Global warning

How far can they go?

Very soon, referring to Brazil, Russia, India and China as emerging economies will seem plain daft. Paul Simpson examines a tectonic shift that will change the world.

If you belong to that substantial swathe of humanity that believes the glass is half full, the fact that four emerging economic powers – Brazil, Russia, India and China – now account for 35% of the world’s economic growth might seem more of an opportunity than a threat. But any Westerner brimming with entrepreneurial gung-ho should ponder the classic cautionary tale of the Ford car, the power windows and the Indian chauffeurs.

Fashion by Russian designer Alena Akhmadullina (picture: Getty Images)

When Ford decided years ago to enter the Indian market, they picked a model that cost £10,500 and told their design team to shave costs. All the designers could think of was to halve the number of power windows. In India, they decided, only the driver and passenger in the front seat would enjoy power windows. That cut costs but even so, only the top 1% of India’s population could afford these cars. As that top percentile sat in the back while their chauffeurs drove, only the hired hands ever had the satisfaction of pushing a button and watching the windows come down. Not entirely coincidentally, Ford’s first foray into the Indian market soon stalled.

As Japan and Korea have shown, it is far easier to enter markets the other way around, from the bottom, with a low-cost offering and move up the value chain. While the public in the West may cling on to the comforting nonsense that Brazil, Russia, India and China will be content to focus on call centres, soft toys and cheap bras, business leaders and policy makers know otherwise. And the BRIC countries, a term coined by investment bank Goldman Sachs in 2001, are merely the most obvious threat. Just behind BRIC comes TVT – Thailand, Vietnam and Turkey – who have a combined population of 230 million, a collective GDP of £305bn, and are enjoying the kind of economic growth that must have the US Treasury secretary John W. Snow turning the colour of his national currency.

Singapore is inculcating its science students in the arts and culture. If they’re ahead of the curve, why can’t we be? John McFall, Treasury Select Committee

The human race has an almost genetic tendency to overestimate change in the short term and underestimate it in the long term. It is easy too to be distracted by the headlines. The announcement that China, for example, is investing £8bn in innovation sounds ominous, while any trickle of call centre jobs back from India is seen as hugely cheering. To get an accurate fix on a global economy that is changing more rapidly than at any time since the late 19th century, it is crucial to focus on underlying trends.
 
What is special about the BRIC countries’ economies is that they have the scale and the trajectory to drive the global economy. Between 2000 and 2005, they contributed roughly 28% of the world’s economic growth. Their share of world trade in 2005 was 15% (double what it was in 2001). They attract 15% of foreign direct investment (three times as much as they did in 2001) and use 18% of the world’s oil. When Goldman Sachs’s analysts revisited their BRIC projections in 2005, they found that the four economies had grown faster than expected. One small measure of their growing influence: the BRICs account for 3% of foreign direct investment, six times as much as in 2001.

For the Chinese, 2050 can’t come quick enough. In the 19th century, China and India were the two biggest economies in the world – and then Britain discovered the steam engine and the power loom. By 2050, as the Chinese might see it, normal service will have been resumed. Barring economic mega-disaster, China will be the biggest economy in the world and India the third largest.

This isn’t to ignore the obvious challenges that all four BRICs and the TVT countries face (see p19 for a detailed assessment of nine emerging economies). Pollution costs China £105bn a year and that bill, as the economy grows, can only rise. In India rapid modernisation is exposing some uncomfortable gaps between ambition and reality, with high-tech citadels juxtaposed with illegal temporary shanty towns, built by people who have given up all hope of negotiating a way through the country’s arcane, labyrinthine planning laws.

But these developing economies have adopted a tried and trusted industrial strategy. Take models, procedures and skills from other countries, adapt them while the domestic market is protected to stimulate growth and exploit the competitive advantage of low costs. These economies evolve if they can do two things: stop relying on imported technology by investing in R&D and transfer this new competence into higher value-added products. But without a serious design capability the economy will struggle to turn technological possibility into reality.

In the new emerging economies this transition has partly been financed by foreign money. But then this is an age when production has been globalised, the skills of returnees from abroad are a precious economic resource and the dynamics of the market have encouraged the globalisation of innovation. Some R&D centres in developed economies are, as cynics say, PR&D – investments made for public relations benefits – but many aren’t. China has used the lure of a massive domestic market – and a pool of cheap, educated labour (China has roughly four times as many graduate engineers as the US) – to persuade multinationals to invest in over 600 R&D centres.

