Source of picture: BASF
By John Richardson
"THE struggle over China's future direction seems to be harder fought than we had imagined," said BASF vice chairman Martin Brudermüller last Thursday, in a German newspaper interview.
"There are very intensive discussions being held in China about the direction the country should take.
"For investors, the times when a project was unanimously rubber-stamped by politicians are over."
As fellow blogger Paul Hodges points out, when the world's biggest chemical company makes a statement as bold as this, one should sit up and take notice.
And so, here are our thoughts.
BASF might be right to worry about China's uncertain direction because:
*There are no guarantees that the 12th Five-Year-Plan 2011-2015), which involves a radically new economic blueprint, will be effectively implemented. This is a result of all the uncertainty over who will lead China following this year's leadership transition.
*Even if the plan succeeds, GDP (gross domestic product) growth could be a lot lower than many economists assume over the next decade, due to the painful process of weaning China off its addiction to investment.
*And if the plan fails, then China could end up pouring ever-more money into inefficient investments with ever-decreasing benefits as domestic demand remains relatively weak.
His comments on project approvals follow those made by Peter Huntsman, CEO of Huntsman Corp, during an investor call two weeks ago.
In the short term, the uncertainty over who will lead China might be making investors very nervous.
Relationships are important and if you end up building strong connections with the political faction that fails to gain control, then you have problems.
And even if companies choose the right faction, there is a big risk in these highly uncertain economic and political times that investment policies will be in constant flux.
Longer term, China might also become far-more self-sufficient in petrochemicals than some people have assumed.
On India, Brudermüller said: ""India is recording growth but the market is feeling the effects of home-grown problems, such as the backlog of reforms and the caution of foreign investors in reaction to questionable legislation.
"The political paralysis in certain areas does hold things up, and it's sad to see how the country is currently falling short of its potential."
India has muddled through in the past, but cannot afford to do so in the future.
Brudermüller, however, said that Southeast Asia (SEA) continued to perform well.
Indonesia alone, with its 240m people, was averaging stable growth of more than 5% per year, he added.
Meanwhile, Malaysia could become an even stronger export base, Vietnam was gaining in stature through its manufacture of shoes, textiles and printers, and Thailand was becoming increasingly important for international automotive and electronics value chains, Brudermuller said.
"We will also need to look more closely at Myanmar in the next few years, for example in the field of crop protection and the expansion of labour-intensive manufacturing," he added.
Geographical diversification is important at a time when growth so uncertain in India and China.
Even if reform in China is effective, there will be changes in the patterns of demand growth as low-value manufacturing migrates from the southern and eastern provinces either into inland China, or overseas to SEA and elsewhere.