Friday, 19 April 2013

Micro Level Trends – European Economic Transition (Part 2) – Corporates as Pathway Creators for the Global Public Good.

The previous web-log demonstrated how the west, and Europe specifically, should seek to better recognise how its reduced but still sizeable 'knowledge gap' must be managed by corporations; so as to devise wholly relevant and applicable 'public good' solutions across the face of the planet.

Historically, since the industrial revolution, it has been largely Northern European minds - latterly joined by American and Japanese efforts - which have been at the forefront of technological progress. This the natural course of events, given its birthplace of 'the Enlightenment' movement and oits associated scientific method; firstly from individuals, then shared interest societies and later academia and manufacturer's laboratories efforts. So brought forth: physics, materials science, steam-power, chemistry, modern biology, electricity, electro-mechanical engineering, radio and radar; and so associated innovations such as: the train, the wire-transmitter, the motor-car

The 19th and 20th century stories saw the US adopt and scale-up European innovations, WW1 and WW2 seeing a brain drain from Europe into the USA. Its own new insights made via military (DARPA), space (NASA) and directed academic research (eg MIT, Caltech, Stanford etc); with of course the rise, fall and rise of California's Silicon Valley closely tied to both local PE financing and broader Wall Street interests. However, it is the emergence of 'Earth Science' as an academic discipline by which the US seemingly desires to influence global ecological issues, through industry and elsewhere.

[NB 'Earth Science' no doubt seen by the BRIC and CIVETS countries as US 'soft-power']

America and EM 'Middle-Ground' Value M&A -

Yet simultaneously US 're-industrialisation' appears under-way, a renewed interest in the innate value of physical manufacture, seen by the re-birth of GM and repatriation of previously 'off-shored' activities. This ironically enabled by the 'de-leveraging' aftermath of the 2008 financial crash, as the now much reduced US cost-base gains productivity competitiveness versus EM nations that have had to absorb often heavy inflationary economies as part of their own success stories.

Yet as inferred in the last post, and well recognised by a recent FT column, this also apparently puts the USA and EM countries head to head regards the manufacturing of 'mid-value' component, assemblies and completed goods. That is unless a new era of global expansion can absorb much of this new productivity, which on a regional basis, might be the case.

But more likely is the inevitable reality that US companies, buoyed by large cash cushions and the massive QE tranches, will seek to merge with, or even outright acquire, any listed or privately held indigenous EM producer that is gaining regional might - whether across: agriculture, construction, energy, transport, IT, consumer goods, defence, etc. Simply history repeating, as seen back in the mid 1990s when AGCO purchased Brazil's Iochpe-Maxion and Argentina's Deutze-Argentina. The attraction for uS companies all the more when any EM company has a strong vertical value-chain, with direct or even possibly a monopoly-like access to secondary (materials processing) and primary (materials extraction) activities.

Given this picture, set against the need for EM investors – whether privateer or SWF – to seek partial and stock-swap exits, investment-auto-motives believes that there is little likelihood of the BRIC and CIVETS nations creating any obvious “EM solidarity-front” against the USA.

Though EM's Seek Their Own Way -

However, given the rising Asian (and ASEAN bloc) influence globally and a willingness for the BRIC and CIVETS to increasingly seek-out their own destinies, it may be the case that such countries remain hesitant of overtly strong US industrial relations; preferring to retain a broad international relations philosophy. This may be the case given that a century ago such an overt reliance on industrial promises (such as Fordlandia regards Brazilian rubber, hemp and hardwoods) failed to materialise with the impact of economic crisis of the time.

So improved EM-US relations by virtue of expectant (QE and other stimulated) global growth, and the inevitable M&A attractions that follow. But also a likelihood of EM nations seeking to cast a wider net and seek-out industrial learning and collaborations from within the EM stable and those other countries that offer high-value products and services, but also able to properly understand and satisfy the real mass-populace needs of the BRICs and CIVETS and others.

Euro – EM Alliances in 'High Value' and 'Low Value' Arenas -

It was this point upon which the previous web-log hinged.

Firstly, the ability for European corporate and political leaders to recognise the potential for both exporting advanced technologies and services, so as to accord to EM hopes into tomorrow. So spanning a plethora of assisting solutions from proven nuclear power to farming methods to mass pharmaceutical, and so much more that can be 'trickled-down' as feasible.

Secondly, of perhaps equal importance, European firms should look to directly or collaboratively – amongst themselves or with EM partners - serve-up evolutionary technical solutions that can be nigh on immediately applied to the 'real world' status quo in the near and mid terms.

