Allies and Adversaries: 2013 BCG Global Challengers

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A  A 2013 BCG GLOBAL CHALLENGERS The Boston Consulting Group (BCG) is a global management consulting fi rm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profi t sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offi ces in 43 countries. For more information, please visit bcg.com.

The BCG Game-Changing Program We are living in an age of accelerating change. The old ways are rapidly becoming outdated, obsolete. New opportunities are opening up. It is clear that the game is changing. At BCG, we are optimistic: we think that the fundamental drivers of growth are stronger than they have ever been in human history. But to capitalize on this trend, leaders need to be proactive, to challenge the status quo, to make bold moves: they need to change the game, too. The decisions they make now, and over the next ten years, will have an extraordinary and enduring impact on their own fortunes as well as those of their organizations, the global economy, and society at large. To help leaders, and to mark our ﬁ  ieth anniversary, BCG is pulling together the best ideas, insights, and ways to win—to own the future. This report is part of that endeavor. ALLIES AND ADVERSARIES

2013 BCG GLOBAL CHALLENGERS

ARINDAM BHATTACHARYA

THOMAS BRADTKE

TENBITE ERMIAS

WHITNEY HARINGSMITH

DAVID LEE

EDUARDO LEON

MICHAEL MEYER

DAVID C. MICHAEL

ANDREW TRATZ

MASAO UKON

BERND WALTERMANN

J  | T B C G CONTENTS

 EXECUTIVE SUMMARY

 THE GAME HAS CHANGED

 COMING OF AGE The New Challengers State Ownership: From Help to Hindrance A New Era

 THE 1 BCG GLOBAL CHALLENGERS The Challengers by Country The Challengers by Industry Sector Value Creation: A Tale of Two Eras New BCG Challengers Signs of Success: The Graduates The Capabilities Beyond Cost Advantage

 NEW ADVERSARIES: A CUTTHROAT COMPETITIVE ENVIRONMENT Moving into New Businesses Captivating the New Consumer Capturing the Digital Opportunity Exploring Frontiers of Fast Growth

 NEW ALLIES: CHALLENGERS GOING GLOBAL Three Diﬀ erent M&A Strategies Game-Changing Partnerships

 REASSESSING GLOBAL RELATIONSHIPS Opportunities for Challengers Opportunities for Multinationals Opportunities for Governments

 FOR FURTHER READING

 NOTE TO THE READER

 | A  A EXECUTIVE SUMMARY

  BCG  challengers—a list of 100 fast-globaliz- Ting companies from rapidly developing economies (RDEs)— are driving global growth.

• From 2008 through 2011, the revenues of global challengers grew by an annual average of 16 percent. Their average revenues now exceed those of the nonﬁ nancial S&P 500 companies.

• From 2006 through 2011, the 2013 BCG global challengers added 1.4 million jobs, while employment at nonﬁ nancial S&P 500 companies remained ﬂ at.

• The 2013 BCG global challengers are from 17 countries—7 more than our ﬁ rst list covered when it was published in 2006—reﬂ ect- ing the growing pursuit of global growth.

• More than 30 of the 2013 BCG global challengers are consumer- focused companies—a sign of the rapid rise of consumer spending in their markets and abroad.

• They buy more than $1.7 trillion of goods and services and invest more than $330 billion in capital spending a year, providing a huge market for their suppliers.

The 2013 challengers also reflect a turbulent global economy.

• Twenty-six of the challengers are new to the list. They displaced former global challengers that have fallen behind or refocused on their home markets.

• Since 2006, meanwhile, only seven companies—two this year— have “graduated” from the list by virtue of having sustained industry leadership. It is more common to drop oﬀ the list than move beyond it.

T B C G |  As global growth shifts to emerging markets, the 2013 BCG global challengers will compete more directly with multinationals.

• Global challengers are active in a broader set of industries, including for the ﬁ rst time ﬁ nancial services, health care equipment, and electronic commerce.

• Many challengers already have positions to defend in markets that multinationals covet, such as Southeast Asia, Latin America, and Africa.

At the same time, global challengers and multinationals will need to learn how to cooperate.

