honda's in the past week.
China has traditionally looked down on worker protests. But instance like these have been getting more frequent of late. Reports suggest that manufacturers are struggling to attract and keep young workers. Brought up in an era of relative affluence, they are proving less willing to put up with poor wages.
India's manufacturing sector too has seen challenges in recent times. Particularly in the form of land acquisition delay and infrastructural bottlenecks. Also the least expected - terrorist attacks. However, China's 'low cost' advantage may not remain that challenging going forward. Thus, a more level playing field for Indian companies may be on their way. Could this be case for India taking over China's GDP growth rate? Time will tell.
So, are the markets right in not giving much heed to these numbers? We believe yes. This is given the Indian economy is domestic consumption driven. It remains to be seen how the consumption numbers come in the current year. But if the growth remains lacklustre, it will be a matter of serious concern. This is especially with respect to sustaining a high GDP growth rate in the future.
Much of the blame for the financial meltdown lies at the door of complicated models that did not sufficiently recognise the dangers of unexpected events. It is high time financial modeling embraced uncertainty and considered a wide range of events. In our view, the inherent strength of a discipline like value investing is that it specifically tries to counter uncertainty through a margin of safety. A practice the broader industry could benefit from.
It should be noted that in FY09, Bihar had the fastest pace of GDP growth among all states at 11.4% and this in turn seems to have boosted demand for all commodities, including cement. Also important to add that the cement demand is not coming from big infrastructure projects but is actually being driven by rural demand and demand from home builders and small businesses. As to how long this buoyancy will last? Well, if governance continues to be good, given the low per capita consumption of cement in state, demand should remain robust for quite some time to come. And this could well be music to the ears of cement companies present in the state.
High inflation, foreign capital inflows, and unfavorable currency appreciation are standard accompaniments for a quick-paced recovery, and the BRIC nations are not immune to these evils. Roubini, however feels that Brazil and India are still in 'better shape' than China due to the strength of their domestic demand.
All in all, positive GDP numbers may not look good for too long; unless inflation shows some respite, spending in developed economies improve, and structural reforms in the emerging nations are implemented.
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