Given that the BRIC countries have effectively already absorbed much of what the west has proffered, often by way of joint ventures with local companies to the financial benefits of both, it is perhaps time for Europe to look to the CIVETS and beyond so as to understand how the typically 'low order' economic pillars of such countries can be improved technologically to help 'democratise' individual, familial and group productivity and so create broader incremental, broader wealth creation.

Identifying the “Low Hanging Fruit” -

This means evaluating at 'ground level' how things have evolved thus far, and how the local populace has itself evolved available, relatively low-cost, 'everyman technologies'.

Herein European corporates could learn from the positive educational influence that established charities (eg Oxfam) and NGO's have had in war-torn or famine-deprived areas. Whilst such places are invariably 'inactive' with less than a fully sustained economy, and should not be directly compared to lower tier EM nations, nonetheless cross-cultural learning has been exchanged between westerners and locals. Such instances give rise to a kind of 'thesis' vs 'anti-thesis', leading to a combined and sustainable 'hypothesis' directed towards everyday functions, including importantly civil and transport engineering. Thus showing how local people's can create and commercialise for themselves when provided with learning and materials in the right manner.

Corporations obviously have a necessary profit-motive and beyond extra-curricula charitable programmes cannot devote great time, resources and effort undertaking work which freely gives away knowledge and materials. So direct comparison to an NGO is obviously flawed. But the approach used by NGO's and charities should be reviewed by European corporates to better understand how they might add value to 'underling economies', and in return gain financially from the small individual amounts of wealth creation, which en mass start to become over time an increasingly important contribution to a company's EM operations balance-sheet and bottom-line.

The Commercial Imperative within CSR -

As seen in various studies and exercises, and popularly conveyed by 'Freakonomics' and 'Poor Economics' books, NGOs have now come to recognise the importance of the economic imperative. With total or near indifference demonstrated by recipient peoples when an item or service is given freely; either under-appreciated for its innate worth, or if of economic value, simply sold to obtain monies. This then highlights the importance of intrinsic value and the vital importance of value creation.

Indeed, most EM countries beneath the CIVETS standing (but above war/famine destitution) are by their very nature avidly commercial, albeit in low-order goods and services, adapting where they can. Necessarily so without the 'safety-nets' of social security, education and healthcare. Yet many of the activities undertaken to earn a living take a toll upon the social perception and eventually self-perception of such people. The millennia-old existence of the caste culture in India (and elsewhere), with what has for many millions become an inescapable vicious circle, forced to do socially exclusive tasks and, formally or not, so labelled. Whether this be scavenging from rubbish tips, collecting and sorting (recycling) rubbish for minimal gain, hunting discarded coal heaps for burnable 'slack', obtaining the contents of underground sewers to extract tiny amounts of precious metals, re-cooking scraps of previously disposed food, etc.

So in an age where the success of western-focused Corporate Social Responsibility is now broadened to Sustainable and Ethical Investment across the world, and where the 'real-world' limitations of NGO's and charities have become obvious, there appears a growing imperative that it is the profit-motive mindset of the corporate world that is best equipped to potentially provide such peoples with the chance of escape from destitution.

Whilst undoubtedly European companies must attend to the B2B and B2C needs of their primary clients in the 'advanced' and first and second tier EM countries, the regions with prime economic power, they should also look to what may be achieved in the myriad of aspirational nations that sit beneath the CIVETS within the bounds of the possible (itself contracted by innate political and cultural power-bases, self-interests and often associated corruption).

Within those countries with an historically stable industrial base, depending upon the specific national industrial policy, it is often the case that aspects of family and community care are at least partially catered. Typically healthcare, creche and schooling provided for employees by state-owned companies (typically infrastructure orientated, eg Indian Railways) with an interest in developing the next generation, or by large private or semi-public conglomerates (with a myriad of inter-connected activities, eg India's TAFE), or ex-state companies that have been privatised but maintain the 'social promise', and lastly, by those companies with high-value specialist interests that must attract well educated employees and offer internal social welfare initiatives to do so.

Yet for most such structured, often life-long, employment is absent and unobtainable.

Beyond Economic Traps -

Major urban centres and their more hive-like economic activities typically draw-in people from surrounding provinces and seek base-wage employment in various arenas. But often these jobs are short-term and thereafter such people must either a) return to his/her village, b) find another similar base-wage job (so not able to better circumstances) or c) seek their own path as 'ghetto entrepreneur'.

Given that point a. creates an economic to-and-fro, and point b. creates an economic merry-go-round, it is the last, point c., which offers the best long-term route to economic success for the individual and his/her family.

[NB it must be noted that those who seek their own way are often subtly or overtly intimidated, harassed and physically abused for not joining the interests (ie groups/gangs) of the local 'big-men'. Themselves self-believed big-fish in little a pond, but in reality nothing more than tiny fish within a far bigger pond].

