Tom McCabe: Asia positioned for post-recovery strength

The pain of the newly-declared recession knows no boundaries, and the Asian economies are not immune, but that region is positioned to rebound faster than the U.S. and come out stronger than before, according to Tom McCabe, managing director of Standard Chartered Bank PLC. Speaking from the perspective of more than a decade in the banking industry in Asia, McCabe told an audience of executives in Phoenix that Asia will be the world's engine of growth in the next 50 years, driven by India and China.

The pain of the newly-declared recession knows no boundaries, and the Asian economies are not immune, but that region is positioned to rebound faster than the U.S. and come out stronger than before, according to Tom McCabe, managing director of Standard Chartered Bank PLC.

Speaking from the perspective of more than a decade in the banking industry in Asia, McCabe told an audience of executives in Phoenix that Asia will be the world's engine of growth in the next 50 years, driven by India and China. Part of Asia's advantage is demographic. Seventy percent of the new consumers between the ages of 22 and 24 who will enter the market in the next 15 years will be in Asia, McCabe said.

"If you are competing for shareholder funds and your competition has exposure to Asia and you do not, you're running uphill," he stated. But another part has to do with decisions made in Asia and in the west concerning infrastructure investment. While recovering from the dot com bust, the Y2K scare and the SARS public health crisis, Asian countries were investing $2 trillion creating jobs and substance by building real infrastructure: roads, hospitals, rail lines, water systems, universities.

During the same period, the U.S. created a vast infrastructure of financial trading services — what McCabe called a shadow economy — that did little to support the real economy. The shadow economy has been a contributor to the severity of mortgage crisis and has caused systemic job loss in the financial services and related industries, he said.

The shadow economy

The infrastructure that supports the shadow economy has grown to enormous proportions in the past 10 to 15 years, McCabe said. Bloomberg, for example, feeds pricing and analytics on more than five million financial products to 250,000 terminals across the world. "I've been in the industry for 25 years," he said, "and there's no way I can see sound commercial use for 5 million financial products. Many of these were created to fuel the proprietary trading needs, not the commercial needs of the real economy."

The complexity and volume of products leads to less transparency, and ultimately wider trading spreads, he added. The rating agencies also played a role. "Traditionally they evaluated operating companies that produce tangible goods and services and made assessments of financial health so that they can issue debt to grow their businesses," McCabe said.

Instead, the agencies shifted tremendous resources to analyzing portfolios full of derivatives and securities that had little direct connection to operating companies. "They stamped many of these portfolios AAA, allowing them to be held by pension funds, mutual funds in 401k's, and municipalities," he said.

Individuals and institutions now held securities that were much riskier than they had intended." How does it all play out? McCabe referred to a chart showing stock performance on the major indices world-wide for the past 52 weeks. Performance dropped 32 percent in the U.K., 42 percent in the U.S., 48 percent in India and 67 percent in China. If past recoveries are a guide, it will take the U.S. two to five years to recover, he said.

The new Asia profile

Asia may be able to lift itself out of the valley quicker than the U.S., he said. McCabe is an expert in corporate and consumer banking in Asia, the Middle East and Africa. He joined Standard Chartered Bank in 1997, and has been managing businesses in China and Korea since 1997, including a role as CEO of the bank's business in Korea from 2004-2006, when SCB completed the purchase of Korea First Bank. Each country will respond differently, he explained.

Each country has a somewhat different approach to policy, and to regulatory and business practices. As well, each has different levels of natural resources, labor skills and management expertise. Investments are already underway to build more inter-Asia trading and reducing dependency on the U.S. and European economies. McCabe used India as an example to support his argument about the potential future strength of the Asia economies.

There are more people in India under 25 years of age than the entire population of the U.S, providing a high quality labor force and retail customers from the next three to four decades, he said. "Today mangers in India are highly educated, ambitious and carry a great work ethic. The compensation structure is significantly less than that for an equally qualified manager in the U.S. or Europe," he added.

Businesses in India are innovating in high quality, low cost goods that are establishing leadership across the world, McCabe said. Tata Motors' new Nano is a family car that seats five, gets over 50 miles per gallon and costs just $2,500. Another example is the design of a mobile phone with full functionality that sells for less than $15.

This product has helped the telecommunications industry to add over 10 million new customers a month. The rest of the world has been built on "brandedness," McCabe said: "the $400 phones, the $600 hand bags." He predicted a return to more frugality, however, and India will lead the way with innovative, quality products at low cost. Korea is a different case. McCabe spent two years there when his company was completing the acquisition of Korea First Bank.

The country is facing head winds he said, as its ship building, automotive and electronics sectors deal with the slump. And, Korea faces competitive pressures from Japan, China, and Vietnam for the Foreign Direct Investment ( FDI) that could stimulate job growth. Topping it all, Korea is the most rapidly aging population in Asia. A high tech manufacturer that McCabe cited has to figure out how to handle a 17-19 percent turnover in senior management in the next couple years.

"Supplying enough top level management talent is a challenge for all of the Asian economies," he said. "Korea has very good management talent, but the age demographics creates issues in terms of the depth of the talent needed." The long term trend, McCabe said, is for the Asian economies to increase their share of world GDP by the year 2050. While China and India comprised about 10 percent of world GDP in 1950, McCabe estimates their combined share to be around 39 percent in 2050.

The view from here

The U.S. must change as it emerges from recession, and the landscape on the other side will have to look different, McCabe said. Consumers will have to change, McCabe said. Many are 'maxed out' on debt and at risk of losing their jobs, but are nevertheless pulled between mixed messages of 'don't spend what you don't have,' and 'go out and spend.'

And business will have to figure out how to create services for consumers with less disposable income. How fast will they do this, he asked. McCabe also stated that the U.S. will need to reshape its compensation structure from the factory floor to the executive level.

"The relative benchmark for compensation must include Asia, now that they are well on their way to producing world class, high quality goods and services," he said. "We will need to be competitive on price if we want the fastest growing economies in the world to import goods and services from the U.S., and a significant portion of any company's cost base is the expense tied to employees. The U.S. cannot maintain the current level of pay or jobs will continue to go offshore."

Investors will also have to allow CEOs to look beyond the next quarter's earnings next quarter's earnings and invest more in R&D to promote more innovation. On the positive side, America will still be the most desirable place for higher education. American universities are hugely respected in Asia, he said, and demand will far outstrip supply in Asia, even at the current rapid pace of university construction there.

McCabe said that the shadow economy has consumed a huge amount of capital and management resources the last 10-15 years. "That part of our economy is shattered and it is not coming back," he said. "The upside is that the demise of the shadow economy unleashes a mother lode of intellectual capital.

There are hundreds of thousands of people who were tied to the shadow economy that are highly educated, intelligent, ambitious … and now unemployed. They will release their energy and leadership into another part of the real economy and I believe that will drive the next wave of innovation for the U.S."