Emerging Markes [SAV Lecture Notes]


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  • ■ Did you know that the world’s number three and four top-selling beer brands are produced by MNEs based in Brazil (Skol, made by InBev) and Mexico (Corona, made by Grupo Modelo)? ■ Together, these firms make more than 50 million barrels of beer annually.
  • Alternatively, ask: “What is an emerging market?” What are the characteristics of an emerging market? What distinguishes an emerging market from an advanced economy (a rich country) and a developing economy? How many people live in developing economies? (Answer: over 2 billion; They typically live on less than $5 per day).
  • Importance to IB Professionals: Talk about monopoly share and downward revenue difficulties. Growth is future oriented, protection is past oriented, More development, learning and personal development in new markets.
  • ADVANCED: are post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure. DEVELOPING: are low-income countries characterized by limited and stagnant economies . EMERGING: Dynamically growing, increasing incomes, living standards, consumption. By exploring economic development stages of countries, strategic managers gain insights into three important country characteristics : ◘ Purchasing capacity of citizens ◘ Business sector sophistication ◘ Commercial infrastructure level- communications, transportation, and energy generation
  • In sub-Saharan countries in Africa involves an average of 11 different approvals, and takes 62 days to complete. In advanced economies, takes an average of 6 approvals, and 17 days to complete.
  • By joining the EU, these countries had to adopt stable monetary and trade policies. They leverage their low-cost labor to attract investment from Western Europe, thereby boosting their economies.
  • Transition economies = Privatization of former state enterprises - since 1989 after transition from centrally planned economies into liberalized markets: Czech Republic, Hungary, and Poland; also China and Russia.
  • Business Week Economy May 9, 2007, 7:21AM EST text size: TT China's Illusory Middle Class Market In spite of the mainland's economic growth, experts say determining whether the middle class is a myth depends on how you crunch the numbers China has made great economic progress in just over two decades, yet growth so far has been driven by heavy investment. For it to continue at the current pace, the general consensus among economists is that consumption needs to increase - but it is difficult to say just how many Chinese are in a position to drive this consumption. A few years ago, Goldman Sachs put the figure at 100 million people, and saw it climbing to 650 million by 2015. McKinsey Global Institute published similar projections. Others claim the number in 2015 will be less than 300 million. More confusingly, everyone has a different definition of the "middle class" that is supposed to be behind this growth in consumer spending. "There's no real definition of middle class," said Jonathan Anderson, chief Asia economist at investment bank UBS. "If you want to identify the number of people who can afford a mobile handset, the answer would run to nearly the entire population. If your definition is how many people have 'significant discretionary power', [it's] 100-125 million." Others go even further. "China doesn't have a middle class," said Arthur Kroeber, director of Dragonomics Research and editor of China Economic Quarterly. He believes the term conjures up too many cultural connotations that simply don't apply - like taking the family of five out in the SUV for dinner and a movie. He prefers to divide Chinese consumers into two classes: Surviving China and Consuming China. Kroeber recently released a series of studies together with Access Asia, a market research consultancy, which say the primary problem lies with the many sets of retail consumption figures the government releases. The first is deceptively called "total retail sales of consumer goods" - misleading because it counts all goods purchased, including wholesale, rather than goods sold to people in shops; furthermore, it leaves out the service sector entirely. Yet this figure most closely resembles analysts' estimations of the size of China's retail market. In 2005 it was US$832 billion or US$637 per capita. Then there is the "private consumption" component of GDP, which was US$671 per capita in 2005, according to government statistics. "This suggests that retail sales equal 95% of private consumption," the report says, "an obvious impossibility." Taking all this into account, how much is China really spending? DECEPTIVE FIGURES McKinsey estimates China's total urban disposable income to be roughly US$622 billion but this just leads into a debate on the urban population is calculated. The government puts it at 562 million, something easily disputed by a careful analysis of census data. The official figures include in the "urban" population millions of residents of small towns far from big cities - most of whom are not very well off. According to Anderson, the "core" urban population of China is 224 million. This helps explain why Kroeber's report estimates that China's true retail market is only half of what is normally reported: roughly US$450 billion or US$346 per capita. That is about half the size of Malaysia or Thailand and one 30th of Japan. From this perspective, there hardly seems to be a market at all. But anyone who has been to a Carrefour hypermarket or Gome appliance store can tell you there are plenty of people lining up to buy. The crucial difference between these two arguments is location and this leads back to Kroeber's thesis of two Chinas. Surviving China consists of pretty much everyone. "As far as significant retailers are concerned, out of China's 1.3 billion people, 1.2 billion simply don't count," said Kroeber. The 110 million people identified in the report as viable Chinese consumers - the Consuming China category - are in the top three urban areas: Beijing/Tianjin, Shanghai, and Guangzhou/Shenzhen, and these areas are as close together as Madrid, Belgrade, and Moscow. Given China's geography and current infrastructure, the logistical difficulties of serving these three areas are huge. If potential sales are great enough, however, they outweigh logistical costs. The rosy figures from McKinsey and Goldman Sachs, which argue that by 2015 some 80% or more of China's urban population will be in the middle class, provide sound argument to outlay for the costs of transportation. The trouble comes when one digs into their definitions. Goldman puts the minimum income for "middle class" status at US$9,000 annually; McKinsey includes gradations from US$3,200 ("lower middle class") to US$12,500 ("upper middle class"). INCOME DISPARITIES In almost any developed country these levels of income would classify people as impoverished. McKinsey defends its numbers by comparing purchasing power parity, by which it argues Chinese middle class incomes would be the equivalent of between US$13,500 and US$53,900. This would be an important point if it weren't for the fact that many of the companies relying on these figures are selling cars and expensive clothing. The price of a BMW is not adjusted for purchasing power parity. In fact, the automobile market makes a good example. Some analysts point to China's growing car craze as evidence of a rise in spending power but they fail to consider that many Chinese may purcase virtually nothing else for years before buying a car. All of this is not to say that China is going to be poor forever. Kroeber and company are not foretelling doom; rather they are calling for cool heads. They predict that Consuming China will grow to some 270 million a decade from now, with average household consumption rising from US$5,000 to US$10,000 in that time. Anderson agrees, pointing to the strong investment of the auto industry. Many predicted a glut in the market, but demand is catching up. Similarly, the reality of a wave of Chinese consumers taking over the world may eventually catch up to the newspaper headlines, but it will be some time still.
