Tom H. C. Anderson and Management Guru Eli Goldratt discuss globalization and the world economy
Thursday Eli Goldratt and I spoke a bit about offshoring, and yesterday we spoke about analytical thinking, today we move on to discuss the recent recession (assuming that there was a recession), and more importantly what is to come. What does globalization mean for global marketing and supply chains… (Post 4 of 5)
TA: Well, speaking about irrational and rational behavior and being able to predict it, I think both you and I would probably have predicted that this recession would have been over by now. Though I think this last quarter was a lot better than any previous for the last two years.
EG: Sorry, I don’t agree with you. I don’t believe that there was a recession.
EG: There was a financial crisis, then the newspapers started to talk about recession. Will you please take how much the consumers in the States have bought. Take out of the equation investments in infrastructure ; investments in machines and so on which are so dependant on their ability to get finance. Take them out of the equation, look at all the consumers, plot the graph and you will see that 2009 is not even a blip down. There was no recession. But, because of all these talks, of course people first of all have deferred investments, so all the sections that are dealing with infrastructure suffered.
But even that is coming back, because banks today are begging to loan. There was no economical recession, there was a financial meltdown. And, by the way, for this financial meltdown, every sign was on the wall a long time ago. This was, once again, the admiration of sophistication that leads people to be totally blind that caused it.
What recession? We are in the midst of one of the greatest economical booms ever!
TA: So are there any fundamental changes, do you think, to the system, as a result?
EG: No. At the same time, there is a force that continues to take us. Look, for example, everybody knows what’s happening in China, right?
TA: Mm hmm.
EG: The economy of China is growing by close to 10% year after year. Do you know for how many years?
TA: Since I can remember I would say before ‘98. Well, there was the Asian Tigers around then, around ‘97, ‘98…
EG: Why don’t you devote three minutes to go on the Internet. All the data is there, taking in the official data of China. It wouldn’t take you more than three minutes to find it. And you will find out that the GDP - the gross domestic product - of China, has been growing by close to 10% since 1979. So it’s a little bit earlier than the numbers that you said.
Now, if you’re talking about such growth, do you agree with me that, in order to create so much GDP, you need more and more people. Correct?
TA: Mm hmm. Right.
EG: So it doesn’t matter which reservoir of people you start with. Since you are dealing here with 10% a year - which, in other words, is exponential growth - there must come a time when the demand of people will start to approach the availability of people. Correct?
EG: Have you noticed, I’m leading you to cause and effect, ok? What happens when the demand starts to approach the availability? You know very well. Prices start to go up, correct?
EG: Since we are dealing here with people, so what are the prices we are talking about? Wages. So, the next thing to do is, while you are on the Internet, get the data - it will take you another 3 minutes, all this data is available freely on the Internet - get the official data of what happened to the average wages of people in China. And you will find out that, yes, for the first ten years - I’m talking about the 80s - the growth in the average wages was exactly the same as the growth of the GDP itself, as economics predicts.
But economics had never seen a situation where this magnitude of growth continued for so long. And, when I’m talking about average wages, I’m talking about everyone in China - including farmers, including people who don’t have a job - the average wage in China since 1990 started to separate and grow faster than the economic growth. And, if you’re looking at the data, its unbelievable how much this exponent is stable. But it’s growing at about 25% per year!
TA: So is that due to communism, or more equal distribution?
EG: Not at all. First of all, it’s not communism. China is dictatorial but not communist at all. It’s one of the most capitalistic countries. Not democratic, but capitalistic for sure! Oh yes, there are huge gaps. There are over half a million millionaires now - millionaires in US dollars - in China, just to give you some data, ok?
Let’s talk about something really expensive, like Bentley, the car. That’s an expensive car?
EG: You cannot afford it, I think.
TA: Not this year….
EG: You know, when somebody breaks a Bentley’s headlight, the cost of replacing it is almost the same cost as a small car! Anyhow, the cheapest Bentley, if I’m not mistaken, is well over £150,000. Do you know which country is number one in the world for buying Bentleys?
EG: Mainland China. Hello. And if you look at that and just look at the numbers, it’s so obvious now that the internal market of China, which is growing tremendously, is due to the fact that the Government there is dictatorial and they cannot afford inflation to start. But, when people are making more and more money, if they don’t have what they want to spend it on, inflation will start.
And look among the changes in the policies of the Chinese government, how much they are begging for imports now. It’s so obvious, and the internal market of China - which is 1.3 billion people - will be more than sufficient to carry their own growth for the next five to ten years. But now look on what, if this exponent that has existed already for 30 years - I’m talking about the wages increase - will continue for another ten years, look what happens. Do the calculation and compare then the average wages in China to the average wages in the U.S.
