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Boston Consulting Group: The Emerging Markets are Still Emerging Despite Crisis
April 23, 2009
Emerging markets and the indigenous companies in those markets that are attempting to become global corporations have not been eliminated from the international competitive equation, says Harold G. Sirkin, a Chicago-based senior partner with The Boston Consulting Group. Sirkin is co-author of “GLOBALITY: Competing with Everyone from Everywhere for Everything” (Business Plus, 2008) and one of the authors of the firm’s 2009 Global Challengers report. Here are excerpts from a conversation:
Q. In view of the world economic crisis, are the so-called emerging markets still emerging?
A. Absolutely--probably even more so. China’s annual growth rate may have dropped to 6 percent. But the U.S. last quarter was minus six percent. India is also still in a growth mode. So 2.3 billion people out of the world’s population of 6 billion are still in a growth mode. There is a still a lot of opportunity.
A second reality is what consumers here really want. On the retail side, we’re seeing same-store sales gains at places such as Wal-Mart, where consumers are trading down. They’re looking for lower cost products. They want to downgrade their lifestyles a little bit but not give up a whole lot of things. That bodes well for low-cost economies.
Q. Are Western multinationals still investing as heavily in Brazil, Russia, India, China (the BRIC countries) and others as they were before?
A. Some are, but there is definitely pullback by others. That may create an opportunity for BRIC companies that have been hoarding cash because they will look at making acquisitions in the developed world to gain distribution systems and to gain customers because the prices right now are lower than they were a year ago.
Q. But what is the pattern of Western multinational activity now in these emerging markets? Are they consolidating or expanding or what? Is there a pattern you can point to?
A. No, it is all of the above. Different companies are taking different approaches. Companies experiencing financial restrictions because they are more highly leveraged may be pulling back because they don’t have capital to invest. Others are playing a more conservative game on their balance sheets by hoarding cash. They’re looking to invest in these markets and they’re hoping to see far less competition than they have in the past.
Q. Can you point to any specific companies that have attempted to exploit this opportunity?
A. A lot of the consumer goods companies are focused on trying to do that. Coca-Cola tried to buy a large juice company in China, but was blocked by the government. But consumer goods companies realize that they’re looking at populations, in China, of 1.3 billion people. With a 6 percent growth rate, that’s a lot of people wanting orange juice and soft drinks and other products. I would expect that we’ll continue to see consumer goods companies, that have capital to invest, go after the next 1 billion customers that are emerging in the rapidly developing economies.
Q. But it seems the emerging markets are shaking out into those that are in good shape like China and India versus those like Russia that are in real trouble, right?
A. Russia was a rapidly developing economy but for different reasons. It was because it was able to export a lot of oil and natural gas and other raw materials. But now, Russia has gone $145 a barrel for oil to $50 a barrel. They’re getting paid roughly a third. That will obviously affect an economy. It’s much the same for natural gas and other commodities. Some of these countries were engaged in a secondary run up. The primary run up was demand for the goods made by China and Brazil and the other countries. Then you saw the secondary effect of the raw material prices running up.
Q. So are harder economic times going to have a shakeout effect in which some of the rapidly developing economies don’t develop as well?
A. I think it will shake out some but it will help others. It may shake out those who have not built a stable base. But others who have a stable base and access to capital may find a lot of opportunities to make acquisitions and to acquire talent and get access to other resources that will allow them to continue growing.
Q. Regarding Indian companies specifically, we see Tata buying Jaguar and introducing its new Nano. They seem to be still on the march abroad. Do you agree?
A. You don’t want to generalize about all Indian companies on the basis of Tata, but yes, I think the Indian companies are still looking at opportunities. They’re still in a growing market. It’s not growing as fast, but it’s still growing.
Q. The scandal at Satyam Computer Services has been a set back for Indian companies, has it not?
A. Well, we’ve been through some of these ourselves in the United States. It’s not like India is the only place in the world that has a financial scandal. This was in the information technology space, which is a big industry in India. But so was Bernie Madoff in the United States. This is the nature of capitalism. Some times people do things that are unethical and they don’t get caught right away.
Q. What about the Chinese, where Lenovo, Haier, Huawei Technologies and others are trying to make it internationally?
A. Again, what we’re seeing is a whole lot of emerging companies. Many won’t make it. But some will be the next multinationals. As they go through their different life cycles, some will succeed and some will fail. Out of 2,000 companies, we can’t predict that all 2,000 will be the next multinationals.
Look at the picture in the United States in the 1950s. There were a lot of companies that started back then that became multinationals. We could list them. But we don’t remember the names of the thousands that didn’t go anywhere. So when it comes to China, you’ve got to believe that some will become true global multinationals over time and some will become multi-nation, meaning they operate in different countries, but they will fall short of being real multinationals. Some will be local or regional players, and some won’t succeed at all.
Q. Do you agree that it’s necessary for Indian or Chinese companies to move from their own cultural points of view toward embracing the more objective management methods and systems that Western multinationals use?
A. Just as it’s necessary for American companies to make cultural adjustments to operate in other parts of the world, yes. You have to be able to operate on a global basis but also on a local basis. You have to make adjustments. If you don’t, and if you try to do everything the same way around the world, you won’t succeed. Companies that focus on the XYZ company way have to be very careful to balance out the global nature of that with the local nature of that. If you say, ‘You must do things the same way in Chicago as you do in Shanghai,’ that just may not work.
Q. Do you think Indian companies such as Tata Motors and BYD, the battery company in southern China, can emerge on the world stage with their cars? Or is that just pie in the sky?
A. I think they can. I don’t think there is a barrier there. The automotive business is very global. If they invest in the right technologies and make certain acquisitions, they certainly have the opportunity to become global players. Remember that in the 1950s, Toyota shipped over a set of cars called Crowns. They were very much designed for the Japanese market, and they were unable to find a distribution system. Those cars didn’t sell. One could argue therefore that Toyota could never succeed in the United States. But Toyota was persistent and focused, and obviously started designing cars that were better suited to this market. We all know what happened.