  • Brazil long has been a center for mining bauxite, the main ingredient in aluminum & Iron Ore
  • ■ Did you know that the world’s number three and four top-selling beer brands are produced by MNEs based in Brazil (Skol, made by InBev) and Mexico (Corona, made by Grupo Modelo)? ■ Together, these firms make more than 50 million barrels of beer annually.
  • Alternatively, ask: “What is an emerging market?” What are the characteristics of an emerging market? What distinguishes an emerging market from an advanced economy (a rich country) and a developing economy? How many people live in developing economies? (Answer: over 2 billion; They typically live on less than $5 per day).
  • -- a form of corporate social responsibility because they help developing economies grow- most cases they also make good business sense. Historically few firms targeted poor countries- however- If firms market appropriate products and employ suitable strategies, doing business in EMS and developing economies can be profitable.
  • Emerging Markes [SAV Lecture Notes]

    1. 1. Seminar in International Business Understanding Emerging Markets (A)
    2. 2. <ul><li>Advanced, developing economies, and emerging markets </li></ul><ul><li>Attractions to Emerging Markets </li></ul><ul><li>Estimating Emerging Market Potential </li></ul><ul><li>Risks and Challenges of Emerging Markets </li></ul><ul><li>Strategies for Doing Business in Emerging Markets </li></ul>Today’s Agenda
    3. 3. Importance to IB Professionals <ul><li>Increased Career Opportunity for IB Managers </li></ul><ul><li>Increased Prospects for Companies </li></ul><ul><ul><li>Large and Small </li></ul></ul><ul><li>Growth = Increased Share Prices and Expansion </li></ul><ul><ul><li>Challenging & Fun Environment to work in / personal development </li></ul></ul><ul><ul><li>Vs. </li></ul></ul><ul><ul><li>Protecting a declining revenue base against competitors </li></ul></ul><ul><ul><li>“ Offense is best Defense” </li></ul></ul><ul><li>Just how important this size is… </li></ul><ul><ul><li>Graeemen Cell Phones in India </li></ul></ul><ul><li>http://www.youtube.com/watch?v=7vpqO8Fnq9E </li></ul>
    4. 4. Emerging Markets: Future Growth <ul><li>Micro-Finance To Facilitate Entrepreneurship </li></ul><ul><li>Source: YouTube: “Call Phones Battle Poverty” </li></ul>
    5. 5. Classifying Countries based on Economic Development <ul><li>Advanced economies: Post industrial </li></ul><ul><ul><ul><li>Examples - world’s richest countries and include Australia, Canada, Japan, New Zealand, the United States, and Western European countries. </li></ul></ul></ul><ul><li>Developing economies: Low income </li></ul><ul><ul><ul><li>Examples - low-income countries, with limited industrialization and stagnant economies- e.g. Bangladesh, Nicaragua and Zaire. </li></ul></ul></ul><ul><li>Emerging market economies : former developing economies </li></ul><ul><ul><ul><li>substantial industrialization, </li></ul></ul></ul><ul><ul><ul><li>modernization, </li></ul></ul></ul><ul><ul><ul><li>improved living standards and </li></ul></ul></ul><ul><ul><ul><li>remarkable economic growth . </li></ul></ul></ul><ul><ul><li>Examples - some 27 countries in East and South Asia, Latin America, Middle East and Eastern Europe- including Brazil, Russia, India, China (so called BRIC countries). </li></ul></ul>
    6. 6. Example of an Advanced Economy:
    7. 10. Advanced Economies <ul><li>Mature state of industrial development ; </li></ul><ul><ul><li>Home to 14% of the world’s population, and account for half of world GDP, over half of world trade in products, and three-quarters of world trade in services. </li></ul></ul><ul><li>Political systems - </li></ul><ul><ul><li>democratic, multiparty systems of government. </li></ul></ul><ul><li>Economic systems - </li></ul><ul><ul><li>typically based on capitalism, with relatively little government intervention in business. </li></ul></ul><ul><li>Serious purchasing power- </li></ul><ul><ul><li>few restrictions on international trade and investment. </li></ul></ul><ul><li>They host the world's largest MNEs. </li></ul>
    8. 11. Developing Economies <ul><li>Low discretionary incomes, </li></ul><ul><ul><li>limited proportion of personal income spent on purchases other than food, clothing, and housing. </li></ul></ul><ul><li>In developing economies, </li></ul><ul><ul><li>17% live on less than NT$34 per day; 40% live on less than NT$68 per day. </li></ul></ul><ul><li>The combination of low income and high birth rates tends to perpetuate poverty. </li></ul>
    9. 12. Developing Economies <ul><li>Poor Health Status and Care Systems </li></ul><ul><li>Productivity is stagnant; living standards deteriorate. </li></ul><ul><ul><li>Haiti today, Africa, North Korea </li></ul></ul><ul><li>Debt- Governments in developing economies have debt levels close to their annual GDP. </li></ul><ul><li>Bureaucracy - government policies that discourage entrepreneurship, trade, and investment. </li></ul><ul><li>Downward Spiral Syndrome </li></ul><ul><li>Favorable environment for revolutions, terrorist acts and war…. </li></ul><ul><li>Not a good thing. </li></ul>