At the same time, China, India, Korea and Singapore have pumped billions into state R&D programmes, while Thailand and Vietnam have signalled their intent to raise their game. In the West, America’s federal spend on R&D in science has slipped as a proportion of GDP while the European Union looks set to miss its own target of spending 3% of GDP on R&D by 2010.

Art work satirising pollution in China (picture: Getty Images)

China, India, Korea, Singapore, Thailand and Taiwan have all realised that design is core to their long-term plans to diversify economically (all have targeted the creative industries: China, with characteristic ambition, has planned for its creative sector to grow by 20% year on year), encourage innovation and develop more global brands or, in China’s case, one global brand. For China, the need to master its own design is urgent: it is already losing manufacturing jobs to Vietnam. Although 600 million Chinese live on less than £3 a day, salaries on the coast have soared and some multinationals prefer to invest in Vietnam.

China took roughly 272 years to build the Great Wall. Its dedication to design in all its forms is almost as impressive. While the aphorism about lies and statistics is especially applicable to China, reasonably reputable research suggests there may be as many as 400 design schools in China and, though this may sound incredible, as many as 200,000 industrial design students (compared to 4,000 in the US). Yet many Chinese designers feel, angrily, that their skills are disregarded as companies obsess over costs and chase short-term sales. That may change if the government puts a proper design policy in place. But attitudes are already shifting. Lenovo, the Chinese PC manufacturer built on IBM’s old PC business, is trying to pull itself out of the doldrums partly by hiring Dell executives and partly by embracing design thinking in its broadest sense.

You can read a lot of quasi-racist nonsense about how China’s inherent inability to innovate dooms it to be the low-cost mass-market WalMart of the industrial superpowers. Yet the real question is not whether a nation that invented gunpowder, football and printing can think innovatively, it’s where that thinking will lead. Most countries with China’s GDP per head have had to accede, to some degree, to popular demands for political involvement. How will the Chinese government react if that happens? Or will the populace be content to enjoy the rewards of economic growth even if those gains are inequitably distributed?

These questions aren’t just relevant to China. Russian president Vladimir Putin has recently performed the public ritual obligatory for every head of state of a wannabe economic superpower – get up on a podium and announce a government plan to make his country more innovative. But he must balance similar concerns to China’s as he strives to remake Russia’s economy following, in a neat reversal of how things used to be in the Communist era, China’s blueprint for success.

Unlike China and Russia, India does have a national design policy, but in India’s case this doesn’t really matter. India’s remarkable economic growth – 7.5% a year from 2002 to 2006 – has been achieved despite the state, not because of it.

Government should get out of activities where we’re not efficient and focus on what the markets can’t provide Manmohan Singh, Prime Minister of India

In the 1950s India suffered what is now jokingly referred to as ‘the Hindu growth rate’ as economic growth was stifled by regulation. Among the more quixotic laws was the small-scale industry act which protected certain markets from big business. In practice, this meant that a company making pencils could never hire more than a certain number of staff, otherwise it would have to stop making pencils. In the 1980s such regulations began to be shredded as India was shaken by economic crises. Today a vibrant entrepreneurial culture has made India a world leader in certain sectors, notably IT, and with world leadership has come the recognition that the design industry can no longer prosper simply by imitation.

The government has identified that it wants India to become a global design hub, is committed to a network of centres of excellence and forecasts that design will be worth £56m to its economy by 2009. But that industry is fragmented and will need restructuring. Also, to the chagrin of its industrial designers, unlike China India doesn’t have a booming manufacturing sector.

Official recognition of the importance of design will help but, in India and Brazil, counts for less than the entrepreneurial verve of design firms. If you measure both countries by the industry awards they win, they have proved they’re not simply cheaper, they can be better. But both may fail if they don’t get their support systems right. Compared to China, Brazil and India attract less foreign investment, spend less on R&D and train fewer graduates in science and technology. Much has been invested by emerging economies in the creative industries in general and in design in particular, but has this strategy really paid off? So far, the most spectacular gains have come not in design but in the entertainment industry and digital media.

