Daily Archives: September 16, 2011

Buy India, Sell China?

A recent article on Fortune on “Another Global Recession? Buy India, Sell China” caught my attention because, while I think China is over-hyped, I’m not sure India is ready for prime yet due to their infrastructure problems and the issues with getting freight from even a few hundred miles inland in many parts of the country. China still has problems, but they have been investing Billions to improve their infrastructure in recent years and making progress at a rapid rate whereas India, with twenty-eight states and seven union territories, and 22 languages of official status, has been slow to tackle their logistics challenges due to the very long timeframes it takes to get agreements on projects of a national scale. (It probably doesn’t help that the Republic of India is a federation with a parliamentary system that was based on that of Great Britain, where some projects take so long that they literally cross career life-spans!)

So why is the article recommending to Buy India, and Sell China? According to the authors, even though BRIC countries are growing at a rapid rate, countries like Brazil and China are doing so at the expense of other countries — primarily by supplying the global economy with raw materials and manufacturing. If major financial crises (continue to) materialize in the US and the EU, and global demand slumps significantly, these countries are going to get hit the hardest and the growth-rates of nearly 10% will be unsustainable. (And depending on which fear-monger you ask, growth could come to a screeching halt.) And this doesn’t even take into account the deep financial exposure China has to troubled regions through its massive foreign exchange reserves.

On the other hand, poorer, insulated economies like India are in much better shape to weather the storm and, in some economists’ views, even see a silver lining if major obstacles (such as nosebleed inflation rates) decline or disappear.

I have to agree, but only to a point. China is experiencing a rapid rise in its middle class at home and the local economy is booming as well. Plus it has a very aggressive five year plan, and a history of meeting those five year plans. While it will get hit hard, and probably drop down to a growth rate of 5% if a double-dip global recession hits us (just like its growth rate fell from 13% in 2007 to 6.8% in 2008), it will continue to grow and, more importantly, will likely be the first to recover when the double-dip recession ends (if it does hit us).

In other words, if you are one of the few investors left with the brains to take a long term view, don’t count China out yet. It may experience a few bumps, but it will figure out how to smooth them over as it builds its global highways. Moreover, if you’re looking to get rich quick, it will likely be another decade before India provides you with that opportunity. If you’re patient, I believe you can win with both economies.

How Much Should Sustainability Cost?

A recent post over on the Procurement Leaders blog asked “how much should sustainability cost”. According to the author, he commonly hears two views and suspects a third, specifically that:

  • cost is not the issue as it is really an investment with a potential impact on the top-line that merits the effort and expense
  • it should cost as much as it takes to avoid a scandal

and, most likely in some firms:

  • cost is not the point as it is simply not worth it

Regardless of your view, the author notes that it is worth thinking about what the acceptable cost of sustainable sourcing is, given that, earlier this year, Cargill payed a US 2.2 Million (sustainability) premium to co-operatives on a delivery of cocoa, with about 50% filtering down to cocoa bean farmers in Cote d’Ivoire.

One could argue that it was an investment as the money could be used to further sustainable farming techniques. One could argue that it was paid to avoid a scandal, given the number of articles that have appeared lately on the plight of cocoa farmers along the Ivory Coast, as sometimes you can avoid a scandal simply by not being one of the worst offenders. One might even argue that Cargill might secretly think it is not worth it, and just paid the money to make the whole issue someone else’s problem. (“We paid extra so the co-operatives could be sustainable. It’s their problem if they’re not.”)

I agree that it’s worth thinking about, but I don’t think that any of the answers the author provided, or suggested, are right. I think the cost of sustainability should be:

  • Less, in the mid to long term, than not doing it at all.

If you’re sustainable, you’re using renewable resources. While the cost of a renewable resource may be high at first, as there are up front costs for the new equipment and processes required to produce or harvest it, over time these costs should reduce dramatically. On the flip-side, it’s almost impossible to point to a non-renewable resource where costs are not skyrocketing. So if you’re switching to a truly renewable resource, within a few years, say 5 on the outside, the cost of doing so should be less than sticking with a non-renewable resource. If it’s not, then either the resource isn’t renewable, the harvesting process is inefficient or wasteful, or someone, trying to take advantange of the sustainability frenzy, is charging you a green premium for which there is no justification but greed. (In that case, find another supplier or do it yourself.)

That’s the doctor‘s view. Anyone want to provide a differing one?