Sky Not the Limit, But Not Falling Either

March 23, 2009
Developing Economies Are Committed to Building Infrastructure

“In the past, the sky was the limit,” said Michel Demaré, ABB Group CFO and president of global markets, as he explained ABB’s view of the global impact of the economic slowdown to an internationally representative crowd today at ABB Automation and Power World 2009 in Orlando, Fla.

“This year, the situation is different,” Demaré continued. And the degree of the difference depends upon which country’s sky you are operating under. “We deal with so many customers in so many different environments in so many different parts of the world, we are like a barometer,” said Demaré. “Developed economies are hardest hit by the economy,” said Demaré. “And growth in emerging markets has gone from very high rates to slow.” But regardless of the maturity of an economy, challenges and opportunities present themselves.

“Developing economies are committed to developing infrastructure.” ABB’s Michel Demaré offered a CFO’s perspective on the silver linings in today’s economic clouds.

In emerging and transition economies, risks of loan default, the inherent potential for social unrest and a steep decrease in demand from historical peaks all pose very tangible challenges, explained Demaré. However, these countries are still relatively rich in opportunities. “These governments are committed to developing infrastructure,” said Demaré, citing examples such as the power industries in India and China, as well as non-oil industries in the Middle East. China, for example, has $586 billion tagged for infrastructure investment. These same areas also have funds available for state-backed enterprises, and the plans can be implemented more quickly than in developed economies. China also has set the goal of improving its energy efficiency by 20% from 2006 to 2010.

Slow decision-making and implementation hurdles are among the many challenges in mature markets. Add the scarcity of private funding and growing protectionism to the list, and it’s no wonder growth in developed economies has been so anemic. But Demaré cited numerous opportunities here as well. “Behind every risk is an opportunity,” he explained. “It is important to focus on the long term.” A sense of urgency will speed up innovative marketing opportunities such as renewable energy in mature economies, said Demaré. Plus, those governments are committed to fix their economic problems and support growth, especially since considerable investment is needed just to maintain the current levels of service for things like power grids and rail networks.

In France, for example, €26 billion has been designated for infrastructure. Germany has earmarked €60 billion, and Italy €25 billion for projects that include infrastructure spending. Many of the benefits of energy efficiency still are being overlooked, explained Demaré.

“If you compare the U.S. with Japan, the GDP output produced per unit energy used in the U.S. is half of what it is in Japan,” said Demaré. The EU aims to improve energy efficiency by 20% in 2020, and Germany specifically aims to double its share of alternative energy power sources by 2020.

Opportunities also will arise from government stimulus programs, customers desiring help with improving productivity, a heightened political focus on energy efficiency and environmental concerns and growth potential through industry consolidation, said Demaré. “There will be failures, so if you’re fit and lean, then you might be able to benefit from that,” he explained.

“A year ago, there was a lot of optimism the economic cycle would continue,” said Demaré. “If we look back to 1970, we have never been as deep as we are now. We are witnessing negative GDP.”

Demaré doesn’t see any indication yet that the economy will rebound significantly in 2010. “We see the overall condition of the banking industry,” he explained. “All of the U.S. banks put together have about $25 trillion of assets, and only about $5 trillion of those are true industrial. Another uncertainty is the growing role of government. The whole world is seeing business becoming more nationalized through governmental acquisitions. There’s a lot of taxpayer money out there.”

Who will survive the worst downtown in 70 years? “Only companies that are fast and flexible in adapting to a rapidly changing competitive environment,” explained Demaré. “The survivors will be companies that can adjust costs and capacity while keeping an eye on growth opportunities, companies that can combine global strength with local presence and partners. They will have built strong long-term relationships with customers and suppliers and have solid balance sheets to support the business through turbulent times.”

But the forthcoming year is not without its risks. Governments defaulting on loans might cause some stress, explained Demaré. “Further bank failures, a weakening lending environment and increasing protectionism could be problems,” he said. And the potential for short-term global deflation followed by hyperinflation will increase the need to be flexible.