The CIVETS are coming. Meow?

Picture from http://www.cdc.gov/animalimportation/civets.html



"Meow" might be the wrong word here, since a civet isn't (technically speaking) a cat.

It's actually a member of the same order (Carnivora) as both cats and dogs, but the civets belong to the Viverridae family (as opposed to cats, whose family is Felidae).  I know you really needed to know that. 

It it worth noting, though, that the civet's natural range is in Southeast Asia, including Indonesia.

Ok.  The CIVETS countries are:

Columbia
Indonesia
Vietnam
Egypt
Turkey
South Africa

So, the theme for this week is the CIVETS, one country at a time.

First of all, the term CIVETS was invented (by British bank HSBC) as a follow-up to the BRIC grouping.  Not the Big Economies, but the smaller, "second generation emerging markets characterized by dynamic, rapidly changing economies and young, growing populations."

It's become fairly common usage; for example, there's a S & P CIVETS Index

 

One article did say that CIVETS is an artificial cluster, unlike BRIC, which really were set to be the next Big Economies.  As one writer put it, "It sort of makes you wonder if Vietnam was added to provide a needed letter."

In any case, artificial or not, let's look at the CIVETS.

Columbia

The first CIVET is Columbia.  How does it look on the numbers?

Columbia's GDP is in the $4 billion neighborhood (#29 world-wide), and growing at 5.9% (2011).  Where is this GDP coming from?  According to one source (the source for all other numbers not otherwise attributed), Columbia's major exports are petroleum, coal, emeralds, coffee, nickel, cut flowers, bananas, and apparel.  In other words, its economy is based on natural resources, agriculture, and (in last place), low-tech manufacturing.

Moreover, Columbia does not appear to be investing in their future.  Gross fixed investment (in income-producing assets) is at 23% of GDP.  To put this in perspective, Belarus is spending almost 40%, Vietnam almost 35%.

I can't determine whether or not there's capital flight going on here (which is what Argentina's been battling for years), but I did find one article talking about FDI flowing out of Columbia -- $20 billion from 200 to 2010.

Official sources claim that FDI flowing into Columbia is increasing, but even that source admits that most of the FDI is coming from oil and mining.

What does your future economy look like?  What are you investing today?

So maybe it's the demographics.  Median age is 28.3 years.  That's right in the ballpark for developing economies (for example, Indonesia is 28.5 years, Brazil is 29.6 years).  This is ok, but nothing special.

Columbia's population is 75% urbanized, which matters, because urban residents shop more, driving domestic consumption (for a discussion of this phenomenon in China, see this report).  Again, not bad.  Indonesia's 44% urbanized, Peru's at 77%.

If the CIVETS are the economies of the future, what else is being done to invest in that future.  Literacy is 90.4% and average educational attainment is 14 years.  Public spending on education is 4.7% (World Bank numbers), which puts Columbia right in line with Nepal (4.7%) and Rwanda (5%).  In contrast, (and more to the point), Brazil spends 5.7% and Costa Rica is at 6.3%.  You'd think that if you were interested in economic growth, you'd invest in education.   Columbia isn't really low, but nor is it inordinately high.

So, then, why Columbia?  Per the Wall Street Journal:

Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade...

A 90% decline in kidnappings.  I don't want to joke about what is a serious issue, but that doesn't strike me as the strongest recommendation out there.

Another source cites Columbia's "pro-business government."  Well, governments change.

During the 1990s, foreign investment was pouring into Argentina, under the government of President Carlos Menem (1989-1999).  That slowed in the Argentine financial crisis in the late 1990s, and under current president Cristina Fernández , nationalization is the order of the day.

And, Columbia has some internal governance issues.  President Santos is currently preparing for Formal Diplomatic Talks with an outfit called FARC (The Revolutionary Armed Forces of Colombia). FARC is politically left-wing and has long financed their operations by kidnapping and drug trafficking (though they claim to have given up kidnapping for ransom).

So, than, why not Venezuela?  The numbers are comparable or better (economic and demographic). 

Venezuela already exports oil; Columbia is in the beginning stages.  And, by the way, FARC just loves to take out oil pipelines....

Our problem with Venezuela -- Hugo Chávez.  However, as we've said, governments change, and we know (or suspect) that  Mr. Chávez is probably not too much longer for this world (though nobody knows for sure).

So am I dismissing Columbia?  No.  Just that there are other attractive Latin American countries in addition to Columbia.  Brazil we aren't counting here as up-and-coming, but I've also heard positive reports about Panama and Costa Rica.  Smaller countries, smaller economies than Columbia, but with growth potential.

Next up....South Africa.

"Avon Calling"

Avon, at one time perhaps the best known of the direct-sales companies, has fallen on hard times.

According to one article:

Avon Products Inc reported weaker-than-expected fourth-quarter results as sales slid in every market except Latin America and the company saw a 3 percent drop in the number of representatives who sell its cosmetics directly to consumers.

This reflects drops in sales overall.  Of interest is that only about 20% of their sales (per the 2010 annual report) are from North America.  Two of their biggest markets -- Brazil and Russia (as per the annual report) are markets where Avon has taken a hit.

In the case of Brazil, Avon claims that computer problems (specifically, a "legacy system") are the reason for the sales drop there.  Shouldn't Avon have anticipated problems with an outdated computer system and addressed that much earlier?