TA: Can we trust Chinese statistics?
EG: You don’t have to trust Chinese statistics. Have you been in China in the last five years?
TA: The last time I was there was 2000.
EG: Will you please go again to China. You’ll be amazed. It’s unbelievable and everyone who has been there will tell you the same thing. And, by the way, some people told me that it’s only in the industrial zones. By the way, each industrial zone is 80 million people, so it’s not small. So two years ago, we took the time and went inside China for two weeks. We almost reached Tibet. It’s not the industrial zones - it’s everywhere in China. Everywhere.
TA: So what is China doing differently than, say, India? Because, obviously, they’re not making as much per capita.
EG: They don’t? Will you please check the same thing for India. India started to grow its GDP by 7% plus year after year throughout the 2000s. And, if you look at wages in India, you will see that the same phenomena has started. In other words, you will see how the wages are now increasing much faster than the GDP. And, by the way, if you are going offshore to India, have you noticed what’s happened to the prices that we have to pay to these same ‘cheap’ people in the last two years? Have you noticed how it’s increasing?
TA: Yes I had. Yup.
EG: More than that. For example, the infrastructure of India is appalling. I’m not talking about the educational infrastructure, which is very good, I’m talking about the physical infrastructure. But look what has happened in India in the last two years. Highways have started to pop up all over the country! Can you imagine a highway in India? This is almost an oxymoron! It’s everywhere now.
Look, China is 1.3 billion people. India is another billion. Look what’s happening to the buying power.
TA: Why did it happen in China first? I believe their average income is still four times or so higher than India.
EG: It’s more than four times by now. Much more than four times by now. Because it started earlier. Why did it start earlier? Because of the crazy regime there. It’s a backlash of what the wife of Mao Tse-tung had done. Dictatorial is very efficient in ruining or in building. That’s why its so dangerous! I would buy democracy every day because of it! When dictatorial is efficient, it’s really efficient.
I’ll give you an example, ok? This was the first shock that they got, six, seven years ago. I’m in China and I’m looking at a big project. And I ask, “Ok, when will it finish?” And I was told, “Six weeks from now.” And I look at it and say, “It can’t be. It doesn’t look like you can finish it in six weeks.” And they say, “Oh no! It will finish in six weeks for sure!” And then I ask “How do you know?” They said, “Because it’s a government project”.
It’s the opposite of Israel; In Israel, if it’s a government project, you are absolutely sure it will not finish on time. And we have a very good democracy. So let’s understand, ok? China today is not communist. Go and see: people have to pay for their health insurance and so on. It is definitely a capitalistic country but it is dictatorial. But that’s irrelevant. What is relevant is that China is turning, right in front of our eyes, from the biggest producer of the world to the biggest consumer of the world.
TA: Right. And so how will that affect us, as marketers in the U.S. and Europe or Israel?
EG: We cannot ignore China’s market anymore. It’s a major market that is becoming bigger and bigger than any other market. As a matter of fact already, almost a year ago, China overtook Germany, and a year from now they will overtake Japan. And, if the growth continues - and there is no reason to assume that it won’t continue - it will overtake the U.S. in five years. You cannot ignore the biggest market in the world. And the fastest growing market in the world.
TA: Well, I think you said that, in ten years, the U.S could become an island in the middle of nowhere and that all consumption will be taking place six weeks away in Asia. And that the only way we could remain…
EG: Not all consumption, I said, too much of the consumption, or a major portion of the consumption. Definitely the main markets will move to China and India.
TA: So, in other words, we need to start thinking about how to sell or, maybe more importantly, get our products over there as fast as possible.
EG: Absolutely. And we should have started thinking about it a year or two ago. It might start to become too late. Because, in order to reduce this huge time gap, we need a total revolution of the cargo airplane industry.
TA: Mm. Well, what about some economies that have been more isolationist? I’m thinking about, say, France. They haven’t done too poorly overall, where I think they’ve had more protectionist…
EG: They also haven’t done very well either. What’s your point?
EG: France is not growing by 10% a year.
TA: No. No. Is all this globalization good? Is it a good thing? Or how should we leverage it best?
EG: I think, personally, that it’s a very good thing, but it doesn’t matter what I think. It exists. Period. So we cannot ignore it. Or we can ignore it, but then we are going to get the consequences. It exists, period. And you know it very well. Show me any large company which is totally restricted to just one country. Those companies existed in the past, but not anymore.
I may be a market researcher, but I love global economics and politics, and believe all good market researchers need to think about these topics and how they affect consumer behavior and sales. Tune in tomorrow as I finish up the interview with Eli and discuss retail marketing a bit.