Which industry sectors will thrive over the next five years? Where are growth opportunities to be found around the globe for both local and foreign investors?
The biggest change for most global industries is that, at long last, Europe will be in recovery mode. For the automotive sector that signals an end to the five-year slump in car registrations. For consumer goods it means a rise in retail sales.
In the energy sector the US is competing with Russia as the top producer of hydrocarbons, thanks to the North American shale oil and gas boom.
The rate of Chinese growth will remain crucial for many global industries, particularly in the telecoms sector, where China Mobile, the big state-owned Chinese telecoms company, will continue to dominate.
In the healthcare sector, landmark healthcare reforms in the US, the one market that still dominates the sector, are opening up significant opportunities.
Automotive sector
The end of Europe’s slump and a slowdown in emerging markets will mean a mixed period ahead for the automotive sector.
As the European Union’s vehicle market returns to growth, Western Europe’s motor industry will expand, along with those in the transition economies of Eastern Europe. The US market will remain strong, while India and Russia will recover momentum after recent slumps. The Chinese market is likely to slow, however, while the Brazilian market may well disappoint and Japan could well carry on contracting.
Much depends on interest rates as economies recover. However, global vehicle markets should stop being as uneven as they have been of late.
The long-term shift for car makers is towards new-growth, heavily-populated markets and away from more established, mature markets. In 2014, Asia is expected to account for 43% of the global car market, up from less than 30% just six years ago. North America will account for 25% and Latin America, and other emerging markets, up to 15%. But it is Europe’s fall, from 26% in 2009 to less than 17% in 2014, that will continue to force a shift in production capacity.
So far, investment in new plants in fast-growing markets has outpaced downsizing in slower ones. Despite shutting plants in Europe and North America, the industry will still need to tackle over-capacity, even as demand recovers.
China (the world’s largest manufacturer and buyer of vehicles), for example, will soon be capable of making 30 million cars per annum, while national sales will take several more years to reach that level of demand. Auto manufacturing plants are therefore seeking out new export markets. So far, the Chinese have focused on markets in the Middle East and Africa, where safety and emission standards appear less stringent. In the future, as standards improve, they will target developed markets too — the day when Chinese car imports make serious inroads into US and European Union markets is not far away.
In some markets, including China and Indonesia, manufacturers are also coping with the threat of more ownership restrictions, as governments try to combat rising pollution and congestion. Indonesia and some Indian cities are contemplating licensing restrictions, while congestion charging and other measures are being used in cities such as London, UK. “Several Chinese cities already have licensing restrictions, and more are likely to be introduced,” says Kurt Lee, Zhonghua CPAs, UHY’s member firm in China. “In fact, recent vehicle sales in China — which reached nearly 22 million units in 2013 — have been, in part, due to anxiety about impending licensing limits.”
Meanwhile, in the world’s biggest auto market, the Chinese government is fostering development of low-energy vehicles through subsidies of up to 60,000 yuan for all-electric vehicles and up to 35,000 yuan for plug-in hybrids. Low-energy vehicle sales totalled 17,600 in China in 2013, mostly all-electric vehicles — still, however, way below the government’s goal of 500,000 cumulative low-energy vehicles by 2015 and five million by 2020.
“China will soon be capable of making 30 million cars per annum, while national sales will take several more years to reach that level of demand.”
Consumer goods sector
Consumer goods are in transition, as retailers address changing consumers and changing channels to market.
Trends, such as e-commerce, will become mainstream as consumption patterns from before the global financial crisis resume, particularly in Europe as incomes recover. Accelerated use of mobile devices is the key driver of e-commerce growth. The biggest swing in fortunes will take place in Western Europe, but the biggest regional growth potential remains in Asia.
China and India continue to merit close monitoring. For India, opening the retail sector to foreign direct investment (FDI) will remain the burning issue. While a liberalisation of single-brand retail investment has been relatively successful, multi-brand investment has been more troublesome. Despite receiving government approval in 2012, legislation has been diluted by opposition, bureaucracy and unworkable clauses. Outcomes from the 2014 elections may dictate what happens next: pre-election some opposition parties had been threatening to reverse concessions granted by the government.
“This has not, however, impacted the FDI inflow which remains steady during 2013-14,” says Sunil Hansraj, Chandabhoy & Jassoobhoy, one of UHY’s member firms in India. “While FDI in multi-brand retail remains a debatable issue, political parties across the spectrum recognise the need for significant increase to the FDI inflow.”
In China, retail volumes are forecast to grow by 9% in 2014, driven largely by e-commerce and rising demand from emerging cities in the interior. Luxury firms and retailers such as WalMart are continuing to unveil ambitious store openings, while goods suppliers have invested in improvements to production and distribution processes.
Uncertainty over China and India will give other fast-growing markets an opportunity to step out of the shadows. Africa, seen as the ‘final frontier’ in many long-term retail investment strategies, is moving up the retail and fast-moving consumer goods agenda.
Although growth in South Africa — where WalMart purchased local player Massmart — is modest, it is expected to provide a springboard into other markets further north. Carrefour’s investment in West Africa reflects a similar strategy. Asian markets such as Thailand, Vietnam, Indonesia and Malaysia will also become more prominent.
“Combating climate change is, however, only one reason for the renewables expansion — equipment prices have fallen, governments prefer to support domestic equipment-manufacturers, and governments need to shore up energy security through alternative supplies.”
