Emerging economies will remain the key source for growth
throughout 2009 and beyond. Global policy makers and business
leaders are predicting that a major component for growth, future
success and prosperity will be establishing or reinforcing a presence
in the emerging markets with greatest risk being the failure to take
any action whatsoever.
A combination of sluggish growth in western economies and
increased global competition for a shrinking market share has led to
the need for fundamental changes to traditional business models.
While globalisation has long forced companies to look beyond their
own borders in order to maximise the potential for growth, many
have only ever felt really comfortable applying this maxim to fellow
developed economies; emerging markets have been considered
high-risk and fraught with complications.
However, as recession bites throughout Europe and North America,
such reticence is fast becoming an unsustainable business practise;
now is the time to investigate the opportunities emerging markets
afford and to invest time and effort into developing a specific strategy
as to how best to capitalise on them.
Change and opportunities
The majority of trade by EU and North American businesses may
still be conducted within developed economies, but the need to
diversify one’s activities into more dynamic, fast-growing markets is
becoming an imperative. The Grant Thorton International Business
Report 2008 warns that ‘businesses choosing not to take advantage
of such opportunities perhaps run the risk of surrendering their
competitive edge and potentially opening up opportunities in their
own market for new entrants’.
Nowhere are these opportunities more apparent than within the BRICS
countries. In November 2007, Goldman Sachs predicted that the
value of the combined economies of Brazil, Russia, India and China
would surpass that of the G7 by 2032. The same report forecast
China’s economy surpassing the US by 2027, with India reaching that
landmark by 2050. This still makes for startling reading, but, as analysts
continue to assess the fallout of the ongoing credit crunch, it seems
fair to assume that such tipping points will arrive sooner than initially
predicted. Indeed, this would not be the first time Goldman Sachs has
underestimated the potential for growth within this group: on coining
the BRICS acronym in 2001, the investment bank made headlines by
claiming its four economies would comprise 10% of global output by
the end of the decade; they already stand at over 15%.
Factors for entry
The figures are staggering: the BRICSs encompass over 25% of
the world’s land mass, 40% of the global population and hold a
combined GDP of $15.435 trillion. Failure to develop a specific
strategy for such a sizeable potential market is beginning to look
unforgivable.
These economies do not develop in isolation. The requirements for
the import of equipment to support growth, the development of a
large middle class demanding consumer goods, and an enthusiasm
for established fi nancial services and foreign direct investment (FDI)
are all common factors that afford western businesses any number
of entry points. Total FDI into emerging economies rose from $167.4
billion in 2006 to $255.6 billion in 2007, with the announcement of a
similar growth rate for 2008 expected once fi gures become available.
Industry survey
According to a survey conducted by PricewaterhouseCoopers, the
majority of organisations outsourcing to emerging countries perceive such countries as a huge market for their products and services.
About 50% of organisations revealed that low cost is the reason for
conducting business in BRICS countries, while 75% cited access to
new customers and markets as a key motivating factor.
80% of organisations surveyed agreed that they will sell their
products in BRICS countries. 67% of executives interviewed revealed
that globalisation is helpful as this will provide them an option of
entering into markets of BRICS countries; only 12% of the executives
interviewed believed that globalisation has negative impacts on their
organisations.
Key considerations
While developing markets are undoubtedly the major driving force for
global economic growth, competition is fierce and the challenge of
leveraging a winning position should not be understated. Traditional
fears also remain: when asked to prioritise factors for determining
foreign investment, a country’s political and economic stability and its
regulatory environment are key considerations for any business.
Therefore, it is vital that one develops an appreciation of the markets
in question. Indeed, despite being four extremely large developing
economies, there is little to tie Brazil, Russia, China and India together.
Two (China and India) are manufacturing-based economies and big
importers while two (Brazil and Russia) are huge exporters of natural
resources. Two (Brazil and India) have growing populations while two
(China and Russia) have shrinking populations. Two (Brazil and India)
are liberal democracies, one (Russia) is a limited ‘sovereign democracy’,
and one (China) is a one-party state. It would be churlish to ignore the
need for extensive research prior to entering such markets, although it
is also fair to say that all four have gone to great lengths over the past
decade to better accommodate foreign investment.
The Boston Consulting Group’s Oil Retail: What it takes to win in
the BRICS countries states that success in these markets depends
on a detailed understanding of the individual market and region, a
tailored business model and upgraded organisational capabilities.
While the lessons learnt from mature markets are relevant in the
developing BRICS markets,’ it concludes, ‘they need to be adapted
to each unique situation. The journey may not be straightforward,
but companies that succeed will find that they have established a
platform for the next wave of growth and profi tability in oil retail.’
But one must also look beyond the BRICS countries when considering
opportunities within emerging markets. Critics of the acronym have
coined their own: CEMENT (Countries in Emerging Markets Excluded
by New Terminology), an acknowledgment that the spectacular
growth enjoyed by these four economies is merely indicative of a
general boom within emerging markets as a whole.
The Grant Thornton IBR emerging markets index picks out at least
27 emerging economies that act both as opportunities for foreign
investment and as potential sources for increased competition. Indeed,
the index, which is based on a calculation of key indicators including
GDP, population size, international trade and growth projections,
places Mexico ahead of Brazil. Among the economies snapping at the
heels of this big five are Poland, Indonesia, Thailand and Malaysia.
Future developments
The creation of new centres of wealth and commerce has
dramatically altered the global marketplace. Opportunities for trade,
outsourcing and mergers and acquisitions are all exciting outlets
for growth, but it cuts both ways: as these economies mature,
emerging-market multinationals are transforming the competitive
sphere. While these businesses may share similar ambitions with
their western counterparts, the manner in which they have evolved
can be markedly different. For example, when PetroChina went
public in November 2007 it became the world’s largest listed
company, with a stock market capitalisation of just under $1 trillion.
This may be an extreme example, but such developments pose
fundamental questions as to how multinationals from established
markets should continue to pursue growth. The emergence of
new competition threatens the status quo, but one should not
overlook the opportunities such a development also affords.
Here is a rich source of new ideas, talent, innovation, capital and
business practises at the exact time traditional business models are
beginning to look obsolete.
|
