Emerging markets and competitivenessPresentation Transcript
Competitiveness 1980s – Japan overtook USA in car manufacturing – not with subsidies or cheap labour – but with innovation – lean manufacturing ( Toyota Production System - any part of production that didn’t have intrinsic value for the end customer is wasteful – lots of middle - management redundancies) worlds centre of economic gravity – shifting towards emerging markets – societies and economies going through rapid economic growth and industrialisation – up to 40 in 2010 led by China / India. ASEAN – China FTA is the largest regional emerging market. Jan 2010. They are no longer content with being source of cheap hands and low cost brains – innovate on their own terms – in healthcare, cars, telecoms. Cutting costs by up to 90%. Redesigning business processes. READ ECONOMIST APR 17 TH 2010 SPECIAL REPORT ON INNOVATION IN EMERGING MARKETS
Rich world losing its competitive advantage in ‘breakthrough ideas’ that transform industries.
Rich world companies are doing more RnD in emerging markets. IBM employs more people in developing countries than the US.
Emerging Market firms and consumers are moving up market faster – Huawei (Chinese telecoms Giant) applied for more international patents than any other firm in 2008. Chinese 20 somethings’ spend even more time on the internet than their American peers.
Emerging world’s ability to make established products for dramatically lower costs – no frill laptops.. Frugal innovation – cheap labour BUT also redesigning products and processes to cut out unnecessary costs.
India – Tata created worlds cheapest car, the Nano – combined dozens of cost saving tricks.
Bharti Airtel slashed costs of its mobile phone services by rethinking relationship with competitors and suppliers – sharing radio towers and contracting out network construction, operations and support to specialists such as Ericsson.
Using mobile phone technology to bring more sophisticated services to healthcare, banking, rural communities. Creating new categories of services e.g. Kenya leads the world in money transfer by mobile phone.
HOPE OR FEAR?
Good for consumers in developing countries – but for the slow growth rich world? Their companies are being taken over, losing competitive advantage, facing price wars.
Good for Western consumers – facing years of slow income growth.
Globalisations argument that its ok to lose our manufacturing jobs to the developing world because we can concentrate on establishing a competitive advantage in high end technology and innovation is at risk.
First World governments could learn from this ‘frugal innovation’ as it faces increasingly crippling budget deficits. Clever ways of applying economies of scale and scope in new ways could boost public sector productivity.
INNOVATION FEEDS ON ITSELF. INNOVATION IN THE EMERGING WORLD WILL ENCOURAGE INNOVATION IN THE RICH WORLD. E.G. AS JAPAN RESTRUCTURED ORGANISATIONAL FRAMEWORK THE WEST FOLLOWED.
General Electric’s Healthcare arm in Bangladore – a hand held ECG – Mac 400 – simplified design – less buttons, inbuilt printer - $800 vs $2,000 conventional ECG.
Lo Tech – Tata Chemicals (India) introduced a water filter using rice husks (common waste product) – reliable, cheap, portable. Cheaper clean water to the masses.
Not just about fiddling with products – designing and creating with the needs of poor consumers as a starting point. Stripping products down to bare essentials.
Nokia’s cheapest handsets come equipped with flashlights (frequent power cuts in developing world) and multiple phone books (phones often have multiple users), rubberised keypads and menus in several different languages.
Using existing technologies – not a lot of PCs in developing world – instead develop ways to link mobile phones to TVs. (TATA again).
Bring techniques of Mass Production in new ways e.g. EoS to services such as heart surgery – Bangladore Hospital with 1000 beds and 600 heart operations a week.
Coming up with new products and services that are dramatically cheaper than their western equivalents.
$3,000 cars; $300 computers; $30 phones with nationwide service for 2 c a minute.
Reinventing systems of production and distribution, experimenting with entirely new business models. From supply chain management to recruitment and retention reinvented.
Emerging market companies are climbing up the value chain.
UN World Investment Report 21,500 MNC based in the emerging world.
Less stark technological breakthrough leading to elite products that trickle down to the masses.
Now most important innovations are about incremental improvements to products and processes aimed at the middle or bottom income consumers.
Looking for smarter ways of designing products and organising processes to reach the billions of consumers who are just entering the global market.
Emerging Markets MNCs
India’s Bharat Forge
China’s BYD (Batteries)
Brazil’s Embraer (jet aircraft) are world class.
BRIC companies – their numbers on FT 500 list went from 15 – 62 between 2006-08.
Brazilian top 20 MNCs more than doubled their foreign assets in a single year 2006.
Buying up Western companies: India’s ArcelorMittal -steel; Mexico’s Cemex;
Traditional Global Supply Chain being reversed: Embraer buys most of its components in the West and does the assembly work in Brazil.
Brazil – 500,000 graduates a year and 10,000 PHDs a year (up 10 fold from 20 years ago) World leader in research on tropical medicine, bioenergy and plant biology.