India’s movie industry is looking beyond Bollywood. The fact that you can make an animated movie for £10m in India (compared to £50m in the US) has helped India’s animation industry grow by 30% a year. The TV series of Star Wars will be made by George Lucas in Singapore. Baidu, the fast growing internet company that looks set to shake off the tag of being the ‘Chinese Google’) has won a Nasdaq listing and, given that 38 new internet users log on in China every minute, its prospects don’t look too grim.

These economies may not have all the design capabilities they need. The investment in high-tech facilities like Thailand’s impressively swanky design centre in Bangkok may smack too much of the Field Of Dreams ‘if you build it they will come’ philosophy for some. What’s most impressive is not how far these countries have to travel, it’s how far they have already come. Don’t be too surprised if, ten years from now, your car is made and designed in China, Toy Story 7 is made in India and the new Vivienne Westwood is Brazilian.

The Indian scrutiny

The challenge facing Prime Minister Manmohan Singh

India’s miraculous growth is not based on low-cost manufacturing and manual labour. Instead, India’s revved-up service sector is fuelling the country’s economy – particularly its famed IT sector. Indian software and business-process outsourcing exports are predicted to reach £18bn by 2008.
 
The IT sector is a shining example of the success of Prime Minister Manmohan Singh’s reforms. As finance minister in 1991 he introduced sweeping changes to revive India’s ossified economy.

A well-educated and able technocrat, Singh has sought to introduce a mixed economy to India. While that does not mean wholesale liberalisation, he does insist it means, “getting government out of activities where we are not very efficient, and focusing on areas where we feel markets alone cannot provide what our people need – basic education and healthcare and environmental protection measures.”

What this means practically is that many of the barriers to private sector growth have been removed – from prohibitive trade tariffs, industrial licensing laws and protectionist barriers to foreign direct investment. Without these changes the country’s IT industry would not be where it is today, but paradoxically much of its success is due to the failures of the state.

Firstly, Indians have a remarkable entrepreneurial spirit. Where the state has failed to provide, individuals have stepped in to deliver basic human requirements. These entrepreneurs are resilient, fighting off rivals and officious bureaucrats.

Secondly, India’s much-vaunted educated classes, vital to the booming knowledge economy, were often privately educated. Few people have faith in national schools and even members of the most disadvantaged castes strive to send their children to one of the country’s many thriving private institutions. NIIT Technologies, for example, has 4,000 ‘learning centres’ in India and has trained some four million students. Though widely credited with aiding India’s IT explosion, it has been refused government accreditation.

Singh’s task is to ensure the government is an active help – not a hindrance – to India’s industry. As well as further liberalisation, the government must invest in education, protect intellectual property more effectively and help spread the IT boom’s riches beyond Bangalore and Hyderabad. If, in his spare time, he could minimise the environmental damage India’s growth is causing, that would be nice too.

But perhaps Singh’s biggest challenge is to reconcile the two nations India is increasingly becoming. His is a country where, in Bangalore, an urban technogeek can juggle his iPod and mobile, while less than an hour away, in a small village, an elderly father is drawing water by hand from an empty well.

Number crunching the BRICs and beyond

Years it took the Indian legal system to confirm that a company could fire an employee who had repeatedly slept on the job.

The number of affluent Chinese consumers under the age of 30.

The amount a Chinese company typically makes from exporting a cheap DVD player.

The amount the foreign patent holder makes from the export of that same DVD player.
 

The predicted annual growth in the value of the Korean design industry until 2010. By then, it is estimated the Korean design industry will be worth £2bn. 

The proportion of Silicon Valley firms started by Indian or Chinese entrepreneurs.

The number of IT staff employed in Silicon Valley.

The number of IT staff employed in Bangalore.

Jobs the Chinese economy will create in 2006.

Jobs the American economy has created in the last year.

The number of iF product design awards won by Brazilian companies in 2006.

John McFall on the threat – and opportunity – that is globalisation

We underestimate the impact of globalisation. The belief that countries such as China and India are mass-producing low-tech goods is totally misplaced.

On recent visits to both these countries I witnessed the most innovative, skilled practices, not least in the automotive and pharmaceutical industries. We have a five- to ten-year window of opportunity to face this challenge from many countries – small and large – in Asia and Latin America. The successful countries of tomorrow are already planning ten years ahead. Today’s most successful products were designed a decade ago.