Energy sector
The energy sector is set for a period of revolution and rapid growth in individual sub-sectors. Global energy use will continue to grow as emerging markets make up for sluggish old- world demand.
Oil production will continue to rise as prices remain high and ever-expanding car fleets in emerging markets guzzle more fuel. Gas has been the less desirable hydrocarbon, but demand is now rocketing, while pipelines and investors in liquefied natural gas (LNG) facilities rush to catch up.
Low North American gas prices will play a big part, supported by policies to tilt electricity utilities away from coal power. The dirtiest fuel is nonetheless proving resilient, as developing countries such as China — the world’s largest energy consumer — and India struggle to extend their power grids. One difficulty they face is incorporating cleaner but less dependable sources of electricity, such as solar and wind power.
Despite this, renewables are on a steep upwards trajectory. China will generate much of the growth, thanks to its targets and incentives in a mounting campaign against air pollution. The US and Germany will also boost capacity.
Combating climate change is, however, only one reason for the renewables expansion — equipment prices have fallen, governments prefer to support domestic equipment-manufacturers, and governments need to shore up energy security through alternative supplies.
Such motivations also help the other main non-fossil fuel. Global nuclear capacity will edge up, thanks partly to Russian and Indian reactor building. But China is again the main dynamo — four new reactors are coming online, and still more are in the pipeline.
Although some analysts warn that global oil output cannot keep rising for much longer, new activity will centre on the US, Canada, Brazil and Iraq (where security risks linger, but output is finally set for steady growth).
The biggest revolution, however, is taking place in the US, which is poised to displace Russia as the top producer of hydrocarbons, thanks to the North American shale oil and gas boom. Production in the major Bakken shale plant in North Dakota is topping one million barrels a day.
For the US, the implications run deep: its net oil-import dependency is edging towards scarcely one-half of its 2005 peak of 60%. Pressure to lift the ban on US oil exports will intensify.
US regulators also face tough decisions on turning the country’s shale-gas wealth into LNG for sale overseas, as demand from Asia grows quickly. The US has a chance to capitalise on its early-mover advantage. Regulators must balance the case for exports against fears of pushing up prices at home by constraining supply.
Yet, it is Australia that leads the charge against Qatar’s pre-eminence in LNG exports. Two giant liquefaction facilities, Queensland Curtis LNG and Gorgon LNG, will boost Australian capacity by 24 million tonnes — as much as the total annual capacity of Malaysia, another significant LNG player. Like future exports from North America, cargoes will mainly be destined for Asia.
Capacity expansion among low-carbon fuels will be limited by surging supplies of cheap natural gas. In the US, for example, the Vermont Yankee atomic plant is expected to close, partly because of low gas prices. Power from coal will also go out of fashion as stringent carbon-emissions standards for new US power plants are finalised and rules for existing plants follow. However, so far, these moves have barely dented US coal production, thanks to vast overseas demand. China, the source of almost half of the world’s coal supply and consumption, is once again pivotal.
A UHY study on the pump prices of petrol, diesel and liquefied petroleum gas has examined differing costs around the world, and how they are affected by local taxes and subsidies. To receive a copy of the study please email Dominique Maeremans: d.maeremans@uhy.com
Telecoms sector
Operators are seeing their investments in 4G and superfast broadband pay off. 4G revenues are up and specialised content, such as pay-TV, is helping operators reduce churn and compete directly with cable firms.
As operators monetise their 4G investments, industry group the GSMA (http://www.gsma.com/connectedliving/) says that in developed countries where 4G has been deployed, average revenues per user are rising by between 10% and 40%.
The Chinese 4G rollout has begun in earnest — China Mobile, the state-backed operator and the country’s largest, with 750 million subscribers, will benefit the most. The company has committed RMB 20 billion (USD 3.2 billion) to creating what will be the world’s largest 4G network.
China, along with India and Brazil, are expected to take the largest slice of revenue growth from the telecoms market over the next few years.
Healthcare sector
The world appears set for a seemingly inexorable rise in healthcare spending, in many cases despite governments pushing through far-reaching reforms, some of which are designed to squeeze costs.
Developing markets are narrowing the gap in spending with developed markets. Pharmaceutical companies are bearing the brunt of cost-cutting.
Yet, there is one big upswing in the market that continues to dominate the sector — the US has implemented its landmark healthcare reforms. Americans are obliged to take out health insurance or face a fine. Up to seven million new customers have been brought into the healthcare insurance system, helped by tax credits and the expansion of Medicaid.
Healthcare spending in the US is set to increase by nearly 5% in 2014 alone.
Healthcare spending globally is also on the rise, not just because of US reforms, but also due to better access to healthcare in developing markets. Global pharmaceutical sales are likely to benefit as transition economies get into gear. Growth will also be driven by rising populations, increasing life expectancy and expanding urban wealth.
Pharmaceutical companies in emerging markets are becoming more assertive in international markets. Rising global demand has seen Indian companies press into Latin America and the Middle East. India is also stepping up its investment into research, in a bid to generate more lucrative original drugs. Other countries, such as China and Brazil, are following the same route, often with help from international health operators keen to diversify.
Government policies are also playing a role, not just in the US. Developing healthcare markets — including in China, India, South Africa, Brazil and the United Arab Emirates — are expanding insurance systems, easing access to drugs, and rolling out universal healthcare systems. Several countries are also trying to step up investment in healthcare, not just for their own populations but also to attract medical tourism.
Details of UHY member firms operating in the countries mentioned in this article are available on the UHY website under Locations