In the case of Russia, Avon blames "agressive pricing" from competitors.  Ok.  You compete on one of two things -- price or quality.  If Avon isn't the cheapest brand, should they not position themselves as at least a brand of choice?  Could be on product quality, customer service, whatever, but something that will convince Russian women that, while Avon may not be the least expensive, it's the best value for the money.

It's something to remember.  A company can make a lot of mistakes in going international -- ignoring cultural differences, etc. -- but it's also possible to do things right in the international sense and still just not do a good job of running a business.

Maybe this is why Avon CEO Andrea Jung is looking for a new job.

Burger King Said to Be in Talks With Brazilian Group - NYTimes.com

In yesterday's (September 1) International Business class, we touched on the BRIC countries -- Brazil, Russia, India and Cihina -- and their growing economic power. Here's an example for you.

Burger King Said to Be in Talks With Brazilian Group - NYTimes.com

Iran and China: New Developments

For the past several years, China has worked to build trade relationships with African and Latin American countries -- Argentina, for example, as well as Sudan, Nigeria and Peru.

It's motivated (as we've discussed in the IB class) by China's growing need for raw materials -- such as recycled paper (for the cardboard boxes that Made-in-China TV is shipped in), soybeans, iron ore and gold. China has an advantage over Europe and the US here -- China isn't a former colonial power (not that the US really was a colonial power or anything, but who cares?). It's been a successful relationship. Even though Japan, South Korea and Taiwan are the biggest source of Chinese imports, China is now Brazil's largest export partner (ahead of the US); Angola, Chile, Democratic Republic of the Congo and Kazakhstan are among the countries sharing that honor.

One of the Chinese trade relationships that is currently troubling to the US is the Chinese relationship with Iran, based, of course, on oil. It goes beyond imports and exports; China has invested heavily in refineries and pipelines in Iran. Moreover, the Iranian government has proposed a system of rail links between China, Iran, Afghanistan, Tajikistan, Kyrgyzstan.

Trade sanctions (banning trade in strategic materials) against Iran have slowed, but not stopped trade between China and Iran.

What exactly can the US do here? Not much. The UN can make agreements, but China is going to act in their own interests. Neither the US nor the EU wants to see Iran with nuclear weapons, but it doesn't appear that the Chinese care.

Don't forget that the Chinese own a lot of US government debt [1]. And, the US exports a lot to China as well -- luxury products [2] such as wine and ginseng roots, but also basic raw materials, such as recycled paper and soybeans.

The batteries in my crystal ball need to be recharged, but I don't see much changing here. It's a tenuous balancing act between the EU [3] and the US, first, China second, and Iran, third. One solution might be for the US to take out Iranian nuclear facilities, making sure to give China plausible deniability. That could get very very messy, though. There's some indication that the Iranian government isn't all that stable, and changes there could very well make a peaceful solution possible. The US would probably have to concede in principle on Iran's right to peaceful nuclear use, though, which would be politically suicidal for the current administration.

Taking a broader and more long-term perspective, though, look at China's trade strategy overall.

China's motivations here are complex. At first glance, the whole point is access to resources. For example, the Democratic Republic of the Congo has copper, Iran has oil, Brazil has wood pulp, etc. China is also investing heavily in infrastructure development in its African and Latin American trading partners. They're thinking long-term. Remember, the Chinese are the folks who have kept track of the (more than 3 million) descendants of Confucius over a 2,500 year span.

Not everyone sees China's growing ties with Africa/Latin America to be a Big Problem; some believe that US influence in Africa is broader based and more likely to be lasting.

But, as we remeber from The Godfather, "it's only business." Trade appears to be the real motivation, with politics being only a means to an end.

It's clear that China isn't in this for their health; China cut off imports of Argentine soybean oil after Argentina imposed retaliatory tariffs in response to accusations that China is dumping textiles and kitchen appliances in the Argentine market.

Another indication that the Chinese government isn't seeing these relationships as one-sided are developments earlier with loans to Zimbabwe:

Deputy Prime Minister Arthur Mutambara says the Chinese want all loans to
be repaid before loosening its purse. According to the Mutambara the Chinese
President Hu Jintao revealed to him during a brief meeting at the World Economic
Forum in Switzerland that he considers Beijing relationship with Harare as
’business partners’ and not ’friends’.

If nothing else, the complexities of trade and politics between China and the rest of the world will give us something to think about for a very long time to come.

Notes

[1] There is some indication that Chinese purchases of US debt declined after the late 2008 economic meltdown. They still hold a lot, though by now China holds enough Treasury securities that it's probably unlikely that they could afford to unload them.

[2] Western luxury products are big in China, though most of these are imported from Europe.

[3] Europe trades a lot with China, too.

IB Exam, February 22

Do you know what language is spoken in Brazil ??? You should.

Did you look over the Fortune Global 500 slides ?? You should.

China and Oil

Ok. The last question I asked you Monday night was this -- where is China going to get the oil needed to fuel (so to speak) its economic growth? They don't produce it themselves. There's oil in Iraq, there's oil in North Central Asia. But, there's lots of folks who want this oil -- the US and Europe, for one; India is also in the market.

China and India Vie for Kazakhstan Oil (8/16)
China Ups the Ante in Its Bid for Oil (8/22)
Uncertain Saudi Supplies Hold Key to China (8/23)

So, is everything gloom-and-doom? Not necessarily. One of the world's 5 most populous countries (China, India, Brazil, and the US being the others) has found an alternative.

Homegrown Fuel Supply Helps Brazil Breathe Easy (6/15)

Your thoughts ??????