    10. 14. Emerging Market Economies <ul><li>Most distinguishing characteristic- </li></ul><ul><ul><li>countries are enjoying rapidly improving living standards and a growing middle class with rising economic aspirations. </li></ul></ul><ul><li>Their Importance in the world economy is increasing: </li></ul><ul><ul><li>attractive destinations for exports, FDI, and sourcing. </li></ul></ul><ul><li>Emerging market countries are evolving towards wealthy nation status. </li></ul><ul><ul><li>Examples : Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan </li></ul></ul><ul><li>2004+ New Emerging Markets- </li></ul><ul><ul><li>Czech Republic, Hungary, and Poland, received a boost when they became members of the European Union. </li></ul></ul>
    11. 15. Why Emerging Markets Matter?
    12. 16. Growth is where the action is…
    13. 17. Emerging Market Dynamics <ul><li>Emerging markets account for over 40 percent of world GDP. They represent over 30 percent of exports and receive over 20 percent of FDI </li></ul><ul><li>Late-2000s, the emerging markets collectively enjoyed an average annual GDP growth rate of over 7% , a remarkable feat – much faster than advanced economies </li></ul><ul><li>Benefit from: low-cost labor, knowledge workers, government support, low-cost capital, and powerful, highly networked conglomerates </li></ul>
    14. 18. The New Global Challengers ( Boston Consulting Group Study) <ul><li>Some 100 companies from Emerging Markets (called Rapidly Developing Economies in the BCG study) are poised to become important 21 st -century multinationals. </li></ul><ul><li>Examples: </li></ul><ul><li>Brazil : Embraer, Sadia & Perdiago, Natura </li></ul><ul><li>Mexico: America Movil, Groupo Modelo </li></ul><ul><li>India : Ranbaxy, Infosys, Tata Tea, WIPRO </li></ul><ul><li>China : Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano </li></ul><ul><li>Turkey : Koc Holding, Vestel & Sisecam </li></ul>
    15. 19. The New Global Challengers: Rapidly Developing Economies (RDE’s) <ul><li>RDEs have rapidly growing markets, some of which are very large </li></ul><ul><li>RDEs have low-cost resources </li></ul><ul><li>Difficult operating environments at home produce some highly capable RDE companies </li></ul><ul><li>RDEs are training grounds for competing with global incumbents </li></ul>
    16. 20. Six Strategic Globalization Patterns of the New Global Challengers from EMs <ul><li>Taking RDE brands global (China’s Hisense, taking consumer electronics to Africa) </li></ul><ul><li>Turning RDE engineering into global innovation (India’s Wipro) </li></ul><ul><li>Assuming global category leadership (Hong Kong’s Johnson Electric) </li></ul><ul><li>Monetizing RDE natural resources (Brazilian food processors Sadia and Perdiago) </li></ul><ul><li>Rolling out new business models to multiple markets (Mexico’s cement conglomerate Cemex’s global acquisition strategy) </li></ul><ul><li>Acquiring natural resources (Shanghai Baosteel group expanding globally to secure stable iron-ore supplies) </li></ul>
    17. 21. Developing Economies Evolving into Emerging Markets <ul><li>European countries: </li></ul><ul><ul><ul><li>Estonia, Latvia, Lithuania, Slovakia. </li></ul></ul></ul><ul><li>Latin American countries: </li></ul><ul><ul><ul><li>Costa Rica, Panama, and Uruguay. </li></ul></ul></ul><ul><li>Also: </li></ul><ul><ul><ul><li>Kazakhstan, Nigeria, Vietnam, and the United Arab Emirates. </li></ul></ul></ul><ul><li>Economic prosperity varies within emerging markets- there are usually two sets of economies </li></ul><ul><ul><ul><li>Urban areas (more developed economic infrastructure) </li></ul></ul></ul><ul><ul><ul><li>Rural areas (less discretionary income). </li></ul></ul></ul>
    18. 22. Transition Economies <ul><li>Engaged in large-scale privatization of state-owned enterprises. </li></ul><ul><li>Regulation and entrenched government bureaucracy </li></ul><ul><ul><li>now are introducing legal frameworks to protect business and consumer interests and ensure intellectual private property rights. </li></ul></ul><ul><li>Russia endured high inflation with annual price increases reaching 100%, not good for investment </li></ul><ul><ul><li>Required the country to restructure not just firms and institutions, but also adopt new values about private ownership, profits, intellectual property, etc. </li></ul></ul><ul><li>Initially, western companies doing business in Russia found it difficult to recruit managers who understand modern management practices. </li></ul>
