Market opportunities to show the way

Given the global economic slowdown, overcapacities will translate to increasingly competitive market actions by manufacturers, resulting in increasing pressure on margins.

It will help to start by understanding that the manufacturing sector covers a very broad spectrum, with products that range from bicycles to automobiles to steel plants and nuclear reactors. To offer a broad forecast on all these sectors will actually necessitate an understanding of the larger economic outlook for global growth.

It is necessary to recognise that in a globalised economic environment, the business outlook for any particular product will depend on the global “demand-supply” balance for that product. Global manufacturing facilities seek market opportunities across the world. For most products, there is production overcapacity at a global level, which was built up over the last decade or so in response to a boom in global growth and increased levels of per capita consumption.

Given the global economic slowdown, overcapacities will translate to increasingly competitive market actions by manufacturers, resulting in increasing pressure on margins. The strongest players will survive and weaker players will either shut down or get taken over by the stronger players at valuations that are driven by market conditions. Such low-cost acquisitions or mergers will lower breakeven levels that will then ensure the viability of these businesses. Viability will also be supplemented by synergies from reducing costs by removing duplication of activities wherever possible, and rationalisation of capacities. This will, in turn, result in increased unemployment and, consequently, lower demand for goods and services.

The growth of the manufacturing sector will be largely influenced by the growth of the global economy, which, in turn, depends on the easy availability of credit at viable costs. Paradoxically, the creation of capital depends on a highsavings rate; the infusion of capital into the economy without matching increases in the production of goods and services will be inflationary. However, easier access to and injection of capital may be necessary in the short term to prevent economies across the world from stalling. In the longer term, it will require discipline across societies to change their habits and shift spending from wasteful consumption to investment.

The prospects of specific companies around the globe will depend on their product portfolios and the relevance and value of their products to their customers. To illustrate this, consider the product offerings of the large automobile manufacturers in the US that do not match the needs of their customers. With increased prices of fuel and the realisation of the environmental impact of large cars and SUVs, customers will increasingly opt for smaller cars, which US manufacturers are presently ill-equipped to manufacture. This will create an opportunity for small car manufacturers across the globe.

Similarly, there will be increasing business opportunities for products that meet the changing requirements of customers. This basic business truth has always been applicable; in turbulent times, the urgency and recognition of this is far more acute.

We expect the Indian economy to continue to grow faster than more mature markets, even though there may be a temporary downturn arising out of the global slowdown, and the higher cost and tighter availability of capital.