Globalisation is a threat. But it can become an opportunity. In the past decade, globalisation has given us ever cheaper goods. It has subsidised US consumers and their massive spending spree, with China and other Asian countries buying dollars for their reserves. In China, 212 million people have been lifted out of poverty. But how can we make globalisation work for the benefit of all and ensure that we in the UK do not lose out?

Part of the answer lies in education. Continual up-skilling is an essential pre-requisite. Investment in R&D will also increase our economy’s development.

For example, Renishaw, a manufacturer of specialist measuring equipment with a turnover of £110m, is as hungry for new ideas now as when it started. It ring-fences 12% of sales for R&D and staff are given time to work on their own ideas and paid to go on degree courses. The company complements a robust defence of its intellectual property with the fostering of a sense of community. This is reflected in a staff turnover of just 2-3%.

Or take Nokia. In the 1980s the company had interests in everything from steel to forestry. Management forced a rethink: executives were asked how Nokia would fit into the world of the future. The result is the Nokia you see today, a global leader in IT. Innovation has to be ongoing, and a cornerstone of strategy.

The students of tomorrow must adapt. Studies must become multidisciplinary – tomorrow’s engineers will need an understanding of art and culture. New educational centres need to establish cross-disciplinary capabilities. We have a sound base on which to build: already in London more people work in the creative industries than in financial services.

At a business seminar last year, the principal of Washington University spoke about a meeting he’d had regarding Singapore science and engineering students visiting his university. The principal was told that the students did not require refinement in their present disciplines: they were being sent for inculcation in culture and the arts. If tiny Singapore is ahead of the curve, why can’t we be?

John McFall is chairman of the Treasury Select Committee.

Anthony Hilton on why the West must shape up

A visitor to Taiwan ten years ago would have seen one of the world’s great modern production centres. The factory names were unknown but they produced the guts of almost every computer bought in the West under the brand names of Dell, IBM Compaq or Apple; about half the world’s now ubiquitous flat screens; most of the world’s microprocessors and almost 60% of its bikes.

But on a return visit three years ago they would have found very little of this left. Almost the entire production base of the country had shifted to cheaper China. Taiwan, which could no longer compete in basic manufacture, saw its future in the more creative areas – design at the beginning of the process, marketing at the end.

Accordingly government and private enterprise are currently engaged in a major five-year plan to shift the emphasis of the economy towards innovation and design, and realign the education system to encourage creativity rather than learning by rote.

Taiwan’s pace of change is remarkable, but the direction is not. In many ways the country is following a path trodden by Japan 25 years earlier when it sent its manufacturing overseas and put more effort into the design, branding and marketing which gave us the Sony Walkman and an endless flood of products since. Japanese cars have become some of the most stylish -– and despite experiencing a difficult decade economically, Japan is still the world’s second largest consumer market.

The Japanese stress that, in assessing the modernisation of China, Westerners must learn to distinguish between products made in China and products made by China. It is the elliptical Japanese way of saying that currently the Chinese do the low-value manufacturing and assembly work. Not until they embrace innovation and creativity will products be made by China.

China is not there yet, but that’s how developing economies progress. They start with exports of raw materials and cheap basic manufacture like textiles and steel, then move on to mechanical goods like motorcycles, cars and electronics, which are driven by exports and designed to Western market specifications.

By the third stage they have their own growing middle class and the beginnings of mass affluence. This creates a domestic market for consumer goods which the market starts to cater for. Design is born in a market prosperous enough for consumers to afford choice.

Technology transfer means China will reach this stage faster than previous developing economies. Even if China wanted to slow down it can’t, because coming up behind it are the next wave – countries like Vietnam.

The idea that China, or its fellow BRIC countries Brazil, Russia and India, will remain trapped in their current roles as low-cost assembly lines is ridiculous. Outside Africa, a continent whose economic growth has been continually stunted by bad government, that just does not happen.

Sir Martin Sorrell’s WPP media group recently published a booklet called Brand Building In The BRICs. In it he noted that the BRIC economies are united by their size and potential, but they are quite different in their economic and cultural backgrounds. They are also developing at different rates. In many ways Brazil is more sophisticated than Russia, but the oil boom has made the latter awash with cash. India has a bias towards software and the creative arts.

But all are in hot pursuit of the West, in the firm belief that anything we can do they can do better. Time, perhaps, for us to run a bit faster.

Anthony Hilton is City editor of the Evening Standard.

Article first published in Design Council Magazine, Issue 1, Winter 2006