    19. 23. Intense Market Liberalization in Transition Economies <ul><li>Transition economies liberalized their markets- many foreign companies initiated trade and investment relationships with them. </li></ul><ul><li>… Hungary, Poland, the Czech Republic, and other former East Bloc countries have made great strides </li></ul><ul><li>political and economic restructuring </li></ul><ul><li>These countries are well on their way to more advanced stages of economic development…. </li></ul>
    20. 24. Opportunities in China <ul><li>Technology and environmental protection equipment markets </li></ul><ul><li>Low Cost Sourcing </li></ul><ul><ul><li>Wal-Mart sourced over $30 billion of merchandise from China in 2007- saves immensely. </li></ul></ul><ul><li>Growing Wealthy </li></ul><ul><ul><li>A sizeable consumer segment: 250 million ‘middle-class’ residents. </li></ul></ul><ul><li>Success requires deep understanding of the market and long-term commitment: </li></ul><ul><ul><li>Coca-Cola, General Motors, McDonald's, Motorola, Airbus, and Volkswagen. </li></ul></ul><ul><li>Challenges: Disparate rates of development between the coastal areas vs. West; poverty; environmental degradation, Varying Infrastructure, civil unrest </li></ul><ul><li>… .Getting your profits out… </li></ul>
    21. 25. China Economic Facts <ul><li>Economic Reforms Since 1970 under Communist Rule </li></ul><ul><ul><li>GDP Quadrupled (1977-2007) </li></ul></ul><ul><ul><li>Exports: 1993 US$ 78B </li></ul></ul><ul><ul><li>Exports: 2006 US$974B </li></ul></ul><ul><ul><li>Income per person modest ~US$6,800 </li></ul></ul><ul><li>Reached Worlds Second Largest Economy in 2007 (PPP Terms). </li></ul>
    22. 26. China as an Emerging Market <ul><li>Rapid Industrialization </li></ul><ul><ul><li>Aircraft </li></ul></ul><ul><ul><li>Machinery </li></ul></ul><ul><ul><li>Telecommunications </li></ul></ul><ul><ul><li>Raw Materials (Iron, Copper, Cement) </li></ul></ul><ul><li>Food / Commodities </li></ul><ul><li>Serve Largest Middle Class: ~250M </li></ul>
    23. 28. What Makes Emerging Markets Attractive? <ul><li>Emerging markets are attractive as target markets, manufacturing bases, and sourcing destinations. </li></ul><ul><li>1. Emerging Markets as Target Markets </li></ul><ul><ul><li>Growing middle class - emerging markets have become important –represent substantial demand for electronics and automobiles and health care services. </li></ul></ul><ul><ul><li>Emerging markets are excellent targets for manufactured products, technology, and sophisticated technology </li></ul></ul><ul><li>Examples : </li></ul><ul><ul><li>Textile machinery industry in India is huge </li></ul></ul><ul><ul><li>Oil and gas exploration plays a vital role in Russia </li></ul></ul><ul><ul><li>Agriculture is a major sector in China </li></ul></ul><ul><ul><li>Airplanes almost everywhere. </li></ul></ul>
    24. 29. Emerging Markets As Manufacturing Bases <ul><li>2. Emerging markets as manufacturing bases </li></ul><ul><ul><li>Home to low-wage, high-quality labor for manufacturing and assembly operations. </li></ul></ul><ul><ul><li>Large reserves of raw materials and natural resources. </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li>South Africa is a key source for industrial diamonds. </li></ul></ul></ul><ul><ul><ul><li>Thailand has become an important manufacturing location for Japanese MNEs such as Sony, Sharp, and Mitsubishi. </li></ul></ul></ul><ul><ul><ul><li>Malaysia and Taiwan- Motorola, Intel, and Philips manufacture semiconductors there. </li></ul></ul></ul><ul><ul><ul><li>Mexico and China- platforms for consumer electronics and auto assembly. </li></ul></ul></ul>
    25. 30. Emerging Markets As Sourcing Destinations <ul><li>3. Emerging markets as sourcing (procurement) destinations: </li></ul><ul><ul><li>MNEs have established call centers in Eastern Europe, India, and the Philippines. </li></ul></ul><ul><ul><li>Dell and IBM outsource certain technological functions to knowledge workers in India. </li></ul></ul><ul><ul><li>Intel and Microsoft programming activities performed in Bangalore, India. </li></ul></ul><ul><ul><li>Brazil as a leading raw material supplier (ag. & petro) </li></ul></ul>
    26. 31. Emerging Markets As Sourcing Destinations <ul><li>Outsourcing - procurement of selected value-adding activities = Service </li></ul><ul><li>Offshoring - when sourcing involves foreign suppliers or production bases = Manufacturing </li></ul><ul><li>“ Global sourcing” – The combination or Strategy… These IB professionals are attractive to MNC’s . </li></ul>
    27. 33. Seminar in International Business Understanding Emerging Markets (B)
    28. 34. Previous Summary <ul><li>Emerging Markets Benefit us by : </li></ul><ul><ul><li>Sales into Target Market = Revenue Growth </li></ul></ul><ul><ul><li>Sourcing Alternatives = Cost Reduction </li></ul></ul><ul><ul><li>Manufacturing Base = Cost Reduction </li></ul></ul><ul><ul><ul><ul><ul><li>+/or Revenue Growth </li></ul></ul></ul></ul></ul>