Corporate Catalysts -

Corporations, of western and EM origination, have of course been catalysts in developing local economies, the automotive sector a shining example of how initial FDI into a specific location for a vehicle or components factory can create a flourishing local economy.

But such attraction is limited to very specific locations where the investment into a factory can be recouped. Initially, that optimal site must be the compelling function of export business model which sends cars, vans, trucks to neighbouring countries, or by virtue of its low cost base, able to underpin cost-effective long-transit of those products to advanced economies. But in order to underpin long-term satisfaction for both the investing company and recipient government, that country and locale must usually proffer a dual-aspect attraction; the export model over time conjoined with a growing 'in-market' indigenous demand which itself is created by a sound national economic agenda. This typically based upon a mixed basis of multi-sector FDI and greater commercialism of state-owned enterprise.

Successful manufacturing stories to date have been Ford pick-up trucks in Thailand, Suzuki small cars in India or latterly the surge of mixed vehicle plants in Indonesia.

There have been many other instances where the manufacturer has born the risk and cost of investing elsewhere, but political, economic and social problems have undermined business projections, and so such a plant is either 'drip-fed' to maintain a presence for the long-term, or simply closed altogether.

So, unfortunately for the economically under-developed countries within and beneath the CIVETS, such optimal sites only emerge periodically and when they do, far greater due diligence is necessary by prospective investing companies with necessarily a greater cautiousness so as not to see wealth destruction of their own investor's monies.

Ecologically sensitive large scale industrialisation within poorer communities and countries has been and remains an ideal, providing a powerful boost to local and national economies.

[NB This more feasible than the other ideal of creating service-based commerce in smaller sized towns; which appears less likely given that such services typically satisfy the BPO needs of foreign firms, and require foreign language and literacy skills; skills more abound in larger cities. Hence the success of the manufacturing model beyond big cities].

As noted, optimal manufacturing sites however, for each sector and company, are relatively few and far between. Reliant upon the specific combinational presence of criteria at a location, so far beyond simply the existence of a low-cost workforce.

Expanding Those Corporate Catalysts -

Given this scarcity, the fact remains that for many countries and their communities much of their future prosperity relies upon evolution of the 'real-world' everyday economy. This through gradual improvement of the commercial approaches undertaken by individuals and small enterprise.

[NB whilst new revolutionary “technology disruption” like mobile phone networks can very quickly supplant under-developed older technologies (ie land-lines) such low-cost, rapid-spread instances are infrequent. And though the mobile phone itself has opened up new commercial realms in under-developed regions, it is also recognised that there is typically and understandably great resistance by the poor to the new, preferring traditional 'tried and tested' approaches given their own financial precariousness].

An evolution pathway for economic growth within the bounds of established conditions then appears more favourable and likely to succeed as opposed to radical change.

Thus, from the western/advanced perspective, we see that much of the “lower-tier world” exists in what may be described as a very unfamiliar, very foreign realm. Somewhere between the extremes of near destitution and so accepting western charity, verses on the 'economic cusp' so absorbing the FDI interests.

Appreciating the “Mother of Invention”

It is within this realm that such countries have naturally created mini-economies of their own, seeing value in everyday materials and processes where advanced-country eyes see none, not having been in such a similar situation for well over a century.

It is a realm in which because of economic scarcity, instances of recycling, innovation and re-application are the necessary every-day norm. And importantly it is a realm from which the advanced nations, now themselves within a new norm, have started to re-learn what has been forgotten for decades; often from EM regions.

So, as shown in the last web-log, whilst it is recognised that a skills and technology “knowledge-gap” exists between European / western / triad regions and the BRICS and CIVETS, there could be said to be a far smaller but apparently reversed knowledge-gap regards low cost creativity and application between the poorest nations and the richest.

Aligning European Interests -

Much of what has been stated should be of interest to all multi-nationals, especially those within the triad region from GE to Toyota. But perhaps of greatest appeal to the those within Europe given its own dual speed fracture between 'core' and 'periphery', this dichotomy itself set within the IMF recognised “3 speed world” of today.

In a world that has been turned upon its head, those large and cash / resource rich European firms should now be seeking - in a skunkworks or formalised manner - how expand beyond the innate long-term limitations of 'business as usual', to create new templates beyond the standard business model, to circumnavigate standard orthodoxy and practice; to think anew.

As seen with the automotive manufacturing example, conventional practice has innate business model limitations. So there is a need to create additional 'new perspective' business models which befit very different conditions and 'bottom-tier' entrepreneurial participants, and reap economic and cultural benefits for both advanced and under-developed countries.

