Chinese and Indian Companies Gain from Recession

Among Boston Consulting Group's 2009 New Global Challengers are some savvy Chinese and Indian companies that will emerge stronger from the downturn By David Michael and James W. Hemerling

The Great Recession has hit everyone hard, but it has been less severe in China and India than elsewhere, boding well for many of the growing and aggressive companies the two countries have spawned in recent years. Not all of China and India's "New Global Challengers," as we call such companies, will emerge unscathed from the economic earthquake. Some took on too much debt in the months leading up to the recession. Others made bad choices.

But some challenger companies will do remarkably well, taking advantage of the opportunities recessions create. When the crisis is over these companies will be stronger and more formidable than ever, reordering the global pecking order. For their U.S., Japanese, and European competitors, this would be the worst time to underestimate the challengers.

In general, 20/20 hindsight will show some day that countries that were growing rapidly before the recession—China and India in particular—fell less far and rebounded more quickly than the developed economies. The comparative resilience of the rapidly developing economies (RDEs) is reflected in the MSCI Emerging Markets Index, measuring equity market performance in 26 emerging economies, which has increased 65% since the start of the year. The Standard & Poor's 500-stock index, by comparison, has risen just 18% so far this year.

While total global gross domestic product is expected to decline by 1.1% this year, according to International Monetary Fund projections, output in China and India is expected to grow 9% and 6.4%, respectively, the IMF says. Others project higher growth rates: The Reserve Bank of India, for example, is predicting 6.5% GDP growth. Regardless of the exact numbers, China's and India's growth will be below 2007 and 2008 levels, but still impressive in the midst of a punishing global recession.

Deploying Government Stimulus Funds
This will not translate into boom times for every Chinese and Indian company on the 2009 BCG 100 New Global Challengers list, which the Boston Consulting Group published early this year. Companies that were highly leveraged prior to the start of the meltdown have been severely strained and are having to reduce costs, restructure their debt, and sell off assets in some cases to improve cash flow. Others highly dependent on exports also have been hard hit. Some of these companies may not survive or will emerge severely weakened when the recession ends.

Other challengers, however, are benefiting from the recession. Companies with healthy balance sheets when the downturn began are growing through mergers and acquisitions and partnerships with other companies. Consumer-goods companies have continued to expand by selling new products designed specifically for their domestic markets. While the outside world is reeling, many challengers are taking advantage of home-based growth opportunities, especially in areas where government stimulus funds are available. China's $586 billion in stimulus spending, which started pouring from the government spigot almost immediately, helped spark a 7.9% jump in second-quarter GDP and an 8.9% surge in the third quarter.

Although the "outbound" M&A activities of BCG's 100 global challengers understandably have decreased since the economic crisis began—down from an average of 20-30 per year to 10 per year—the crisis has created a opportunity for companies to make important acquisitions at favorable prices.