    29. 35. <ul><li>Advanced, Developing, and Emerging markets </li></ul><ul><li>Attractions to Emerging Markets </li></ul><ul><li>Estimating Emerging Market Potential </li></ul><ul><li>Risks and Challenges of Emerging Markets </li></ul><ul><li>Strategies for Doing Business in Emerging Markets </li></ul>Today’s (Chapter) Agenda
    30. 36. Estimating the Potential of Emerging Markets <ul><li>Estimating the true potential of emerging market demand is challenging. </li></ul><ul><ul><li>Limited availability of data sources or reliability of information… </li></ul></ul><ul><ul><li>Market research may be more costly and less precise than in advanced economies…can also take more time </li></ul></ul><ul><ul><li>Market potential indicators include : GDP growth rate, income distribution, commercial infrastructure, the rate of urbanization, consumer expenditures for discretionary items and unemployment rate . </li></ul></ul><ul><li>Traditional Assessment Methods are rarely accurate </li></ul><ul><ul><li>Cultural Distance “Haircuts” </li></ul></ul><ul><ul><li>Real Options </li></ul></ul>
    31. 37. Market Potential Indicators <ul><li>Three practical approaches firms employ in assessing market potential of individual countries are: </li></ul><ul><ul><li>per-capita income </li></ul></ul><ul><ul><li>size of middle-class, and </li></ul></ul><ul><ul><li>A mix of market potential indicators (art rather than science) </li></ul></ul><ul><li>Market potential: </li></ul><ul><ul><li>gross national income (GNI) </li></ul></ul><ul><ul><li>per-capita GDP, expressed in terms of a reference currency, such as the U.S. dollar. </li></ul></ul>
    32. 38. Purchasing Power Parity Adjustment to per capita GDP <ul><li>In relying on per capita GDP for comparison of different countries, one should use purchasing power parity exchange rates, rather than the market exchange rates. </li></ul><ul><li>Purchasing power parity adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies. </li></ul><ul><li>PPP adjusted per capita GDP more accurately represents the amount of products that consumers can buy in a given country , using their own currency and consistent with their own standard of living. </li></ul>
    33. 40. Big Mac Index (The Economist) <ul><li>Big Mac Index - another way to illustrate the PPP concept is to examine the Big Mac Index available at globalEDGE™ and developed by the Economist (www.economist.com). </li></ul><ul><li>The Economist 's Big Mac index is based on the theory of purchasing-power parity (PPP), </li></ul><ul><ul><li>according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. </li></ul></ul><ul><ul><li>The Economist publication selects a single product for the basket of goods: a McDonald’s Big Mac. </li></ul></ul>
    34. 41. What the Big Mac Index Suggests <ul><li>The Big Mac Index gathers the cost of a Big Mac at McDonald’s restaurants worldwide. </li></ul><ul><li>It then compares the prices based on actual exchange rates to those based on the PPP price of Big Macs to see whether a nation’s currency is under-valued (most developing economies or emerging markets) or over-valued (most European countries). </li></ul><ul><li>The index is supposed to serve as a guide to the direction in which currencies should, in theory, head in the long run. </li></ul><ul><li>In its most current version, the big Mac index suggests that the Japanese yen is 28% undervalued against the dollar, and the euro is 19% overvalued. </li></ul>
    35. 42. Big Mac Index Source: The Economist , July 2007 Big Mac prices Implied PPP of the Actual dollar exchange rate July 2007 Under (-)/over (+) valuation against the dollar, % In local currency In U.S. dollars The EURO €- 3.06 4.17 1.12 1.36 +22 British Pound £ 1.99 4.01 1.71 2.01 +18 Japanese Yen ¥ 280 2.29 82.1 122 -33 Chinese yuan 元 11 1.45 3.23 7.60 -58 Norwegian kroner kr 40.0 6.88 11.7 5.81 +102 Swiss francs CHF 6.30 5.20 1.85 1.21 +53 South African rand R 15.5 2.22 4.55 6.97 -35 Russian ruble руб 52.0 2.03 15.2 25.6 -41
    36. 43. Limitations to the Use of Per Capita GDP <ul><li>Informal Economy </li></ul><ul><ul><li>economic transactions that are not officially recorded and therefore left out of government calculations of a nation's GDP, e.g. barter exchanges. </li></ul></ul><ul><li>Low end of the income scale in emerging markets, ‘ mean’ or ‘average’ does not accurately represent a non-normal distribution </li></ul><ul><ul><li>often, the median or the modal income would yield a better understanding. </li></ul></ul><ul><li>Household income is several times larger than per-capita income because of multiple wage earners in these countries. </li></ul><ul><li>Governments in these countries may under-report national income so they can qualify for low-interest loans and grants from international aid agencies and development banks. </li></ul>
