The Future of Emerging Markets

Stephen DeAngelis

October 29, 2008

As the global economy continues to roil, one has to wonder whether emerging economies are going to lose their wheels as they traverse the rough road ahead. Just before the worst of the downturn emerged, The Economist asserted that “globalisation is entering a new phase, with emerging-market companies now competing furiously against rich-country ones” [“A bigger world,” 20 September 2008 print edition]. With predictions of “recession” being heard more often, some analysts believe that companies may be fighting for survival just as furiously as they compete against each other. I believe, however, that we have reached a turning point where emerging market companies cannot only survive but thrive in the years ahead. It won’t be easy; but using best practices and solid business plans, emerging market companies and economies should be able to push through the current travails into a brighter future. The Economist writes:

“Globalisation used to mean, by and large, that business expanded from developed to emerging economies. Now it flows in both directions, and increasingly also from one developing economy to another. Business these days is all about ‘competing with everyone from everywhere for everything’, write the authors of ‘Globality’, a new book on this latest phase of globalisation by the Boston Consulting Group (BCG). One sign of the times is the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the so-called BRIC economies of Brazil, Russia, India and China, up from 31 in 2003, and is set to rise rapidly. On current trends, emerging-market companies will account for one-third of the Fortune list within ten years, predicts Mark Spelman, head of a global think-tank run by Accenture, a consultancy. There has been a sharp increase in the number of emerging-market companies acquiring established rich-world businesses and brands, starkly demonstrating that ‘globalisation’ is no longer just another word for ‘Americanisation’. Within the past year, Budweiser, America’s favourite beer, has been bought by a Belgian-Brazilian conglomerate. And several of America’s leading financial institutions avoided bankruptcy only by going cap in hand to the sovereign-wealth funds (state-owned investment funds) of various Arab kingdoms and the Chinese government.”

Anyone familiar with the publishing business knows that a “new book” was written and submitted to the publisher months before it actually appears on store shelves. In a rapidly changing world, this means that even a “new book” can be dated. The authors of Globality probably put their book to bed before sharp hikes in oil prices and the sub-prime mortgage crisis rushed ferociously over the horizon and grabbed the world’s economy by the throat. Even though oil prices have fallen by half from their peak, they remain twice what they were three years ago. Relatively high oil prices will continue a trend towards regionalization (within globalization) and which means there will probably be limits to people “competing with everyone from everywhere for everything.” This regionalization though is one reason The Economist believes that emerging markets will make it through the downturn. Domestic markets are becoming nearly as important as international markets.

“One example of this seismic shift in global business is Lenovo, a Chinese computer-maker. It became a global brand in 2005, when it paid around $1.75 billion for the personal-computer business of one of America’s best-known companies, IBM—including the ThinkPad laptop range beloved of many businessmen. Lenovo had the right to use the IBM brand for five years, but dropped it two years ahead of schedule, such was its confidence in its own brand. It has only just squeezed into 499th place in the Fortune 500, with worldwide revenues of $16.8 billion last year. But ‘this is just the start. We have big plans to grow,’ says Yang Yuanqing, Lenovo’s chairman. One reason why his company could afford to buy a piece of Big Blue was its leading position in a domestic market buoyed by GDP growth rates that dwarf those in developed countries. These are lifting the incomes of millions of people to a level where they start to splash out on everything from new homes to cars to computers. ‘It took 25 years for the PC to get to the first billion consumers; the next billion should take seven years,’ says Bill Amelio, Lenovo’s chief executive. The sheer size of the consumer markets now opening up in emerging economies, especially in India and China, and their rapid growth rates, will shift the balance of business activity far more than the earlier rise of less populous economies such as Japan and South Korea and their handful of ‘new champions’ that seemed to threaten the old order at the time.”

The article argues that “the macroeconomic turbulence that the world is now going through after almost a decade of smooth growth will probably not alter the picture fundamentally, but it will complicate it.” If correct, it means that opportunities will continue to characterize emerging market economies. This will only be true, however, if leaders (both business and political) act wisely and counter challenges they currently face.