Much of the modern world has been built upon the ideal of standardisation and simplification, seen from the Model T to evolved 'Lean Sigma Six'. And such attained and engrained industrial philosophies must still be expanded worldwide to serve all. This well understood by European firms that seek to underpin a Eurozone renaissance along with their broader global interests.

However, conversely, appreciating the very foreign realm of the 'bottom-tier' populace may require a completely revised approach, one ironically more akin to the short handmade fabrication runs of the craftsmen's 'atelier approach'. One in which a great number of small-scale economic actors can be understood, commercially supported and through a kaizan-like approach operationally grown.

Their typically labour intensive business models relaying goods and services with apparent uniqueness and definite local flavour. Those aspirational business people in return providing equity/dividends or interest/re-paid capital (upon limited size loans), or indeed a hybrid of the two financing schemes.

The kids who once made novelty items and toys derived from used coca-cola cans have grown up into necessarily hard-headed entrepreneurs, yet have maintained a creative spirit that draws from both their own surroundings and the wider world.

Europe's present economic sluggishness - itself still in the early phases of structural reform and economic transition – essentially demands that the continent look both within and also far beyond its own back yard. As the US and leading EM nations look to compete and merge upon the industrial middle-ground, so Europe must seek offer both continued 'high-ground' and now also new 'low-ground' industrial approaches, so as to create a 'visible' and 'invisible' trade circularity with much of the remaining world.

If Europe fails to seize the opportunity- itself afforded by ongoing ECB liquidity expansion measures - then in time, America will certainly seek to do so; by re-applying the remnant material of its own 20th century expansionist past.

Given investment-auto-motive's obvious regard to the auto-sector, the next web-log will take a snap-shot view of vehicle-based enterprise with a various functioning, but far from socially, politically and economically matured countries.

Friday, 5 April 2013

Micro Level Trends – Western Economic Transition – From Investor Profiteering to Continent Re-Engineering to Leverage the Global Knowledge Gap.

In Q1 of this year, a painful five years on, the major western stock market indices at long last crept towards their October 2007 highs, America's S&P now beyond.

New Futurism -

This an important watershed moment regards not only investor sentiment and outlook, but also renewed faith amongst the much disillusioned America and European populace; who saw the foundation stones of the much hyped ‘new norm’ being laid, so promising a better (and closer) tomorrow.

The new highs of the S&P, FTSE, DAX and CAC, indicate the critical transition point between heavily contrasting old and new eras.

The former built on the premis of a triple aspect demand-led economy that saw credit-fuelled exuberant spending from governments, households and corporates. That in stark juxtaposition against a present essentially reliant upon a single aspect: the corporate-orientated “supply-led” economic regeneration.

In the Hands of Corporations -

Centre-stage are the blue-chip, high-cap commercial players, sitting upon sizeable liquidity cushions gained from a mixture of retained earnings and access to QE measures and (for investment grade entities at least) low borrowing rates. Yet even in what appears this perfect-storm period for those corporate giants, holding the levers to growth, they must now balance a range of opposing forces which constitute the ingredients of the supply-side mix.

Theory and practice expectantly sees a shift from operational focus upon ‘tick-over’ maintenance budgets toward greater capital expenditure, which obviously improves productivity when well timed. Yet such heavy fixed costs in what is still a fragile environment must invariably be off-set by truly cost-efficient and critically value-adding labour; at all levels of the organisation. The scheduling of available funds for such fixed and variable cost endeavours obviously weighed against the macro and micro picture, but given today's fiscal sensitivity more than ever correlated a firm’s confirmed and prospective order book.

M&A Temptations -

Yet for many well positioned firms the temptation of avoiding the disadvantages of organic growth – primarily management time and cost - the idea of a quick-fix from ‘bolt-on’ growth achieved through M&A can be attractive. Especially so at this time when funded either from cash reserves, or from the presently compliant pool of credit sources.

M&A typically provides extended horizontal business reach through complementary product segments and/or additional regional markets, or can extended vertical reach up or down the value chain. And indeed possibly provide for ‘diagonal’ reach giving the best of both worlds, though usually as part of a major restructuring.

However, whilst typically assuring the operations of an enlarged group in the short-term, and that of a re-shaped group in the medium-term, that newly captured productivity gains, associated value-added and wealth generation will naturally be recycled internally to the company and of course distributed to shareholders.

When performed well, M&A extracts additional value from the synergies of a combined operations set , and typically sees a shrinkage of ‘back office’ functions as administration is centralised or contracted-out externally (BPO). These savings providing for expansion of outward-facing operations in sales and marketing and core operations of production and/or service provision. Therefore, whilst the firm changes shape, shedding overhead and expanding value-creation, often overall personnel numbers may ultimately remain little changed from previously.

Of course, the company is operating more efficiently, and in doing so able to grow short and medium term income, EBIT and net earnings. So operates well within its own business sphere, and offers promise to investors.