    37. 44. Middle Class as an Indicator of Market Potential <ul><li>Economic Independence </li></ul><ul><ul><li>consume many discretionary items, including electronics, furniture, automobiles, recreation, and education. </li></ul></ul><ul><li>In Emerging Markets… </li></ul><ul><ul><li>the size and growth rate of the middle class serve as signals of a dynamic market economy </li></ul></ul><ul><li>Demographic trends indicate that… </li></ul><ul><ul><li>in the coming two decades, the proportion of middle-class households in emerging markets will become much bigger , with enormous spending power. </li></ul></ul>
    38. 46. Progress of Emerging Markets in Building Their Middle Classes <ul><li>India and Indonesia </li></ul><ul><ul><li>feature large middle-class populations in absolute terms, per-capita GDP is rather modest </li></ul></ul><ul><ul><li>especially when compared to South Korea, China, Russia, and Mexico – </li></ul></ul><ul><ul><li>although income is relatively high at 49 and 48 %, respectively. </li></ul></ul><ul><li>Brazil </li></ul><ul><ul><li>- middle class citizens control only about 35 % of national income </li></ul></ul><ul><li>South Korea has made the most progress towards building a sizable middle class; </li></ul><ul><ul><li>its middle-class accounts for about 55 % of national income. </li></ul></ul>
    39. 47. Emerging Market Potential Index (EMPI) p. 255 <ul><li>The EMPI measure of export market potential: </li></ul><ul><li>Market Size : </li></ul><ul><ul><li>the country’s population, especially urban population </li></ul></ul><ul><li>Market Growth Rate : </li></ul><ul><ul><li>the country’s real GDP growth rate </li></ul></ul><ul><li>Market Intensity : </li></ul><ul><ul><li>private consumption and GNI represent discretionary expenditures of citizens </li></ul></ul><ul><li>Market Consumption Capacity : </li></ul><ul><ul><li>The percentage share of income held by the country’s middle class </li></ul></ul>
    40. 48. Emerging Market Potential Index (EMPI) <ul><li>Commercial Infrastructure </li></ul><ul><ul><li>characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet </li></ul></ul><ul><li>Economic Freedom : </li></ul><ul><ul><li>the degree of government intervention </li></ul></ul><ul><li>Market Receptivity : </li></ul><ul><ul><li>the particular country’s inclination to trade with the exporter’s country as estimated by the volume of imports </li></ul></ul><ul><li>Country Risk : the degree of political risk </li></ul>
    41. 50. IMF Growth Data: World Economic Outlook (October, 2007)
    42. 51. China is Biggest Gainer…
    43. 52. Managers can use EMPI in Many Ways <ul><li>Rankings can provide an objective method for prioritizing </li></ul><ul><li>On-line EMPI rankings are interactive, so users can rank markets on the basis on any of the eight dimensions making up the overall Index </li></ul><ul><li>Managers can modify the assigned weights to fit the unique characteristics of their own industry. </li></ul><ul><li>Managers may add additional indicators that are not currently included in the EMPI . </li></ul>
    44. 54. Challenges of Doing Business in EMs: Political Stability <ul><li>The absence of reliable government functioning adds to business costs, increases risks, and reduces managers’ ability to forecast business conditions. </li></ul><ul><ul><li>Strikes: Judicial, Transportation, Education, Government </li></ul></ul><ul><ul><li>Speed: Years instead of Months due to lack of infrastructure </li></ul></ul><ul><li>Political instability is associated with corruption and weak legal frameworks that discourage investment. </li></ul><ul><ul><ul><li>Example - Russia- Bureaucratic practices favor well-connected, home-grown firms threaten the business activities of foreign firms, i.e. denying access to Russia’s energy resources- harming foreign investor confidence. </li></ul></ul></ul>
    45. 55. Challenges of Doing Business in EMs: Weak Intellectual Property Protection <ul><li>Laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow. </li></ul><ul><ul><li>Argentina- enforcement of copyrights on recorded music, videos, books, and computer software is inconsistent- laws against Internet piracy are weak and ineffective. </li></ul></ul><ul><ul><li>China Indonesia, and Russia - counterfeiting is common , especially with software, DVDs, and CDs. </li></ul></ul><ul><ul><li>India- weak patent laws discourage investment by foreign firms. </li></ul></ul>
    46. 56. Challenges of Doing Business in EMs: Bureaucracy and Lack of Transparency <ul><li>Bureaucracy, as well as excessive requirements for licenses, approvals, and paperwork, delay business activities… </li></ul><ul><ul><li>Example - American International Group (AIG) formed a joint venture with Tata, to enter India's underserved $8 billion insurance market, it took six years before the Indian government granted AIG permission to sell property and life insurance. </li></ul></ul><ul><li>Bureaucracy means lack of transparency… </li></ul><ul><ul><li>i.e. legal and political systems are not open and accountable. Where anti-corruption laws are weak, bribery, kickbacks and extortion are common. </li></ul></ul><ul><li>In Transparency International’s rankings, emerging markets such as Argentina, Indonesia, and Venezuela experience substantial corruption. </li></ul>
