This commentary originally appeared in Forbes
It has been 52 weeks since the end of capitalism. Except that it didn't end, as so many predicted, after Lehman fell on September 15, 2008. Oprah Winfrey and Donald Trump remain enormously popular. The bankers at firms like Goldman Sachs (NYSE:GS) are still reaping massive profits as they develop new carbon credit and insurance products.
In fact, if anything, capitalism is at its strongest right now, with hungry and hardened executives emerging from the panic to guide their companies into a new world. We are in a very Darwinian period, with the smartest and the cash-rich, like Kraft (KFT), scooping up assets on the cheap, while the weak and overleveraged, like Linens 'n Things, collapse. This is capitalism at work
Capitalism survives, but the players are not the same, and the last year has seen an emergence of new power brokers. Many of them are coming from places Americans tend to think of as poor and backward, places like China, India and Brazil. Yet those so-called emerging markets are the very ones that have withstood the panic the best. China's gross domestic product grew 7.9% in the second quarter, and India's grew 6.1%. Retail sales have climbed 15% this year in China. Companies like Coca-Cola (NYSE:KO) and Volkswagen (OTCPK:VLKAY) have committed billions of dollars of new investment into Asia to offset their declining sales in America and Europe.
There is a new world order, and companies had better adjust and evolve or they will go the way of the dodo and Circuit City. What major trends are developing? What should executives and investors do?
Take a cue from currency traders. Fearful that Ben Bernanke's Federal Reserve seems to be pulling dollars out of thin air, they have been fleeing the money for currencies like the Australian and Canadian dollars, which benefit from China's insatiable appetite for commodities. Although China's drop in exports has hit its manufacturing industry hard, the Chinese are betting on an economic recovery and are pushing to secure natural resources.
Not a day seems to go by without another Chinese company acquiring a stake in an iron ore mine in Australia or completing a deal for oil in Iran or Sudan. China Development Bank just gave China National Petroleum Corporation (the parent of Petrochina) a $30 billion loan to make overseas acquisitions. Look for this trend to continue and look for an erosion of the U.S. dollar, not only because of worries that America is taking on too much debt but also for geopolitical reasons.
China is using money and soft power to forge stronger relations with the Middle East, Latin America and Africa and to provide a balance of power against American hegemony. It is also flexing its muscles to supplant Japan, with all its political turmoil, as the dominant power in Asia.
I recently met with an investor in charge of a Middle Eastern sovereign fund worth tens of billions of dollars. He lamented to me that the climate in the U.S. toward Middle Eastern investors had turned so chilly that he was looking to invest in China--he felt forced to. And he represents a nation that has been as good a friend to the U.S., as has Britain.
The numbers tell the story. Trade between China and the Middle East is expected to top $100 billion by the end of 2010. And the Middle East is not the only place China has been building its influence. China overtook the U.S. as the largest trading partner for both Brazil and Japan in the first half of 2009.
We should also expect to see more emerging market players develop global brands, through both acquisitions and organic growth. The Indian conglomerate Tata Motors (NYSE:TTM) has acquired the Jaguar and Land Rover brands. The Chinese construction company Sichuan Tengzhong is trying to buy the Hummer brand, and rumors are that Saab and Volvo will be sold to Chinese firms.
In the past year, my firm, the China Market Research Group, has interviewed a thousand Chinese executives about their outlook. Far from being cowed by the financial crisis, they have said they see the downturn as an opportunity. Some 70% have told us they'll take advantage of the recession to speed the global growth they already had underway. Many have told us they have faced far worse times in their business lives, and they want to make sure they don't miss out on a once-in-a-lifetime investing opportunity. American companies will have to develop strategies to compete with these emerging market brands. They are fast improving in both product quality and branding.
A year after Lehman's fall, capitalism is anything but dead. The global market is evolving, and it is a watershed moment for many companies. The weak are perishing, while the strong who can adapt are thriving. It's a business form of natural selection. It is capitalism at its core.