See emerging markets as sources of economic growth and high quality brainpower, which they need more of. They expect about 70% of the worlds growth over next few years to come from emerging markets with 40% coming from China and India alone.
China / India – heavy investment in education especially engineering and computing science – Coalition Govs move towards English Bac!!!
Western MNCs moving RnD facilities to emerging markets. General Electric Health Care - $50m RnD facility in Bangladore. Microsoft RnD in Beijing – its biggest outside of its US Headquarters.
The need to innovate
To grow companies have to learn to appeal to billions outside world cities, the emerging middle classes in second tier cities and the rural poor.
Therefore rethink products AND distribution systems.
Tough markets – unpredictable income streams, high pollution, current distribution systems hopeless or non-existent, non efficient Governments, pirating, ubiquitous poverty.
Branding often mistrusted by locals.
Engage in ‘embedding’ – live and study new group of consumers – so can shape consumer tastes and establish buying habits.
P&G sends young marketing people to live with Chinese peasants for months on end - give free products.
Work with ‘local’ distribution systems – local womens networks, local shops (and repackaging to suit these shops)
NOTE : Yahoo! And eBay left China! Google left to go to HK.
Doing business in China
Google – closed Chinese search engine diverting traffic to site in HK due to censorship.
Rio Tinto (mining) – employees jailed for taking bribes from Chinese Firms.
Unilever – forced into shotgun marriages with unsatisfactory Chinese Partners.
Coca – Cola stopped from buying local juice-maker on anti-competitive grounds.
Vodafone sold its stake in China Mobile after 8 years – didn’t feel it could get a foothold in Chinese market
Chinese used feel they get capital, technology, management skills and better corporate governance. But Chinese companies now feel rich enough to buy whatever expertise they want.
BP, Shell, Exxon all sold their holdings in state owned Chinese firms by 2005.
Inconsistent policy from ruling party.
Insists on Joint Ventures to get access to technology and know how. And economic growth is seen as an important part of entrenching ruling party power.
Doing business in China
Cultural differences – guanxi – emphasis on personal connections – is it business or corruption.
Weak legal system for companies to operate in. Transparency International – Corruption Perceptions Index has China 79 th out of 180 countries.
But dangerous also NOT to deal with China – its market is only going to get bigger.
Emerging Markets advantages
potential market is huge, populations bigger and growing faster than developed world.
In both China and India hundreds of millions of people will enter the middle class in the coming decades.
Economies are set to grow faster – consumers are getting richer faster than western counterparts
Companies don’t have costly ‘legacy systems’
Brainpower is relatively cheap and abundant (China 5 m / India 3 m graduates a year)
They turn problems into advantages e.g.
Japan 1980s Car Manufacturers established Just-In-Time inventory systems as land and raw materials were expensive – but streamlined their production – profits up.
Now where consumer base is poor but piracy is high companies going for both Volume (low prices for customers) AND constant upgrades (keep one step ahead of piracy) -> Quantity and Quality.
Emerging Market Companies
Global GDP at PPP from 36% in 1980 – 45% in 2008, predicted 51% by 2014.
They now consume more than Americans!
Shook off recession quicker.
Last quarter of 2009 Thailand grew at annual growth rate of 15.3%, Taiwan 18%.
1990 Mittel – unknown steel producer in Indonesia – now as AcelorMittal it’s the worlds largest steel company – bigger than the next 3 combined.
Lenovo, not exist in 1990, bought IBMs personal computer business in 2005 and is now worlds 4 th largest pc maker.
Very optimistic business environment
Premium on speed and flexibility – gain their share of hyper growth
Lots of lateral moves, companies buying into other businesses- emerging companies are buying sophisticated corporate machinery in the West.
Innovation’s impact on Rich World
Emerging markets buying western companies (greater access to world capital markets)
Their sheer size, key players in most markets.
Their emphasis on volume
Western Companies chasing potential of emerging markets.
Emerging Markets Economic Data
Countries outside of N America and Europe will account for 80% of global growth between 2000 and 2050.
Western consumers have become more frugal.
Japan stagnant for 20 years and population shrinking.
Corporate Japan is looking to new places.
Traditional exports ill suited for emerging markets. Costly, complex and easily undercut by simpler gadgets from South Korea, Taiwan and China.
Japan has long used poor countries merely as production bases and then shipped products to rich ones. This no longer works.
Government facilitated growth by eradicating technical and physical obstacles.
Built roads, power plants and bridges
Facilitated the transfer of foreign intellectual property.
But not just top down. China has vigorous private entrepreneurs – ‘bamboo capitalism’.
Often operate outside state controlled companies AND the law. Can’t be well tracked but they are a BIG force.
Scale of their activities – 70% GDP by private means
Their dynamism – average 14% return on equity – dealing with intense competition and fluctuating demand.
Vulnerable to sudden regulatory crackdown – also hard for them to mature into more permanent structures.