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Got Growth? Growing Business in a Changing World

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Decelerating growth, a more insular economic strategy, rising costs and new regulations are changing China's business dynamics, leading to a host of new challenges and opportunities in Asia's largest market. Meanwhile, an uneven economic recovery looms over Europe while the debate as to whether Frontier markets are faring better than Emerging markets continues. Growth strategist David Hartman looks forward to where global growth is coming from and how changing country dynamics will impact strategic account management.

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Got Growth? Growing Business in a Changing World

  1. 1. © 2014 Blue Canyon Partners, Inc. DAVID G. HARTMAN, PRINCIPAL | MARCH 26, 2014 SAMA Webinar Got Growth? Growing Business in a Changing World
  2. 2. © 2014 Blue Canyon Partners, Inc. 1. Dissecting the Daily Headlines about China’s Economy, and a Look at a New Set of Growth Markets. How Significant Will They Be? 2. Where China Has Been as a Market and as a Global Competitor, and Where It is Headed 3. What Have We Learned That is Useful in Looking at Frontier Markets Agenda 2
  3. 3. © 2014 Blue Canyon Partners, Inc. We Have Witnessed a Sea Change in the Sources of Global Growth in Recent Years  As recently as 2002, North America and Europe were the growth drivers of the world market, accounting for 70% of global market growth.  As recently as 1992, Asian developing countries (bars with black outline) accounted for less of global market growth than Japan alone.  The past 5 years have seen developing Asia account for a remarkable 60% of all the market growth in the world, nearly 40% of it in China alone.  Regions not shown in the chart now account for about 30% of global growth, three times as high as in the 90’s and higher even than during the oil crises of the 70’s. Sources: World Bank, WDI, Blue Canyon analysis Percentage of 5-Year Global GDP Growth Accounted for by Selected Regions 3
  4. 4. © 2014 Blue Canyon Partners, Inc. While Asian Emerging Markets Still Lead, Frontier Markets in Other Regions Have Emerged  With some exceptions such as Argentina and Vietnam, the Frontier markets are outside the mainstream of prior rapid growth: Asia and Latin America.  With global growth faltering over the past 5 years, the Middle East and Africa were home to some substantial growth. The old adage of the developing world getting pneumonia when the US and Europe catch cold seems quite outdated now.  The reasons can be debated, but the demands on the world’s resources created by explosive growth by China are a factor.  Even with a substantial slowdown in China from this level of growth, China will still outweigh the importance of all the Frontier group for some time to come. But positioning for the future requires attention. Sources: World Bank, WDI, Blue Canyon analysis Percentage of 5-Year Global GDP Growth Accounted for by Selected Regions 4
  5. 5. © 2014 Blue Canyon Partners, Inc. Still, China Looms So Large That Its Growth Slowdown Makes for Shocking Headlines  Global concern over China’s economic slowdown is probably overdone  China’s policymakers are determined to build a more balanced economy: ▫ Services vs manufacturing ▫ Personal consumer choice vs government spending ▫ Interior regions vs coastal ▫ Environment vs growth  “Slowdown” scenarios to below 8% must be seen in context of less than 2.5% growth in the US and Europe (solid blue line) Sources: World Bank, WDI, Blue Canyon analysis China’s Real Annual GDP Growth 5
  6. 6. © 2014 Blue Canyon Partners, Inc. Government Spending Has Given China a Vast Modern Infrastructure, Such as a Highway System, Built Largely in 15 Years  China’s growth was maintained during the great global recession by government stimulus spending, largely on infrastructure projects.  Expressways have been a large part of the construction boom in China, taking China from few “interstate highways to the size of the US’s system.  China has been pushing the highway network west, allowing for delivery to ports and major cities of products produced outside the most developed coastal rim.  The same building boom has similarly expanded rail and air infrastructure. Sources: National Bureau of Statistics of China, Wikipedia user ASDFGH for Map translation/presentation China’s Expressway Development China’s Expressways: Operational (Blue) and Planned (Red) 6
  7. 7. © 2014 Blue Canyon Partners, Inc. This Transportation Infrastructure Supports the Ongoing Westward Shift in Centers of Growth  Long China’s laggards, the interior regions of China have per capital incomes a fraction of the most developed provinces along the coast.  The much-discussed wage increases faced by foreign and Chinese manufacturers are far less burdensome in the poorer regions where new development is taking place.  And now the former leaders - Beijing, Shanghai, and Guangdong - have fallen to the bottom of the growth chart.  Those companies looking for new “frontier markets” should look at the low-income regions of China as well as outside. Sources: China National Bureau of Statistics, Blue Canyon analysis 7
  8. 8. © 2014 Blue Canyon Partners, Inc. What Do All These China Dynamics Mean for Succeeding With Strategic Accounts? Trend What It Means China’s overall growth rate slows Still-growing demand for your products and your strategic accounts’ products, but growing more slowly than some had anticipated Consumer demand replaces government infrastructure spending Manufacturing for some of the most fashion-conscious consumers in the world presents great opportunities but different opportunities from supporting construction. Service providers could also see opportunity A significant population moves from subsistence agriculture to new cities As peasants become city-dwellers, dependencies on products from the market increase dramatically Industry moves from the Coastal areas to regions farther and farther West Instead of moving (migrant) workers from the West to factories in the East, B2B customers will move goods from factories in the West to markets, often in the East but also in the West. Logistics reemerges as a key challenge/differentiator. Domestic demand and higher-value exports replace exports of low-priced labor-intensive goods Changes in pattern of goods movement within China is coupled with an increase in demand for imported products. Export volumes fall over time. Key accounts that are in China for low cost manufacturing will be challenged by basic economics. Consumer concerns such as Food safety are a daily topic of conversation and shapes people’s dining habits Foreign brand name products and inputs gain acceptance; more reliable and well-monitored supply chains, as well as inspections at source, can start to calm fears. 8