    47. 57. Challenges of Doing Business in EMs: Partner Availability and Qualifications <ul><li>Foreign firms: seek alliances with local partners in countries characterized by inadequate legal and political frameworks- gaining access to local market knowledge, supplier and distributor networks, and key government contacts. </li></ul><ul><li>Qualified: business partners in emerging markets are not readily available... </li></ul><ul><ul><li>Second best, more concessions… </li></ul></ul>
    48. 58. Transparency International (2007) ( www.transparency.org )
    49. 59. 200 Corruption Perceptions Index (http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table)
    50. 60. Challenges of Doing Business in EMs <ul><li>Many emerging market economies are dominated by family-owned rather than publicly-owned businesses. </li></ul><ul><li>Family conglomerate (FC) is a large, privately-owned company that is highly diversified, and control economic activity and employment in emerging markets. </li></ul><ul><ul><li>Carlos Slim (80% of Mexican Stock Market) </li></ul></ul><ul><li>South Korea, where they are called chaebols - the top 30 FCs, 50% of assets and industry revenues in the Korean economy. </li></ul><ul><ul><li>Samsung, the most famous Korean FC, has annual revenues of $140 billion. </li></ul></ul><ul><li>India’s business houses & Latin American grupos </li></ul>
    51. 62. Characteristics of Family Conglomerates <ul><li>A typical FC may hold the largest market share in each of several industries in its home country. </li></ul><ul><li>FCs enjoy various competitive advantag es in their home countries, such as government protection and support, extensive networks in various industries, superior market knowledge, and access to capital </li></ul><ul><li>The origin and growth of FCs are partly attributable to governments, which protect FCs by providing subsidies, loans, tax incentives, and market entry barriers to competitors. </li></ul><ul><li>FCs provide huge tax revenues and facilitate national economic development. </li></ul><ul><li>FC dominance in emerging markets suggests that they will be formidable competitors or capable partners. </li></ul>
    52. 63. Managerial Strategies: Partnering with Family Conglomerates <ul><li>FCs make valuable venture partners in emerging markets. They can: </li></ul><ul><ul><li>reduce risks, time, and capital requirements for new market entry </li></ul></ul><ul><ul><li>develop relationships with governments and other key, local players </li></ul></ul><ul><ul><li>target market opportunities more rapidly and effectively </li></ul></ul><ul><ul><li>overcome infrastructure-related hurdles </li></ul></ul><ul><ul><li>leverage FC’s resources and local contacts. </li></ul></ul>
    53. 64. Examples of Partnering with Family Conglomerates <ul><li>Ford partnered with Kia to introduce the Sable line of cars in South Korea-Kia's strong distribution and after-service network. </li></ul><ul><li>Digital Equipment Corporation (DEC) designated Tatung, a Taiwanese FC, as the main distributor of its workstations and client-server products in Taiwan- Tatung's local experience and distribution network. </li></ul><ul><li>In Turkey, Sabanci entered a joint venture with Danone, the French yogurt producer and owner of the Evian brand of bottled water. </li></ul><ul><ul><li>Danone brought ample technical knowledge in packaging and bottling, </li></ul></ul><ul><ul><li>Sabanci knows the market, retailers, and distributors- resulting in making Danone the bottled water market leader in the first year. </li></ul></ul>
    54. 65. Managerial Strategies: Marketing to Governments <ul><li>Governments buy enormous quantities of products : </li></ul><ul><ul><li>Computers, </li></ul></ul><ul><ul><li>furniture, </li></ul></ul><ul><ul><li>office supplies, and </li></ul></ul><ul><ul><li>motor vehicles </li></ul></ul><ul><li> services </li></ul><ul><ul><li>Architectural </li></ul></ul><ul><ul><li>legal, </li></ul></ul><ul><ul><li>Consulting. </li></ul></ul><ul><li>State enterprises operate in areas such as: </li></ul><ul><ul><li>railways, </li></ul></ul><ul><ul><li>airlines, </li></ul></ul><ul><ul><li>banking, </li></ul></ul><ul><ul><li>oil, </li></ul></ul><ul><ul><li>chemicals and </li></ul></ul><ul><ul><li>Steel. </li></ul></ul>