Downsides Appear -

But from the macro-economic perspective (specifically regards the central issue of GDP growth), to the chagrin of governments, it (and its sector counterparts) are still effectively treading water. The firm has yet to physically expand enough so as to take on new labour (execs, management and staff), all required to absorb meaningful portions of excess labour capacity. Those newly employed then able to become more economically proactive individuals and thereby able add to a nation’s economic growth story.

Whilst we are undoubtedly in the mid stages of western economic transition, the very process is complex and verses a normative historic re-bound perspective has proven stilted. This because the corporate and banking worlds are having to wade through far greater “after-shock debris” at micro and macro levels when seeking-out sector-specific M&A target opportunities ; whilst other finance-backed players such as holding companies, 'buy-out 'shells and hedge-funds seek – at the higher economic altitude - an optimal re-arrangement of the good, the bad and the ugly firms across the western world.

'Public Good' Growth Paths -

It is a well entrenched theme that those nations and global corporates with interests in the “post-industrial west” now seek to rediscover their manufacturing pasts and potency through eco inspired technology and methods, similarly seeking to strengthen their service sectors via the affiliated ideology of “sustainability”.

The mantras of eco-tech and sustainability complemented by the application of intelligently efficient networked systems. The whole (a post-post-modern “grand narrative”) notionally directed to humanistic ends, reducing time and cost waste. Simultaneously reducing what economists term 'externalities', since the cost of dealing with issues that affect the 'public good' can no longer be born from ever more limited governmental resources.

This simplistic description today means that an ever greater burden for economic growth and the public good is placed upon the shoulders of corporations...largely western corporations.

A Truly New Era -

The story of global industrial development obviously had its 18th and 19th century roots in Western and Eastern Europe, these innovations deployed across British and French colonies of the time, and redeployed with productive and consumptive economies of scale in North America during the 20th century. That competitive advantage in turn exercised giving the USA economic reach into Japan and S.Korea. Thereafter, the mixed-market advantages of Europe overtook the ailing Soviet system, with new the EU entrants able to effectively provide new demand and new supply participants. The 21st century has seen such productivity orientated economic expansionism re-played yet again with formerly the 'BRICs', now the 'CIVETS', with Mexico becoming ever more integrated into the NAFTA free-trade pact.

Thus the redeployment of 20th century technology across the world has been the maxim to date.

Of course when such 'old tech' previously created for smaller populaces invariably becomes adopted by an ever increasing number of companies and consumers, the associated 'externality' problems becomes increasingly apparent. Newer innovations play a part in helping to circumnavigate some problems.

An example being internet based 'apps' based mobile telephony giving even those in remote under-developed areas direct access to personal banking, so reducing their reliance upon what are often heavily polluting aged public transport vehicles.

Yet for most people in notionally advanced regions, for those in notional EM regions and those in so called under-developed regions, the dream of personal travel has long been an actuality, engrained as a basic human expectation.

Thus as those notional 'democratic freedoms' have emerged so the challenges of containing the 'externalities' created by billions of people have equally emerged. And though the internet and soft-tech solutions can undoubtedly assist (as seen) it is also recognised that a major and ongoing innovation overhaul is required if the peoples of the world are to enjoy a similar living standards.

Re-Engineering Western Capabilities for the Global Good -

It is obvious across various disciplines that Europe and North America still retains portions of technical advancement and advantage with a plethora of world-leading companies offering research, development, specialist and umbrella-span technologists and as critical strategically attuned leadership.

View the S&P, FTSE, DAX and CAC and those company names and associated brands are self-evident, from AstraZeneca to GSK to Merck to Pfizer, from BAE to Boeing to EADS to GE to Rolls-Royce to Safran, from GKN to Siemens to Bombardier.

North America, though perhaps more socially fragmented today still operates as a politically and financially unified entity, presently with positive indicators regards home-market re-growth and ASEAN orientated free-trade aspirations – such regeneration sought to heal both the domestic social fractures and try and retain its world-power status.

Importantly, the central issue of the supply-side driven economic model is being seen to take form in the US with a cumulative effect that connects its domestic shale gas and domestic deep water drilling energy policy to create affordable power to energise its light and heavy industries.

Yet Europe, today whilst far from broken even with negative conjecture, is still obviously politically and socially fractured, so affording the idea that a more centralised financial system will better support the ideals of the Euro, a 're-Europeanisation' of the region and so assist a stable future for new EU members.

Ironically, whilst the US is able to domestically merge its old-tech and new-tech industries (exemplified by Detroit conjoining matured pressed-steel manufacturing with evermore innovative consumer electronics), for the most part the wider-world may eventually need to rely upon European, Japanese (and to a lesser extent US) commercial know-how to bring forth advanced 'leap-frog' technical solutions – from lightweight hybrid cars to public service and home-help robots – and their associated manufacturing systems.