“High oil and food prices are creating inflationary pressures in many emerging countries that had enjoyed years of stable, low prices along with extraordinary economic growth. The side-effects of rapid development, such as pollution and water shortages, also need to be tackled. ‘After a long period in which globalisation has been all about labour productivity, the business challenge everywhere, and especially in emerging markets, will increasingly be to raise resource productivity—using fuel, raw materials and water more efficiently,” says Bob Hormats of Goldman Sachs, an investment bank.”

While most of the world’s analysts are considering worst case scenarios, The Economist is taking a look at the best case future.

“Assuming that the upbeat growth forecasts for emerging markets remain broadly on track and the developed economies get back on their feet, what will be the main competitive battlegrounds of global business? One is those new consumers, who often demand products at far lower prices and often in more basic forms or smaller sizes than their developed-country counterparts. Emerging-market firms with experience of serving these consumers think they are better placed to devise such products than their developed-world competitors. Lenovo, for example, is going after the developing world’s rural markets with a cheap, customised PC that enables farmers to become networked. Some of these innovations have global potential. Lenovo’s Chinese R&D labs developed a button that recovers a computer system within 60 seconds of a crash, essential in countries with an unreliable power supply. Known as ‘Express Repair’, this is now being incorporated into its computers everywhere. The same logic may apply to innovations in business models that allow goods and services to be delivered in fundamentally different ways and at much lower cost.”

One of the reasons that I moved my company into emerging markets is that I also believe that the future belongs to companies that can learn to sell to people at the bottom of the economic pyramid. For years, people made the bad assumption that impoverished populations wanted nothing more than the very basics — food, housing, and water. Yet business people clever enough to package goods in sizes that the poor could afford (like single-wash packages of detergent or a minute of cellphone time) found that the poor could be consumers and profits could be made. We shouldn’t be surprised; “Apple Marys” in the U.S. survived the great depression using this economic model. The article reports that large multinational corporations realize that they must learn to compete in this new world.

“IBM may have felt that it was no longer worth its while to compete in PCs, but Lenovo is facing fierce competition from American companies such as Hewlett-Packard and Dell everywhere, including in China. Nor was IBM’s decision to sell its (low-margin) PC business due to a lack of commitment to emerging markets: it now employs 73,000 people in India, against 2,000 at the start of the decade, and hopes to increase the share of its global revenues coming from emerging markets from 18% now to 30% within five years. Although multinational companies in developed countries must grapple with legacy costs of various kinds—financial (pensions, health-care liabilities), organisational (headquarters far away from new markets) and cultural (old ways of thinking)—they have advantages too. The greatest of these may be a deep well of managerial experience, which emerging-market firms often lack.”

The article goes on to describe how Lenovo, like IBM, is becoming a globally integrated enterprise.

“The firm has no headquarters; the meetings of its senior managers rotate among its bases around the world. Its development teams are made up of people in several centres around the world, often working together virtually. The firm’s global marketing department is in Bangalore. A huge effort has been made to integrate the different cultures within the firm. ‘In all situations: assume good intentions; be intentional about understanding others and being understood; respect cultural differences,’ reads one of many tip sheets issued by the firm to promote ‘effective teamwork across cultures’. Mr Yang even moved his family to live in North Carolina to allow him to learn more about American culture and to improve his already respectable command of English, the language of global business. In short, Lenovo is well on its way to becoming a role model for a successful multinational company in the age of globality: a good reason to be optimistic about the future of capitalism, even capitalism with a Chinese face.”

The Economist likes globally integrated enterprises. To learn more on that subject, read my post More on Globally Integrated Enterprises. The magazine does a little introspection and wonders if its optimism is justified. They note protectionist sentiment is growing in many places, including the United States, and if economic outcries aren’t the problem security worries are (they refer to broken deals like those with Dubai Ports World). The article asserts that its optimism could be derailed if such “bad capitalism” gains the upper hand over “good capitalism.”

“There is a real risk that bad capitalism will spread in the coming decades. Yet at the same time this latest, multidirectional phase of globalisation offers enormous potential for business to raise living standards around the world.”

People should be encouraged by the way world leaders are working together to get through the current financial crisis. Hopefully, it will generate enough international good will that cries for protectionism can be quieted and further cooperation pursued.