The Manpower Of Asian Economic Machines

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Includes: INDF, MSN, NKE, SMSNX, TM, TYTMF, UAA
by: One Road Research Company
Summary

People can be capital too. It’s called human capital and it’s the calculated worth of someone’s labor, skills and education.

Human capital is a powerful tool. As a state, investing in it can tremendously grow the economy. Therefore, knowing a country’s human capital level is vital information as an investor.

When governments invest in their population’s human capital the economy moves up the value chain: from agriculture to manufacturing to services. Societies start earning more and producing higher quality goods.

This is why some tiny nations (like Singapore) can dwarf the economies of their giant neighbors (like Thailand, Indonesia) because when it comes to human capital, quality out-preforms quantity.

By understanding human capital and the value chain we’ll show you how to locate stocks ready to grow and pass on stocks soon to be in decline.



In our last article we discussed capital in its tangible forms, like coins in the piggy-bank or shares traded on the stock market.

But capital is so much more than that. Capital is defined by its ability to produce future profits, income and growth. If you think about it, that description is suitable for people, societies and individuals. When people are viewed as capital it’s called human capital and is characterized by the economic value of someone’s labor, skills and knowledge.

We know natural resources are incredibly valuable, but they are naturally limited (some take a thousand years to replenish). The human population, on the other hand, is ever growing and ‘restocking’. Therefore, human capital is key in defining a nation in the long term.

Knowing a country’s human capital level is vital information as an investor. This knowledge will absolutely assist in determining which industries will expand, shrink or burst at their seams.

In this article, we will explain human capital’s role to an economy, how it developed over time, the importance of GDP per capita and what your investment in Asia should look like based on the human capital of different nations in the region.

The Government Knows What’s Best…For Its Constituents

People in power will use a nation’s human capital to grow the country. And of course, to benefit themselves by acquiring more power and wealth. Those in governments have policy goals, and they will control the nation’s resources to turn their ideas into a reality.

Unfortunately, for those with the lowest economic standing, this will most likely trap them in a never-ending cycle of complete poverty. The majority of people in Asia belong to the lower-middle class. Their lives (job, education, income) will be almost entirely determined by their government’s policy goals. And almost none of these people will see a dollar of the trillions being printed.

For instance, early on, Taiwan's policy makers envisioned an economy with the bulk of its population working in low-skilled labor for manufacturing. They even built Special Economic Zones (SEZs) where people were trained. And to no surprise, that’s what most Taiwanese citizens are still doing for work - gradually rising up the value chain.

Recently, as Taiwanese policy begins to favor higher skilled manufacturing and services, a large chunk of the population will follow.

Car manufacturing factory in Malaysia. (Shutterstock)

But who really benefits from this? Workers arguably enjoy stability. Some may be able to work the system and move up the economic ladder - maybe becoming business owners, shareholders, or even CEOs. But let’s be honest, factory investors and the government will take home the biggest prizes.

People in power merely need to figure out what brings home the best rewards and then establish that kind of system through policy. Then they can just sit back and reap the rewards.

How do you stand out from the crowd? (Shutterstock)

We inhabit a world governed by systems. While it may be nearly impossible for an individual to change the system they are born into, they can change their position in it. By tracking where society is headed, someone can try to improve their own value. Not attempting this is like investing at the wrong time. Both one’s portfolio and personal wealth will be damaged.

Nations, markets and companies follow the same pattern. Emerging markets can’t jump from farming rice to building robotics overnight. But how does this play out for countries unlocking the potential promise of human capital and moving up the “value chain”? How do they go from farming into manufacturing and onto services successfully?

The answer lies in people power. Productive societies create productive economies. The more advanced a country’s population is (ability to create higher quality goods), the more the country will produce and earn. And much like other forms of capital, it’s essential to invest in human capital for a nation to develop.

Unlocking Human Capital

Developing nations set out with two forms of capital: natural and human. When reforms are made in land, agriculture and banking policies, society is steadily pushed into manufacturing. As factories are more lucrative than rice-paddies, wages also rise.

In turn, as manufacturing develops, education levels rise and overall human capital increases. Eventually, as economies evolve, the service sector will replace manufacturing.

