The Big Fall

A month ago, we held the Horasis global China business meeting in Valencia, Spain. That was attended by a big delegation of Chinese firms. Then, the Chinese government and companies were hailed as the last resort to bail out Europe. There was a lot of speculation on China's sovereign wealth funds buying into Europe. The European Union president Herman Van Rompuy and other European leaders went to Beijing to persuade China to invest in Europe; French President Nicolas Sarkozy and German chancellor Angela Merkel were knocking on the door of China on behalf of other European countries. But the response from Beijing was lukewarm. China said they wanted to help Europe, but on their terms.

China wants developed market-economy status at the World Trade Organisation. There are anti-trust cases against it at the forum. So, it will give a little bit, not the amounts Europeans have in mind. It will strategically buy European firms — at much better prices. It is a much better approach, much better than just buying sovereign wealth or debt, which does not have a direct industrial link. By buying companies, the Chinese will be seen as the saviour of Europe.

Most Chinese entrepreneurs believe China is a rising power and will benefit from the fall of Europe. But in our China meeting, a textile exporter said that if European markets go down, it could affect their exports. So they have both sentiments; bullish as well as apprehensive.

In Europe, China is interested in branded, retail and high-tech engineering products. The Chinese are looking at not just suppliers of automobile, but even buying whole car makers. For example, the Chinese have bought Volvo. And Volvo that was owned by Ford Motor is now owned by Chinese company Geely. Many people said China cannot own a European car brand, but the Chinese have turned it around, even without changing the workforce. In fact, they gave a lot of autonomy to the Swedish managers.

The Europeans want Chinese companies to invest in greenfield operations and set up their regional headquarters in Europe. But the Chinese are more interested in buying firms rather than setting up new companies. Their approach is to get hold of a brand and then revive it.

Compared to China or even Indonesia, India's level of investment is small. But India can do much more. It has a lot to do with perceptions. There are some Indian examples. Rahul Bajaj had a partnership with Piaggio in Italy, and has a tie-up with Germany's Allianz. Baba Kalyani of Bharat Forge owns mid-size German makers of forge products. In fact, this is the best way to do it — buy smaller companies and integrate them. Big-ticket deals might not work for Indian companies. Take Corus. Tata is a great company, but Tata Steel initially had big trouble integrating Corus.

All export-oriented companies will suffer. The automotive sector is going strong now, but it will slow down. The question is what will happen to India's IT outsourcing firms. Some say that when a crisis hits, the outsourcing business will gain as companies will cut costs and outsource more. This was true for the first crisis in 1998 when a lot of companies outsourced to Wipro, Infosys and TCS. But now the second part of the crisis is different; IT companies will suffer, as there is not much room to outsource anymore. And European and US customers will cut business. But Indian pharma companies are thriving as they mostly supply to local markets. Fortunately, India is not so much dependent on exports like China.

The year 2012 will be an apocalyptic year for Europe. Things will get worse; I am extremely pessimistic. Even the Euro might fall apart. Of course, a lot of people talk about it. If Greece falls, what about countries such as Italy, Spain and Portugal? Greece is a very small country, accounting for hardly 2 per cent GDP of the whole of Europe. If Italy or Spain goes down the drain, the impact will be different. It will trawl the whole of Europe into a deep debt crisis. And the impact will be worldwide — the world could slip into a deep recession for the next few years. Needless to say, it can impact India, too.

The fall of Greece is certain. Because coming from Europe, I do not see any other way. Some austerity measures are underway now, but those are not enough. People on the streets are violent — I would not call it a civil war yet. And in European elections, the extreme parties are winning. That is dangerous.

Sitting in India, you cannot imagine how serious the crisis in Europe is. Today, when you walk into any European city, you see beggars all around. You see many young people begging on the streets all over Europe — even in Germany. People who lose jobs cannot afford their lifestyle anymore because there is no social net. I am not saying this because gloom sells, but I am convinced this will happen.

As told to T.K. Vineeth

(This story was published in Businessworld Issue Dated 09-01-2012)