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Françoise Pardos, Pardos Marketing


Advantages and hurdles for companies from emerging countries

The new multinationals have some distinct advantages.

They often are family-owned or family-controlled, which helps them to make decisions quickly.

They have the experience of growing up in a tough domestic market. Japanese and Korean firms who went international in the 1980s and 1990s had been nurtured by protectionism at home, but many of the latest newcomers have had to fight all their lives.

Technological innovation may be a differentiator. The emerging challengers are good about repackaging existing ideas, combining Eastern and Western cultural values to create new products and devising ways to make and sell things for less money. All of that gives them competitive edge. They will make fast technological progress.

But their really major advantage is costs. Because of their position in lower-cost developing countries, they can undercut Western firms on labour, property, equipment, raw materials and sometimes even financing. Labour might cost 10 to 20 times less than in a developed economy, for example. Indian generic drug makers such as Ranbaxy Laboratories charge domestic customers 1 to 2% of what US consumers pay. Telecoms firms offer mobile services at tariffs that make European charges look huge.

In this environment, the firms that survive are ready to take on the world.

But they also face particular problems

They are trying to break into a world economy in which globalization is already well advanced.

The crucial step in the development of emerging market giants is when they choose to go global. Many have access to vast, fast growing domestic markets, enabling them to grow large and profitable without venturing overseas.

But being number one in China or India alone will not give them the scale of a true global leader. In many cases, their domestic market has given them the opportunity to compete with established multinationals while they have the home advantage. But eventually, they must take the fight to the wide world.

Tariffs and anti-dumping actions can prevent developing country companies from getting into the rich world. Firms may be ignorant of the markets they are entering. Their brands, though well established at home, are unknown in Europe or America.

They may lack the necessary management talent. Recruiting world class management may be difficult.

The challengers often tend to pay more for their acquisitions and are relatively inexperienced in handling post-merger integrations. The emerging market firms make their own mistakes through poor acquisitions and overexpansion, as many Chinese electronics firms are finding to their cost.

They may be unwanted and barred by legal decisions, like the attempt of the China National Offshore Oil Corporation, CNOOC, Chinese government company, prevented from getting Unocal, or the difficult time given Mittal at first by some European decision makers.

Few of new global companies operate at the cutting edge of innovation. There are some exceptions, such as Brazilian oil major Petrobras, which is one of the world leaders in deep water oil and gas extraction.

Emerging market firms still struggle to handle complex supply chains with developing world facilities. On the whole, emerging multinationals operate low in the value chain.

About the value of brand names, the newcomers are buying into brand names, like Tata with Jaguar, but, of the top 100 brands in 2006, as ranked by the corporate branding consultant Interbrand, not one comes from the rapidly developing economies. Major exceptions are Samsung, Hyundai and LG, from South Korea, but they emerged during a previous wave of competition.

In today emerging markets, there still are no real rivals to Coke, American Express or Google when it comes to the power of brand names, but this will definitely change soon.

Once they realise the threat, the old multinationals fight hard for their markets. US household appliance manufacturer Whirlpool paid high for rival Maytag, just to keep it out of the hands of Haier. Technology firm Cisco Systems is taking the fight to Huawei by attacking it in the Chinese market, although to do so, it formed an alliance with another fast growing Chinese competitor, ZTE.

Westerners are buying up emerging competitors, too. A Chinese national, for example, created a Silicon Valley company called WebEx that relied heavily on highly skilled engineers in China for programming. Rather than allow WebEx to emerge as a competitor, Cisco Systems simply bought it in 2007.

Similarly, IBM and Electronic Data Systems have been buying business process outsourcing companies in India.

Many large American companies are competing at home in the countries of their would-be competitors. They absorb foreigners into their management ranks, allow some decision-making to distant markets and adapt their products or invent new products to compete. General Motors, for example, is enjoying good sales growth in China, where it was number one in 2007, India, Russia and Brazil. Coca Cola is trying to buy Huiyan Juice group, the largest Chinese juice and nectar manufacturer.

In reverse to all the moves from emerging countries to industrialized countries, Vodafone, from the UK, is the largest mobile telecommunications network company in the world by turnover and has a market value of about £75 billions. Vodafone built its global presence through a series of acquisitions and strategic alliances. It is now applying its successful European growth strategy to emerging markets.

All in all, emerging multinationals have the advantages of low costs and being well placed in the world fastest growing markets. But they have a long way to go before they can compete at all levels with their western competitors.

In spite of all hurdles, the future of the new global companies is bright.

Even if the emerging giants are currently lagging in innovation, Chinese and Indian universities are soon expected to graduate 12 times as many engineers, mathematicians, technicians and scientists as US universities.

Many companies in the developing world are also expanding into other developing world markets. In the spring of 2008, Bharti Airtel of India made a bid for the largest wireless company in Africa, MTN.

Even if the developing world companies do not mount major global companies, many succeed in supplying middle income consumers at home.

For instance, Grupo Positivo in Brazil has 18 % of the domestic computer market, larger than the combined share of Hewlett-Packard and Dell, its two closest competitors.

The acquisition of Jaguar Land Rover by Tata was preceded by the advent of its Nano, a $2,500 automobile aimed at growing Indian demand for cheap personal transportation. At this low selling price, Tata is making it difficult for other international car makers eying the Indian middle class markets.

To conclude, to be counted as world class, a firm needs to be more than just well run and large. It should have a globally valued brand, or its own leading technology, or a genuinely innovative and admired business method. Given this, the sky is the limit!

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