EGS Global Business Blog

The February 14, 2009 edition of ‘The Economist’ magazine had a special section on the world’s middle class.

If one defines the Middle Class as people with one third of their income left for discretionary spending after providing for basic food and shelter, new research -defined in detail in ‘The Economist’ - indicates that as of 2005 there were 2.6 billion people in the Middle Class - about 55% of the world’s population.

This has immense implications for companies selling their products and services on a global basis. And for the future development of the world, for that matter.

As people emerge into the Middle Class, they do not merely create a new market. They think and behave differently. They are more open-minded.

This aspirational, new to Middle Class population is more likely to invest in new products, new technologies and new businesses than the already rich, who tend to try to defend their existing assets.

This new Middle Class are now concerned about quality, brand and convenience for their discretionary spending. They often show they have ‘made it’ by frequenting western branded businesses, which are seen to have better quality and be more convenient than local brands.

And the newly Middle Class like to show off by being seen at western brands. How else can one explain almost 30 Starbuck’s in the Greater Shanghai Area with western prices and often busier than in the U.S.?

This changes countries and offer immense future opportunity for western brands on a global basis.

China started applying its economic stimulus last November while the US was thinking about when the US Congress might act. And now we are starting to see articles in international publications such as ‘The Economist’, ‘Financial Times’ and the ‘Wall Street Journal’ that there is evidence the China stimulus is working on internal consumer and business spending.

Last Saturday’s ‘Wall Street Journal’ had a front page article on this subject.

http://online.wsj.com/article/SB123934751932407099.html

Chinese demand for crude oil hit a one-year high in March. Steel mills imported record quantities of iron ore in March. Cars sales hit a monthly high.

Articles in today’s ‘Wall Street Journal’ highlight upbeat news on the China property market and stock market.

Some of the biggest international retailers are going ahead with ambitious expansion plans in China in 2009.

Companies like Tesco PLC, Carrefour and Wal-Mart Stores Inc. continue to see the Chinese consumer as a good long-term bet.

Walmart http://online.wsj.com/article/SB123258172515304267.html

Yum http://online.wsj.com/article/SB122896373927096997.html

It has been some time since our last blog.

This has been due to a rush by European and Asia Pacific companies to acquire licenses from US franchisors - who are most of our Clients.

The economics are simple. A US$250,000 license from a US franchisor cost 200,000 Euros in the summer of 2006. Today it costs 155,000 Euros.

The news is also good for Australian companies. The same US$250,000 license cost $330,000 Australian dollars in mid 2006 and would cost $260,000 Australian dollars today.

For Chinese investors - who are strong buyers of US franchises these days - the cost of the license has dropped 15% over the past two years due to currency appreciation.

While this is good news for US franchisors as far as up front fees are concerned, there is a down side. Traveling to Europe and Asia Pacific for negotiations, training and support costs considerably more than two years ago.

And 36 years of international experience says the dollar will come back at least some of the way towards the exchnage rates of mid 2006.

Meanwhile, it is a peak time for US franchisors to license their business model into other countries.

One of the basic tenants of international development has always been an evaluation of the Rule Of Law in a country as a measure of the risk of doing business in a country.

Countries with a strong Rule Of Law have been perceived to be inherently less risky for foreign investors. A strong Rule Of Law has generally meant foreign investors were treated equally to local investors. And, economists have repeatedly found that the better the rule of law, the richer the nation.

A new set of studies show that the tie of the Rule Of Law to economic growth is not as simple as previously thought, as discussed in an article in the current issue of ‘The Economist‘ magazine (see link at right).

There is an “intrinsic difficulty of defining the rule of law, combined with the problems of knowing how specific laws work in practice.” What the new studies have “not yet shown beyond doubt is that the rule of law is a precondition for economic growth everywhere.”

New definitions of the Rule Of Law are emerging, as quoted from this article:

“(1)‘Thick’ definitions treat the rule of law as the core of a just society. In this version, the concept is inextricably linked to liberty and democracy.

(2) ‘Thin’ definitions are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights.

The existence of competing definitions of something may seem fatally to undermine its usefulness.”

After discussing efforts to improve the Rule Of Law in places such as Argentina, Chile, Eastern Europe and Russia, the article concludes as follows: “the more economists find out about the rule of law, the more desirable it seems—and the more problematic as a universal economic guide.”

All that having been said, my 36 years of experience working in over 60 countries from first to fifth world, says where there is strong Rule Of Law foreign investors are much more likely to get a good return on their investment and to be able to maintain control of their brands and business than in counties with weak laws.

Investor beware!