    55. 66. Aspects of Marketing to Governments <ul><li>Request for proposals ( RFPs ) or tenders - Formal requests, can be 100’s of pages. </li></ul><ul><li>Governments prefer dealing with vendors that offer complete sales and service packages -- in addition to financing (e.g., low-interest loans). </li></ul><ul><li>Governments are attracted by deals that create local jobs, employ local resources, reduce import dependence, and provide other country-level advantages. </li></ul><ul><ul><li>Examples - Bechtel, Siemens, General Electric, Hitachi, KBR… regularly participate in bidding for global tenders from emerging market governments. </li></ul></ul><ul><ul><li>Three Gorges Dam on the Yangtze River in China, will be fully operational in 2009, 16 years, $25 billion, largest hydroelectric dam in the world- global contractors- ABB, Kvaerner, Voith, Siemens, and GE. </li></ul></ul>
    56. 67. Managerial Strategies: Skillfully Challenging EM Competitors <ul><li>Advantages such as low-cost labor, skilled workforce, government support, and FCs, help take share from incumbent international players. </li></ul><ul><ul><li>Example - India’s Mahindra & Mahindra (farm equipment industry) has been grabbing market share from John Deere and Komatsu, with less expensive brands such as the Mahindra 5500. </li></ul></ul><ul><li>Advanced economy firms must: </li></ul><ul><li>Conduct research to understand the indigenous challengers </li></ul><ul><li>Acquire new capabilities that build competitive advantages (R&D investment, partnering with competitors, leveraging low-cost labor). </li></ul>
    57. 68. Catering to Economic Development Needs of EMs <ul><li>Internationalizing firms can be involved in fostering economic development in Emerging Market’s </li></ul><ul><li>Economic development through profitable modernization projects or </li></ul><ul><li>Entrepreneurship through small-scale loans, and </li></ul><ul><li>Fostering economic development with profitable projects…sometimes a penny at a time. </li></ul>
    58. 69. For example … <ul><li>Unilever and P&G </li></ul><ul><ul><li>sell Sunsilk and Pantene shampoo in India for less than $0.02 per mini-sachet. </li></ul></ul><ul><li>Narayana Hrudayalaya </li></ul><ul><ul><li>sells health insurance for less than $0.20 per person per month in India. </li></ul></ul><ul><li>Graeemen (video) </li></ul><ul><ul><li>sells prepaid cellular minutes to remote users in India. </li></ul></ul>
    59. 70. Big Companies are also Contributing <ul><li>Ericsson, </li></ul><ul><ul><li>in rural parts of Tanzania, and </li></ul></ul><ul><ul><li>other parts of Africa. </li></ul></ul><ul><ul><li>between 1998 and 2004, the number of mobile-phone users in Africa grew to 81 million – the fastest growth worldwide. </li></ul></ul><ul><li>Led to the development of related industries and the launch of local firms that produce accessories, such as devices for recharging cell phone batteries. </li></ul><ul><li>Ericsson’s experiences suggest that market-based solutions not only contribute to social and economic transformation, but can be profitable as well. </li></ul><ul><li>Ericsson also modernized phone systems in Russia, Vietnam and fiber optic cable systems in India </li></ul>
    60. 71. And…Experience with Microfinance Projects <ul><li>World Bank estimates there are more than 7,000 microfinance institutions, serving some 16 million poor people in developing economies. </li></ul><ul><li>Thanks to the success of microfinance, Yunus was awarded the 2006 Nobel Peace Prize. </li></ul><ul><li>Similar efforts have been inspired in dozens of poor countries worldwide, often sponsored by philanthropic organizations such as the Bill and Melinda Gates Foundation. </li></ul><ul><li>Proponents point to how a small amount of money can have a dynamic, ripple effect on many lives in a village. </li></ul><ul><li>Microfinance has gained credibility in the mainstream banking industry- with other forms of small-scale financial services offered in poor countries worldwide, including insurance and mortgage lending. </li></ul>
    61. 72. Summary <ul><li>Emerging markets represent the future of growth…. </li></ul><ul><li>Sourcing options will migrate towards the lowest cost provider </li></ul><ul><li>Competitive advantage is constantly in motion (i.e. China today, Vietnam tomorrow) </li></ul><ul><li>Manufacturing bases will follow the combination of large markets, trade bocks and cheap labor. </li></ul>
    62. 73. Best Strategy… <ul><li>Start with Traditional Assessment’s </li></ul><ul><li>Identify and Collaborate with a Local Partner (FC) </li></ul><ul><li>Trade technology/finance for local market access… </li></ul><ul><li>Use culturally driven frameworks for adjusting your targets.. </li></ul><ul><ul><li>I.e. Distance Still Matters [HBS] </li></ul></ul>
    63. 74. Conclusion <ul><li>As IB professionals: </li></ul><ul><ul><li>Skilled in the “business of emerging markets” </li></ul></ul><ul><ul><li>Culturally aware of local environment, risks, resources and practices </li></ul></ul><ul><ul><li>Adaptable and transferrable from one market to another. </li></ul></ul><ul><ul><li>The rate of change in the future will be faster than ever before. </li></ul></ul>