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It is 15 years since Goldman Sachs coined the word BRIC to highlight their argument that growth in the global economy would, in future, be led by the major emerging economies rather than the developed world. The core concept was that China and India would become the dominant suppliers of manufactured goods and services, whilst Brazil and Russia would become dominant suppliers of raw materials.
The idea was, of course, mainly a marketing venture for Goldman, who hoped to use it to stimulate investment activity at a time when many were in a state of shock after the 9/11 tragedy. And their timing was excellent, as the Note was published just before China joined the World Trade Organisation in December 2001:
China’s declared aim of becoming”the manufacturing capital of the world” provided good collateral for their argument
India’s 2002 launch of its “Incredible India” marketing campaign was equally supportive
With this support, the idea of Brazil and Russia moving closer to developed country status, via increasing their role as commodity suppliers, did not seem so far-fetched
The other great virtue of the BRIC concept, as a marketing venture, was that it was impossible to disprove the theory. Anyone who argued that these countries were too poor to really replace the G7’s economic leadership were simply told they “didn’t understand” or were “stuck in the past”. But 15 years is long enough to test the strength of the analysis, particularly in a key area such as autos. The chart above, showing January – August auto sales in the 4 countries since 2006, enables us to focus on some of the key issues:
China has been a qualified success. Its auto sales have risen more than four-fold from 3.2m in 2006 to 14.4m today. But it seems unlikely that this growth will continue in the future, as used cars are now set to become the main growth driver. This market has only developed recently, as auto quality was very poor before Western manufacturing techniques were introduced from 2009 onwards. It is also clear that government policy over the past 2 years has shifted to focus on increasing China’s self-sufficiency in auto production. The main tactic has been to halve the purchase tax on small cars (engines up to 1.6l), as these are primarily Chinese made. This tax reduction expires in October, but it has achieved its objective, boosting the market share for Chinese brands cars to 42.5%.
India has been successful on a smaller scale. Its auto sales have more than doubled from 800k in 2006 to 1.9m today, but the market for motor vehicles is still dominated by motorbikes – which have a 2/3rds market share, with cars at just 12%. Ford’s experience highlights the problem, as it has been forced to repurpose its major car manufacturing investment in India away from the domestic market into exports – which now account for 2/3rds of sales. Ford is also now moving away from pure manufacturing to become “an auto and mobility company”, with its investment in Zoomcar highlighting its new focus on becoming a “full service mobility company”
Brazil, unfortunately, has been a major disappointment. Its auto sales had doubled to 2.5m by 2012, but are back at 1.3m this year. 2013 was, of course, a turning point in the Chinese economy with the appointment of President Xi, and the subsequent development of his New Normal policies, which have taken the economy in a new direction. Xi’s policies are not based on China being the “manufacturing capital of the world”. Instead, he is focused on building a more service-driven economy, based on the mobile internet and greater self-sufficiency. As a result, Brazil is now left with an economy that is dangerously exposed to commodities, in a world where over-supply has become endemic.
Russia has also unfortunately proved a disappointment. Its auto sales doubled from 900k in 2006 to 2m in 2009, but then collapsed back to 1m after the financial crisis. China’s stimulus programme then took them to 1.9m. But 2015 saw a major decline to 1.1m, and 2016 has been worse, with sales back at 900k again.
2 key conclusions seem to stand out from this analysis:
The BRIC concept only appeared to work when China was operating as the “manufacturing capital of the world” following WTO entry. And even then, its success was more apparent than real, as Western demand for its production was inflated by the subprime policies pursued in the West – which then led to the 2008 Financial Crisis. China hasnow recognised under President Xi that this policy has reached its sell-by date, as the ageing of the BabyBoomers means that Western demand for manufactured goods has gone ex-growth
Ford’s experience highlights how India’s future is not going to be as a “China lookalike” focused on manufacturing. Instead, it will be more focused on services – not only due to reasons of affordability and sustainability, but also because of the new opportunities opened up by the mobile internet, as Mukesh Ambani has highlighted. The arrival of the smartphone is a paradigm shift, which will completely change demand patterns due to its ability to enable the “sharing economy”, and more localised producttion on demand via 3D printing.
The BRIC example is thus another powerful example of the dangers created by building an unthinking consensus on the basis of clever marketing by a major player. Goldman have done very well out of the BRIC thesis, as have those companies and investors who were agile enough to play the trend for their own benefit.
But others, who let their judgement be swayed by consensus thinking have, like Ford, made some expensive mistakes. Today, after all, it is very clear that Goldman’s core thesis was simply wrong. Emerging economies have not taken over economic leadership from the G7, and and are unlikely to do so in the foreseeable future.
