Sometimes Local is Better than Global
June 03, 2008
Often in my discussion about Development-in-a-Box™ I have stressed the importance of connecting with the global economy. An article in The Economist reports that “not all of the developing world’s most successful companies are globalising.” [“The stay-at-home giants,” 15 March 2008 print edition] The surprising thing is that many of these companies are successful even though what they offer is not necessarily the best product on the market.
“Israel is a ‘powerhouse of agricultural technology’, says Abraham Goren of Elbit Imaging (EI), an Israeli multinational. The country’s cows can produce as much as 37 litres of milk a day. In India, by contrast, cows yield just seven litres. Spotting an opportunity, EI is going into the Indian dairy business. It will import 10,000 cows and supply fortified and flavoured milk to supermarkets and other buyers. So will EI lap up India’s milk market? Not necessarily. As the Times of India points out, its cows will ruminate less than 100 miles from the headquarters of a formidable local producer—the Gujarat Co-operative Milk Marketing Federation, otherwise known as Amul. This farmers’ co-operative spans 2.6m members, collects 6.5m litres of milk a day, and boasts one of the longest-running and best-loved advertising campaigns in India. It has already shown ‘immense resilience’ in the face of multinational competition, says Arindam Bhattacharya of the Boston Consulting Group (BCG). Its ice-cream business survived the arrival of Unilever; its chocolate milk has thrived despite Nestlé.”
Resilience in all of its shades is of interest to me. The article points out that Amul is not the only local company that has done well (i.e., has demonstrated resilience) in the face of global competition.
“Amul is one of 50 firms—from China, India, Brazil, Russia and six other emerging economies—that BCG has anointed as ‘local dynamos’. They are prospering in their home market, are fending off multinational rivals, and are not focused on expanding abroad. BCG discovered many of these firms while drawing up its ‘global challengers’ list of multinationals from the developing world. The companies that were venturing abroad most eagerly, it discovered, were not necessarily the most successful at home.”
So what makes these particular “dynamos” so resilient? The short answer seems to be that they are consumer oriented and know their customers better than multinational companies.
“Of [the] 50 dynamos, 41 are in consumer businesses, where they can exploit a more intimate understanding of their compatriots’ tastes. [BCG] gives the example of Gol, a Brazilian budget airline, which bet that its cash-strapped customers would sacrifice convenience and speed for price. Many Gol planes therefore depart at odd hours and make several hops to out-of-the-way locations, rather than flying directly. Similarly astute was India’s Titan Industries, which has increased its share of India’s wristwatch market despite the entry of foreign brands such as Timex and Swatch. It understood that Indians, who expect a good price even for old newspapers, do not throw their watches away lightly, and has over 700 after-sales centres that will replace straps and batteries.”
These local dynamos have changed how analysts think about valuing companies. Because so many local companies in developing nations have either been state-owned or state-supported, companies that have done well in export markets have historically been valued higher than companies strictly focused on local markets.
“Emerging economies are still prey to what Harvard’s Dani Rodrik has called ‘export fetishism’. International success remains a firm’s proudest boast, and with good reason: economists have shown that exporters are typically bigger, more efficient and pay better than their more parochial rivals. ‘Exporters are better’ was the crisp verdict of a recent review of the data. Countries like India and Brazil were, after all, once secluded backwaters fenced off by high tariffs. Prominent firms idled along on government favours and captive markets. In that era, exporting was a truer test of a company’s worth. But as such countries have opened up, their home markets have become more trying places. Withstanding the onslaught of foreign firms on home soil may be as impressive a feat as beating them in global markets.”
Local dynamos, beyond knowing their customers better, also have a few other things in common. The Boston Consulting Group describes some these:
“Exporters tend to be more capital-intensive than their home-bound peers; they also rely more on skilled labour. Many local dynamos, conversely, take full advantage of the cheap workforce at their disposal. Focus Media, China’s biggest ‘out of home’ advertising company, gets messages out on flat-panel displays in 85,000 locations around the country. Those displays could be linked and reprogrammed electronically, but that might fall foul of broadcast regulations. So instead the firm’s fleet of workers on bicycles replace the displays’ discs and flash-cards by hand. The list of multinationals resisted or repelled by these dynamos includes some of the world’s biggest names: eBay and Google in China; Wal-Mart in Mexico; SAP in Brazil.”
I have found in my Development-in-a-Box work that local governments want a program that helps foster local businesses as well as attract multinational businesses. BCG’s identification of characteristics that help make local businesses successful is helpful. It should provide confidence to local business people that they can compete if they take advantage of local knowledge and conditions. It may also help remove some of the fears about the spread of globalization.