  9. 9. © 2014 Blue Canyon Partners, Inc. Chinese Companies as Strategic Accounts and as Competitors Taking stock of Where China has Been and Where China is Headed as a Global Competitor 1. Remarkable change in not much more than 20 years: command and control to largely market-driven 2. Now a “must-win” market for most global manufacturers who intend to achieve growth and continue being global leaders, needing partners to support them 3. Having created a formidable set of Chinese competitors who are large, well-funded and tend to follow a different business model, creating challenges across the globe 9
  10. 10. © 2014 Blue Canyon Partners, Inc. Value Creation for Chinese Key Accounts Is Defined by the Market in Which Second Mice Have Prospered  Incomes have soared, but most of China is still a poor country ▫ Labor is still relatively cheap ▫ Consumer products are sold in volume in the middle market where price is critical  Most Chinese companies know of only one way to compete: “Almost as good as ____ (Motorola, Nike, Ericsson, Apple, Siemens) at a fraction of the price.” 10
  11. 11. © 2014 Blue Canyon Partners, Inc. How the Second Mice Succeed in That Market  Manufacturing and sourcing capabilities, including ones learned from western firms  “China economics” ▫ Substituting labor for supplies and equipment ▫ Moving to lower-cost geographies ▫ Redefining relationships with customers around service  Fast learner and fast follower competencies ▫ Copying what works elsewhere ▫ Thinking “outside the stadium” ▫ Moving at “China speed” to be Second ▫ Using close customer relationships to engineer features out  A focus on China’s “middle market” – where the products of western companies are too expensive Source: George F. Brown, Jr. and David G. Hartman, Are You Ready to Take on China’s Next Generation Competitors?, Chief Executive, September 2011. 11
  12. 12. © 2014 Blue Canyon Partners, Inc. Coming to a Market Near You: The “Going Out” Strategy  Before China joined WTO in 2001, most Chinese “exporters” had little idea what happened to their products after they left the factory.  The government began a policy of actively supporting firms to invest abroad. There was even a list of resources and technologies for companies to target.  Through acquisition, Chinese companies are becoming major players on the world stage. Not all will succeed and not all will change the companies they acquire, but some will do both.  Chinese resource and engineering companies are doing projects across the world, moving large volumes of Chinese products with them. 12
  13. 13. © 2014 Blue Canyon Partners, Inc. What You and Your Western Strategic Customers Need to Do to Win Against Chinese Competitors  To sustain global leadership, most western firms will need to win in China’s mid-market: to bring what the Chinese do so well into their own firm’s cultures, most likely through acquisition and a new perspective on integration.  The task of competing with Chinese companies, in China and at home, is monumental, but the China market remains a “must win” for western firms aspiring to sustained global leadership.  While ensuring reliability, the western firms must keep the primary focus on cost in order to compete. 13
  14. 14. © 2014 Blue Canyon Partners, Inc. China Lessons for Frontier Markets Lesson What it Means Being early to China meant being the only supplier of sophisticated products; but most western companies later found themselves positioned in high-end niche market segments that failed to match explosive growth in overall market demand. Be realistic that people waiting in line to buy your products is a short-lived phenomenon. The phenomenon will be even more short-lived due to the focus of China on being the supplier to the New Frontier Markets in Africa, the Middle East, and Latin America. Being early to China meant dealing with high costs due to lack of development, such as training workers, poor infrastructure, and an immature supply base, despite the low labor cost environment. In frontier markets, some companies make money despite the cost environment, others do not. Being thoughtful about the costs and the future is critical. Being early to China meant dealing with a business culture that was insulated from global norms, was confusing and risky and led to some violating their ethics and the law. Frontier markets are frontier for a reason. Choose carefully the regions and market segments in which you can operate effectively. China developed in a relatively short time from a cheap manufacturing location to offer higher labor costs but a compelling market. Chasing the next low-cost manufacturing location may bring only temporary rewards unless you position for a long-term win in that country as a market. China developed quickly into a manufacturing powerhouse, with local competitors who attacked the local mid-market but also have global ambitions Not every frontier market will see the rise of indigenous competitors to that degree, but it is important to anticipate how it will evolve. 14
  15. 15. © 2014 Blue Canyon Partners, Inc. Questions? David G. Hartman Current Responsibilities As a Principal of Blue Canyon, David Hartman works with major corporations developing growth strategies, defining ways to capture value from Big Data, and strengthening B-to-B customer relationships. David also serves as the Director of Blue Canyon’s China Practice and CEO of Blue Canyon & China Associates in Beijing. PRINCIPAL T (847) 967-0295 E dgh@bluecanyonpartners.com Experience David has worked across a multitude of industries, including automotive, telecommunications, construction and many others. As a leading economist, David has directed Blue Canyon associates to create detailed data models that forecast growth and offer insights for clients. During his 15 years at Blue Canyon, David has worked on a broad range of projects, including:  Identifying global growth opportunities for multiple U.S. manufacturers  Recommending how clients must address new channel opportunities and strategic pricing  Advising longstanding China market participants on how to break through barriers to further growth and strategies for succeeding against local competitors in China’s mid markets. Prior to joining Blue Canyon, David served for 10 years on the faculty of Harvard University, was Executive Director of the National Bureau of Economic Research, and was Managing Director of DRI McGraw-Hill, a pioneer in the information industry. Education and Affiliations David earned a Ph.D. degree in economics from Harvard and B.A. and M.A. degrees from Northwestern University in mathematics and economics. Thought Leadership David has spoken to numerous organizations and has been interviewed by a number of publications. He has written more than a dozen articles and white papers on topics ranging from global expansion, market creation in China, and the development of new data-driven business models. 15

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