Value Chains and Emerging Markets

Stephen DeAngelis

January 16, 2014

In his book entitled Global Tilt: Leading Your Business Through the Great Economic Power Shift, Ram Charan persuasively argues that the future of the global economy is going to be determined by countries that are primarily positioned below the 31st parallel. If Charan’s vision of the future becomes a reality (and most analysts agree that it certainly looks like it will), then companies with expansion plans need to understand the new business landscape forming in emerging market countries. Although the future looks brighter for emerging and frontier markets, challenges remain. Boston Consulting Group analysts Harold L. Sirkin and David C. Michael name a few. They include: “Sharp swings in exchange rates. Swooning equity markets. Slowing growth.” They add, “Investors in emerging markets over the past three decades have seen all these warning signs before. And when they flash in a number of economies simultaneously, the outcome often is not good.” [“Why It’s Time to Reassess Your Emerging-Market Strategy,” bcg.perspectives, 29 October 2013 (subscription required)] As Sirkin and Michael peer into the future, they see a bumpy landscape over which companies must traverse if they hope to remain successful. They explain:

“For more than a decade, the economic success of these emerging markets has driven global growth and lifted millions of people out of poverty. Companies that built international businesses around such markets have found important new sources of growth and lowered their costs. For executives who have come to view the global economy as essentially a two-speed world —composed of sluggish, mature developed economies and rapidly growing developing economies — the change in fortunes has been jarring. For the next few years at least, companies will have to learn to shift gears, perhaps frequently, as they navigate the global economy.”

Part of shifting gear (and strategies) will likely involve the creation of north/south, north/north, and south/south value chains. An article published by the Wharton Business School states, “Global value chains (GVCs) … take a broader look at supply chains coordinated by multinational companies, but also encompass economic analyses of the countries involved with the activities.” [“As Developing Economies Grow, Global Value Chains Reach a Turning Point,” Knowledge @ Wharton, 21 October 2013] Wharton operations and information management professor Morris A. Cohen, who was interviewed for the article, stated, “There is an enormous amount of change going on. The global supply chain is in flux.” When both the Boston Consulting Group and Wharton Business School assert that volatility is a prominent characteristic of today’s global value chain, one should probably pay attention. Although emerging markets are often lumped together, Sirkin and Michael correctly note that there is a wide variation in markets. They call them “diverging markets — economies that are growing at different speeds, experiencing different degrees of financial health, and facing different structural challenges.” Ram Charan notes that even within countries there are diverging markets. He claims that India, for example, is made up of over two dozen different markets. Despite the challenges, Sirkin and Michael conclude, “All the short-term anxiety does not diminish the reality that emerging markets still present companies with some of the greatest opportunities for growth over the medium and long term.”

Multinational corporations from the developed world aren’t the only companies that recognize the opportunities. Amitava Chattopadhyay, Rajeev Batra and Aysegul Ozsomer observe, “In the past decade, a new breed of challenger businesses and brands has burst upon the world stage, and in many categories — such as appliances, automobiles, consumer electronics, mobile phones, computers, personal-care products, telecommunications equipment, and beer — has built up significant new branded businesses with a broad international footprint.” And where does this new breed of company originate? They report, “They are from countries such as China, India, Brazil, Russia, Turkey, South Africa, and Mexico.” [“The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands,” The European Financial Review, 20 October 2013] Chattopadhyay, Batra and Ozsomer note that these emerging market multinational corporations have the “ambition, vision, and confidence to want to become global giants themselves.” The reality, however, is that most of their business will likely involve south to south value chains.

Malory Davies, editor in chief of Supply Chain Standard, writes, “Sitting in an office in western Europe it is all too easy to be drawn into a stereotypical view of how global supply chains work — with the focus firmly on the links between Europe, North America and China. So, when Pascal Lamy, director general of the World Trade Organisation, starts talking about South-South trade and the shifting balance of power, it is worth taking a moment to consider the implications.” [“The balance of power is shifting…” 26 November 2012] One of the implications, as noted above, is that multinational corporations are likely to be involved in north/north, north/south, and south/south value chains. Each of those value chains will need to be designed and implemented differently. The Wharton article states, “Transnational companies coordinate around 80% of global trade, according to UNCTAD.” Anthony Mistri, an economics expert at the World Trade Organization (WTO) who was quoted in the Wharton article stated, “Nations may have borders, but businesses no longer do.” He went on to note “that developing countries need to plan a more sophisticated approach to maximize their role in GVCs with ‘good infrastructure, education and know-how; market access; the ability to produce at internationally recognized standards; security of finances, and geopolitical stability, to only list a few.”

Although the challenges associated with doing business in emerging market countries are considerable, they pale in comparison to challenges associated with so-called frontier market countries. Roben Farzed notes, however, that those countries can’t be ignored because “the frontier represents 30 percent of the world’s population, crammed into some of its fastest-growing economies.” [“Are Frontier Markets Ready for Prime Time?Bloomberg BusinessWeek, 6 March 2013] Frontier markets derive their name from the fact that infrastructure is often lacking and that regulations are either lacking or selectively enforced. Although Sirkin and Michael offer some advice about operating in emerging market countries, the advice is even more pertinent to frontier market countries. They write, “Now more than ever, distinguishing carefully among emerging markets and making fact-based, reasoned decisions about which direction to take in each of them can be the difference between tremendous success and weak performance.”