fears of a global downdraft are overdone. They point to continued robust growth in developing economies in Asia and Latin America as well as the gradual rebuilding of bank balance sheets in the U.S. as supporting a less apocalyptic view. "I've been traveling through Asia all August from Karachi to Taipei. There is not a feeling that everything has gone wrong (or) that all parts of the global economy are in ever-worse shape," says Norbert Walter, chief economist of Deutsche Bank.
Emerging markets, once the first places to feel an economic chill, remain hot. Continued expansion in developing countries such as China, India and Brazil mean companies from tractor maker John Deere to medical devices producer Covidien expect continued strong financial results. At Deere, based in Moline, Ill., 43% of its more than $7 billion in third-quarter sales came from outside North America, up from 30% five years ago.
The company's hottest markets include the former Soviet empire, where Deere logged more than $1 billion in sales last year, and Latin America. The boom in global food prices has prompted farmers around the world to open their wallets for the company's array of tractors and combines. Demand is so strong that customers wanting one of Deere's series 9000 tractors must wait until September 2009 to take delivery.
"The broader global economic environment remains quite favorable for a company like ours," Susan Karlix, the company's investor relations manager, said on an Aug. 13 conference call.
To meet the surging demand, Deere last week announced a $97 million expansion of its Waterloo, Iowa, and Coffeyville, Kan., facilities. That followed a $90 million investment in the plant announced in February. About one out of every three tractors made in the Waterloo plant are shipped outside of the U.S. and Canada, the company says.
The spread of affluence into pockets of the developing world has created openings for products linked to the traditional suburban lifestyle. Toro, maker of lawn mowers and irrigation systems, has increased international sales to almost 30% of total revenue vs. 20% four years ago, says John Wright, director of investor relations for the Bloomington, Minn.-based company.
Golf courses in South Korea and Dubai. Parks and athletic fields in China. All have spurred demand for the company's products. "As countries develop, they put in more bridges and roads, sure. But they also want more grass and better-looking grass," Wright said.
Even as some manufacturers worry that slowing foreign economies will pinch sales, others occupy niches expected to ride out any downturn. Covidien has seen steady sales growth the past three years, most of it outside the U.S., says CEO Richard Meelia.
The company doesn't expect to emerge unscathed from a global downdraft. But aging populations that demand more health care mean the company's outlook is positive. "Basic demand doesn't really change from cycle to cycle. … It's not like industrial businesses," said Meelia.
Higher shipping costs
Many U.S. multinationals, however, are bracing for the impact of higher transport and materials costs. Skyrocketing oil prices have increased transoceanic shipping costs 64% since 2005 and also have raised the cost of producing many plastics-based products. In 2009, higher costs for resins used to make syringes and plastic collection tubs for used needles will cost Covidien up to $50 million, Meelia says.
At Deere, about half of this year's higher costs are expected to hit in the fourth quarter. The annual bill could reach $475 million and put pressure on profit margins, the company said.
A bigger worry is the medium-term outlook for the emerging markets that have become the global economy's chief bright spot. With Europe, Japan and the U.S. expected to remain weak into 2009, multinationals' prospects may hinge on developing nations.
So far, they've held up well. But inflation is bubbling in several countries, including in the Middle East and East Asia. Nervous central bankers have held off on raising interest rates to slow their economies, fearing such moves could be ill-timed if the global financial crisis worsens. Growth-choking rate increases in countries such as Malaysia, however, can't be postponed indefinitely.
There are already signs of emerging weakness. In August, three nations — Taiwan, Singapore and the Philippines — trimmed their 2008 growth forecasts to take into account the spreading global slowdown
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