BRIJ Feb16China’s slowdown is continuing to reverberate around the world.  One way of measuring this is to look at auto sales in countries closely linked to China’s market such as Japan, Russia and Brazil.  As the chart shows, they did well during China’s stimulus period, but they are struggling now.  By comparison, more self-sufficient India has so far avoided the worst of the storm:

  • Japan’s sales fell 24% in January versus 2014, confirming the 1.4% decline in its 2015 GDP
  • Russia’s sales almost halved, as its currency collapsed in response to China’s slowdown
  • Brazil’s sales were hit even more badly, down 52%, as the political crisis continues to escalate
  • Only India was a relative island of calm, seeing its sales rise 7% over the period

Overall, January’s sales in the 4 countries were down by almost a third, 29%, to 800k.  And during the 2008 – 2013 period, when China’s stimulus programme went into over-drive, the 4 countries sold 1 in 5 of all cars sold in the world. Today, they are back at just 16% of the global total, close to 2005′s level.

Its easy to overlook these second order impacts.  But they are just as important, perhaps even more important collectively, than the direct impact of the slowdown in China itself.

One key issue is that China is aware of its problems, and has been focused for the past 3 years on overcoming them – hence its New Normal policies.  But Japan, Russia and Brazil had no thought for the future:

  • Japan introduced its own form of stimulus in Abenomics in 2013, even though the previous 20 years of stimulus showed this would inevitably fail
  • Brazil and Russia assumed their export revenues would always continue, and allowed corruption to flourish at the expense of economic reform
  • Only India has set out on a realistic reform programme since Premier Modi’s election victory in 2014, focused on meeting real needs for toilets and better living conditions

Russia highlights the scale of the reversal.  Its real wages (ie adjusted for inflation) fell 11% last year.  People don’t buy many cars, or other non-essentials, against this type of background. Yet less than 3 years ago, just as the bubble burst, Boston Consulting had forecast it would be the world’s 5th largest market by 2020, with sales of 4.4m.

These developments create major challenges, even for those not doing direct business with China.  They highlight how the chemical industry has reached a fork in the road, just like the auto industry – its major customer.  GM’s President, Dan Ammann, put it very well last month, when he warned:

“We think there’s going to be more change in the world of mobility in the next five years than there has been in the last 50 years”

His use of the word “mobility” is also significant.  People around the world will still need mobility, but will they need to own cars to achieve this?  Probably not, if they live in cities, which most people now do in the wealthy developed economies. Ammann highlighted this in June 2015, when commenting:

“It’s the last thing you should do because you buy this asset, it depreciates fairly rapidly, you use it 3% of the time, and you pay a vast amount of money to park it for the other 97% of the time”.

This paradigm shift is one of the main topics in our new Study – “Demand – the new direction for profit”, which will be published early next month.  In it, we focus on describing the new business models needed for future success, and detail practical ways of using these to develop major new revenue and profit streams for the future.

The world, as we see from the second order impacts of China’s slowdown, is dividing into Winners and Losers.  There really is no going back to the BabyBoomer-led economic SuperCycle.  And whilst all change is uncomfortable, the experience of Japan, Russia and Brazil suggests that failure to change can produce an even more unpleasant result.