The USA will no doubt seek to commercialise a new raft of militarily developed solutions, successors to the likes of teflon materials of the 1960s space programmes to unmanned flying drones of the last decade. And seek to strengthen much of its web-related activities , building on the foundation-stones of Google, Facebook etc; if indeed able to given international privacy issues.

Here and now, very simplistically, it seems that Europe leads in advanced materials and manufacturing science, whilst the US leads in advanced cyber-space development; the former obviously providing the basis for people's future physical needs, the latter far more subtly shaping people's perceptions and behaviour today/tomorrow.

Thus it will be both 'Euro-hardware' and 'American-software' that promise to shape the world. But of course, historic western dominance is slowly shifting.

Prime EM Players “Go Long” on Eco Advantage -

The basis of European technical leadership (along with Japan) was well recognised by India's TATA conglomerate when TATA Motors bought Jaguar Land Rover, for its lightweight engineering skills as much as its legendary nameplates. Similarly China's Geely when it acquired Volvo Cars for its skill set in world-class safety engineering, and the purchase of SAAB's assets by Singapore's National Modern Energy Holdings, as it seeks to either create a reborn eco-friendly SAAB via Chinese alliances or find timely exit s from its ex-SAAB divisions .

Naturally then, as perhaps initially prompted by Lenovo's purchase of the IBM laptop division, those EM based companies with sizeable resources invariably seek-out advantageous technological solutions for their own national, regional and even global needs.

Though a Closer Horizon for Most -

Thus far such examples which marry present/future scale with accordant technology solutions appear to have been limited to these few obvious high profile deals.

As is the usual case, most EM firms hunt for acquisitions that immediately fit everyday operational business rationale, evolution rather than revolution, or indeed a far horizon 'bolt-on' by which to possible steer the company. Most EM firms, even the majority of large corporations, will be focused on the near and mid-term business template as opposed to being primary catalysts of the national economic agenda.

In the past, typically EM countries with prime activities in 'low-order' activities have firstly sought to strengthen their international presence so as to gain economies of scale, access new markets and improve margins: as seen with ArcelorMittal in steel production and various mining and oil sector expansion efforts. Latterly, to serve the national and corporate agenda such endeavours have been balanced with 'mid-order' at lower cost service efforts, as seen by the previous emergence of Asian call centres, whilst simultaneously efforts made to offer 'high-order' services from highly educated workforces, such as TATA Consulting in civil engineering and IT.

History's Influence -

Given the fact that for much of the latter half of the 20th century EM countries were effectively economically forced to retain extended use of licensed 1950s-1980s technologies - still evident in light 3-wheeler 'tuk-tuks', medium trucks and vans, though less so now with passenger cars – it is hardly surprising that the skills base of EM countries has been so slow to broadly grow, even with propelling project efforts such as Nano.

The Knowledge Gap -

Though EM nations have been replicating western solutions and processes to form ever higher value commercial services and products, and the pace of progress impressive, it still appears that a distinct knowledge-gap still exists.

That gap very much dependent upon the philosophy of the specific national agenda. Whether to protect and build a domestic industry, gaining skills as and when feasible, and invariably takes decades; or to attract FDI (foreign direct investment) so as to modernise far more quickly but see portions of new national wealth creation repatriated to foreign firms.

This well illustrated by the auto-sector development paths of India vs Brazil.

India's wish to protect the market share of its indigenous manufacturers (TATA, Mahindra) and its previous special relationship with Japan (Maruti-Suzuki, Hero Honda) means that knowledge and technology transfers have limited. The Ultra Low Cost Car idea – forged by Nano – was supposed to have opened the doors to major VMs seeking to create such small cars via Indian alliances. But initial collaboration deals publicising imminent new R and D facilities flailed. Instead those 'open doors' (eg Mahindra-Renault/Dacia and TATA-FIAT) invariably created to attract limited series CKD manufacturing deals from which the host nation could effectively extract modern vehicle design and manufacturing intelligence (ie Dacia Logan and FIAT Linea).

Indeed, the 'knowledge-gap' seen by TATA Motor's recourse to contracting Italian engineering skills when developing the concept and development work of a supposedly “home-grown” steel bodied, low parts count, Nano model. The 'Heath Robinson' appearance of Nano's initial prototype / packaging buck, though with its own cost-learning merit, seemed to highlight that knowledge-gap.

[NB Nano has been decried as a failure since it has not met its targeted launch and early stage volume forecasts, but the car seems certain to remain a core product of TATA's line-up, and could eventually attain its 1 Lakh as the company balances eventual amortised enabled price reduction relative to slowly increasing wealth amongst the motorcycling masses].