Today, there’s more people working in offices, laboratories and banks than factories.

The graph below illustrates China’s workforce in the 1960s. The majority of society worked in agriculture. This was roughly 40% of China’s GDP. Services barely accounted for 20%.

Fast-forward forty years to 2000 and you’ll see that the two sectors have switched sides. In 2015 agriculture accounted for a mere 10% of GDP while services bounced to 50%!

So, what story does the journey of China’s GDP tell?

China’s GDP rise corresponds to its unlocking the potential of its massive human capital. As human capital is unlocked the nation moves up the “value chain.”

However, this story is not a quick read, as it happened gradually. It’s important for economic development and human capital to grow steadily together.

It’s a big mistake to rush the process. Hurrying will result in people being unequipped (in terms of knowledge or skills) to properly work with new technologies. Nations who have attempted leaping from agriculture into services prematurely have landed in trouble. Their workers are unproductive and their service sector is noncompetitive and inefficient.

This is because the connection between a nation’s people and the nation’s economic development is strongly linked. It all comes down to timing. If a nation’s workforce has received the proper education or development level when a switch within the economy takes place, the transition into a new sector is smooth sailing.

Let’s compare a nation’s GDP to its population to illustrate that country’s human capital level, or how efficiently citizens contribute to their country’s GDP.

As the graph above shows, nations with higher levels of human capital are usually richer. Obviously, populations need to be accounted for. For example, China’s population is over a billion people. So cities like Beijing and Shanghai, with more human capital, can balance out the lower levels found in rural areas.

Meanwhile Singapore, populated by only 5 million people (but who have high levels of human capital), generates nearly the same gross national income as Malaysia (with 30 million people) and produces more than Vietnam (home to 90 million people). Quality over quantity is very important when considering the value of human capital.

What Does All This Mean for You?

By comparing different countries’ GDP per capita, one can safely assume that countries with higher GDP per capita are more developed and their economies on the higher end of the value chain. That’s because each citizen in those countries is more educated, obtains more job skills and contributes more to their economy, thus more people can work in companies that operate in more sophisticated fields.

Furthermore, an economy that’s on the high end of the value chain is made up mainly by high-tech manufacturing and service industries, whereas agriculture and low-tech manufacturing are the basis of an economy that’s on the low end of the value chain.

There is a strong correlation between GDP per capita, human capital and the stage of economic development (value chain). When one determines that human capital in a country is high, they will understand that sophisticated industries (high-tech manufacturing and services) make up the most part of the country’s economy, and investing in companies operating in those industries would be considered a wise move.

For nations home to a highly skilled workforce (where GDP per Capita is relatively high), such as Japan and South Korea, look into advanced manufacturing and services. Keep an eye out for Samsung Electronics Co., Ltd. (LSE: SMSN, KRX: 005930), Toyota Motor Corporation (NYSE: TM, LSE: TYT, TYO: 7203) and Daiwa House Industry Co Ltd (JPX: 1925, OTC: OTCPK:DWAHY).

In nations with less developed workforce (where GDP per Capita is lower), like the Philippines and Malaysia, keep an eye on the agriculture and low skilled manufacturing sectors for investment opportunities. Foreign textile and footwear companies such as Nike, Inc. (NYSE: NKE) & Under Armour, Inc. (NYSE: UAA) have outsource their labor to China and Southeast Asia. At the same time, a promising industry in Southeast Asia is food processing, including Vietnam’s Masan Group Corporation (HOSE: MSN) and Indonesia’s PT. Indofood CBP Sukses Makmur Tbk. (IDX: INDF).

Understanding a country’s human capital level is key for investing successfully, because that can help you figure out where countries are positioned on the “value chain” ladder (which showcases their current levels of human capital and development), and from there you can both find stocks in markets on the verge of prosperity and know when to sell shares in sectors soon-to-be in decline.

In our next article we will examine how Asian governments often make use of their citizens and natural resources in order to maneuver up the value chain. This practice tends to result in a great initial cost as reform, and unlocking a nation’s resources, can be a harsh business.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.