Comment on European and Asian firms

Yesterday Fund Strategy published a cover story by me on the euro-zone and a related comment. They were, strictly speaking, more about economics generally rather than growth scepticism but I thought they might be of interest. The cover story is too long to post here (and there is no direct link) but I have pasted the comment below:

Many large European companies seem to be pinning their hopes for the future on outsourcing production to Asia. While this might work as a short-term financial strategy, it will not alter the shifting power balance between the two continents.

As Daniel Ben-Ami discusses in this week’s cover story many European firms are transforming themselves into “platform companies”. This means they are retaining control of such functions as marketing and design, while outsourcing the production of their products. Ikea and H&M; are prime examples of European platform companies.

The phenomenon has also been noticed by those discussing Asia. Will Hutton, one of Britain’s best-known economic commentators, has written a book that makes much of the fact that hardly any leading global brands are Chinese. He argues that China’s strength is frequently exaggerated because commentators fail to grasp that it often acts as a sub-contractor for Western firms.

It is true that Western companies can benefit from outsourcing their production to Asia. No doubt they are bolstered by the restructuring involved in shedding their own workforces and relocating elsewhere. It also means they have fewer assets tied up in fixed capital. Lower volatility and higher share prices can be a result of this process.

But if Western companies believe Asian firms will be content to just assemble products for others they are deluding themselves. Once Asian companies have honed their production skills, they are likely to start developing their design and marketing abilities. This may take time but it is hard to see how the process can be thwarted.

The process will in some ways be analogous to Britain’s relative decline. In the Victorian era Britain was the world’s leading power, but in the 20th century it was supplanted by America. This did not mean Britain disappeared but it is not the power it once was. In absolute terms, Britain is far wealthier than in the 19th century, but relative to other powers it has fallen behind.

In a similar way, the shift today is towards Asia. Firms from the East will no doubt become leaders in technology and marketing rather than assemblers of Western goods. European firms will continue to operate – many may thrive, but fewer of them will be the world leaders they are now. The continent of the future looks set to be Asia rather than Europe.