Hence, India's historical background as a national specialist in the licensing and national adoption of western manufacture – from textiles to railway rolling-stock to cars – means that whilst it has become very proficient at 'recycling' and 'life-extending' old technologies well suited to its domestic low cost needs, it would as a result always be a technology follower as opposed to leader. Hence would never allow India to become a truly powerful global leader. With this well understood at the turn of the 21st century, and with much improved corporate cash positions thanks to the Indian IT revolution, initiative were undertaken to reach the 'distant horizon'. Moreover, it was understood that such learning could not be extracted from short term foreign alliances, whilst long-term alliances demand a give-away of domestic market share. Hence the decision to fully purchase attractive entities such as JLR.

[NB investment-auto-motives believes that TATA Motors / TATA Group will seek to similarly bolster the core competences of its Truck / Bus and Defence Vehicle divisions by acquiring world-class western firms].

In contrast has been the story of Brazil's auto-sector.

Whilst Brazil has periodically enjoyed pseudo-national vehicles (adaptations of other vehicles) it has never had a truly indigenous large-scale auto industry. Since the 1920s Ford, GM and Chrysler sought market domination, but post WW2, it was the European corporations that won favour, initially VW and latterly FIAT. From the early 1990s to date, initially as an 'over-spill' market, many companies have become present, latterly the Japanese, S.Koreans and now Chinese.

As such, with the need to grow GDP and without the need to protect a self-created domestic industry, Brazil has had a true open door policy to automotive FDI.

Thanks largely to the export of commodity goods underpinning an impressive economic success story over the last 20 years, public spending programmes and private consumption created massive demand for construction equipment, agricultural equipment, HGV, MGV and LGV trucks, buses and passenger cars.

To satisfy this multi-aspect transportation need the administrators in Brazilia welcomed most if not all foreign interests, the well entrenched and newcomers. It appears to have learned what could be construed as the past mistakes of other countries (ie India) by not electing to create a large domestic auto-industry from scratch using bought-in old generation technology. Instead, it seeks to intrinsically learn by both keeping pace and mimicking the capabilities of its broad, imported foreign skills-base, from which the local population can professionally learn both directly as an employee and indirectly via industry-academia relationships.

That skills base seen to be grown with the advent of FIAT's dedicated design and engineering centre in Belo Horionte (the only one outside of Italy prior to acquiring Chrysler), producing the effectively 'home-grown' Nouvo Uno.

First signs of this approach come from the creation of the Brazilian motorcycle firm 'Brasil and Movomento' in 2000, with apparent intent to deploy where possible best practice learned from foreign makers, at lower cost to suit the national marketplace.

Also have been commercial developments form the multi-mix vehicle maker Agrale, It started with the licensed manufacture tractors, but latterly has sought to develop (like other EM countries) its own commercial and specialist vehicle ranges. This with large trucks and specialist (4x4, 4x2) utility vehicles (utility spanning military, emergency services and SVO build needs). Both are understandably styled with heavy aesthetic connotations of class leading vehicles – Euro-Trucks and for Utility a merged formula of Hummer front aspect, Jeep rear aspect and Land-Rover side aspect; typical of any newcomers engineering stance. However whilst seemingly capable, the lack off-road poise (eg axle articulation / weight distribution etc) demonstrates an absence of engineering integrity compared to more expensive western products, hence a necessary lower manufacturing cost and price point of Agrale (ie Brazilian) vehicles to service Brazilian, Latin region and other EM nations.

However, as seen with Indian 4x4s (TATA and Mahindra) dedication to decades long generational vehicle improvement does pay dividends in home grown skills and maintained and improved market share, even if ultimately still removed from world-class vehicle performance benchmarks.

Hence Brazil is then seeking to primarily extract core competence knowledge from western auto-makers, whilst also creating its own extended learning path in low volume but higher value specialist products.

India and Brazil then demonstrate two very different auto-tech growth stories, and the lessons learned is that: whilst EM countries undoubtedly seek to much improve domestic Research, Design and Engineering Development capabilities, the ability to actually properly obtain and integrate modern skills (education, IT etc) very much depends upon trade negotiation terms with the major international manufacturers.

Yes, self-creation and what may be termed delayed learning is an approach that may be deemed appropriate given specific country circumstances, (specifically the desire to micro-manage industrial expansion directly relative to population wealth expansion), but as also seen such a perspective must also be balanced by recognising the need to invest toward the far horizon, again done through complete acquisition (not alliances) of target technologies.

However, whilst an obvious and large technological (and associated commercialisation) knowledge gap exists, its appears the fact that whilst all EM countries are individually unique, the myriad of smaller non-BRIC countries will only offer lip-service regards the transformative power of 'new-tech' and 'eco-tech', and may in fact because of financial, political and cultural reasons be generally satisfied by maintaining the general status quo regards industrial development.

Whilst the BRICs and various CIVETS have the financial might to apply advanced solutions in the mid-term, across showcase buildings, general infrastructure, energy, vehicles, IT and healthcare, the vast majority of those that lie beneath the BRICs and CIVETS umbrella will in reality continue to recycle in a marginal, evolutionary manner previous generation methods from the west whilst re-deploying locally engrained traditional answers.

Timely Re-Expansion of the European Advantage -

It is now seen that the technological advantage held by the west is still apparent, yet because of the re-orientation of global trade over the last 15 years and the EM focus on national economic growth agendas, that once massive knowledge-gap is being reduced, the top-tier EM countries able to now obtain such knowledge by M&A or FDI.

Such events should raise 'alarm bells' for western firms, the marked or gradual depletion of their innate competitive advantage(s) halted and reversed through investment into what needs to be a new golden era of western research, development and manufacturing.

The spectre of global warming has been an ongoing issue throughout the 20th century, in contemporary times highlighted by the 1997 Kyoto Protocol's first and second commitment periods (2008-12 and 2013-20). Whilst various governments chose to adhere, or not, to the expectation, the fact is that the aftermath of the 2007/8 financial crisis scuppered both modest and grand scheme attempts to harness what is still by conventional standards the high costs of the idealised 'new energy economy', itself founded upon over-optimistic perceptions regards the prevalence (ubiquitousness) and associated costs of 'far reach' eco-tech.

The new norm has reset expectations, yet that Kyoto ideal could instead be resurrected in a broader manner beyond the centricism of 'new energy' to encompass a wider appreciation of the 'global public good' and the challenges of the 'externalities' to be overcome.

The west, and specifically Europe, should seek to lead this debate, but instead of putting the “horse before the cart” as seems the case with Kyoto's reliance upon immature, revolutionary technologies; European companies, consortia and associations should offer and far more convincing and constructive approach by demonstrating the very real advantages that a quickened evolution of current and 'bridge' technologies may bring.

This perspective has already been seen in the automotive sphere, with the likes of European manufacturers avidly 'down-sizing' their engine capacities and reducing vehicle mass, so as to much improve emissions measures, and now increasingly adopting Japanese initiated petrol-hybrid, diesel-hybrid and plug-in hybrid ('bridge technology') systems.

This approach, though more cautious than the pre-2007 'eco-dream' - involving a world of electric cars powered by wind and sea and solar farms – is readily understood and applicable, and critically more readily understood and convincing to the European and indeed global investment community.

Importantly, accompanying this fast-track evolutionary technology approach should be a truly concerted effort to cross-fertilise the cornucopia of technological solutions past and present, so as to attain improved ecological (and otherwise) performance standards.

Only by realistically creating a new remit for 'Advanced Europe' (and indeed the broader West to include the US, UK, Scandinavia and near Eurasia) toward a new but realistic 'global public good' forum (akin to Kyoto's principles but, but within Europe) will the most advanced nations of the West be able to positively influence the broader direction of world progress.

As the 'new order' BRIC and CIVETS* countries understandably seek to take control of their own destinies via trade pacts and ongoing summit talks (seen very recently), the west will need to demonstrate its innate technological and moral worth.

Without doing so it will become increasingly excluded as new order countries seek to maximise the exploitation of now engrained older technologies and benchmarks, and dissuaded from anything but distant era improvement.

In automotive sector terms, when China's C-NCAP safety standards (itself ultimately improved by Volvo's local input) becomes the BRIC and CIVETS 'gold standard' instead of Europe's original NCAP, much of the world will be happy to continue with decreasing western input.

The time has undoubtedly come for a European shift from investor profiteering to continent re-engineering to leverage the diminishing but still powerful Euro-Global “knowledge gap”.

To this end, the E16bn EuMaT 'materials and technology' programme and its strategic research agenda may (or may not) serve as the broad aspirations template, but necessarily altered from the 'radical change' to 'optimal change'.

Of course, efforts must be maintained to reach into the future with high-brow 'pure' research-work, but without recognising the global realities and true challenges within the 'applied' realm, the politicians, academics and 'brainiacs' in Europe and the West may be seen to be operating idealistically within its own slowly crumbling ivory tower.

Post Script -

Though formally known as the BRICS since the inclusion of South Africa (invited because of its mineral wealth), investment-auto-motives prefers to retain the distinct BRIC and CIVETS nomenclature given S.Africa's closer approximation with those notionally 2nd-tier countries.