• As the global marketplace becomes more demanding, partnerships, joint ventures, and other collaborations will be needed.

• Global challengers and multinationals are increasingly collaborat- ing in order to exchange technology, enter new markets, develop products, and enter long-term supplier relationships.

Global challengers, multinationals, and governments all have constructive roles to play in generating economic growth.

• The global challengers need to keep building capabilities beyond low costs, strengthening stakeholder management, and exploring new growth areas.

• Multinationals should localize their approaches to emerging markets, understand when they should collaborate rather than compete with challengers, and seize the potential for beneﬁ cial partnerships.

• Governments should not unduly restrict cross-border M&A and investment activity, develop regional specialties to drive local investment, and encourage economic development more broadly.

 | A  A THE GAME HAS CHANGED

    the content to focus on their home market, while Eworld’s economic engines. They are large others are expanding abroad. And many of and becoming larger, thanks to annual GDP those that are going overseas aspire to be growth exceeding 6 percent and a rapidly global leaders in their industries. These are growing class of consumers with disposable the global challengers. They are the compa- income. nies that will shape the global economy over the next decade. These markets have become highly prized by companies everywhere, not just for their In publishing our fifth edition of the BCG growth but also as sources of talent, capital, global challengers—a list of 100 fast-growing and companies. Over the past five years, and fast-globalizing companies from rapidly more than 1,000 companies headquartered developing economies (RDEs)—we hope to in emerging markets have reached at least illuminate this new economic terrain and its $1 billion in annual sales. Many of these are players.

T B C G |  COMING OF AGE

   ; capabilities. In doing so, they are fundamen- Gthese companies from RDEs are not tally altering industries ranging from aircraft mere curiosities operating in distant regions. manufacturing and medical devices to e-com- Collectively, the challengers purchase more merce and mobile telephony. than $1.7 trillion of goods and services and invest more than $330 billion in capital The Boston Consulting Group (BCG) pub- expenditures a year. (See Exhibit 1.) lished its first list of 100 global challengers in 2006. The original list was meant to be a Global challengers are full-fledged competi- wake-up call to executives of multinationals. tors making game-changing moves. They are Today, global challengers are not just compet- winning with a broad range of strategies and itors but also lucrative customers and poten-

E  | Global Challengers by the Numbers

BCG Global Challengers 100 New challengers in 2013 26 Countries represented 17

Average Annual Growth (2008–2011) Total shareholder return 20% Revenues 16% Earnings before interest and tax (EBIT) 10%

Employment and Productivity (2006–2011) Jobs created 1.4 million Average annual increase in revenue per employee 12%

The Business Opportunity (2011) Total revenue $2.6 trillion Total costs of goods sold $1.7 trillion Capital expenditures $330 billion

Sources: Bloomberg; S&P Capital IQ; BCG analysis.

 | A  A tial partners. More broadly, they are emblems From Diverse Lands. Our 2006 list was of the new order in which emerging markets dominated by China—where 44 of them will power global growth. were based. But newcomers from other countries have pushed some former challengers off the list—there are now just 30 The New Challengers Chinese companies. The number of home Let’s examine some of the highlights of the countries is steadily broadening. The past 2013 BCG global challengers. two lists have added companies from Egypt, Colombia, Qatar, Saudi Arabia, and South Growth. From 2008 through 2011, the reve- Africa. nues of global challengers grew by an annual average of 16 percent. Global challengers had R&D. Initially, the global challengers relied higher average revenues in 2011 than nonﬁ - on low costs and large captive domestic nancial S&P 500 companies did. (See Exhibit markets—in the case of China and India—as 2.) From 2008 through 2011, the combined their primary sources of competitive advan- earnings of the global challengers expanded tage. Now, many are increasingly investing in by an annual average of 10 percent and total innovation, and their annual spending on shareholder return (TSR) grew by 20 percent. R&D more than tripled from 2007 through 2011. (See Exhibit 4.) Job growth has been equally impressive. From 2006 through 2011, the 2013 BCG glob- Focus on New Consumers. From 2010 al challengers added 1.4 million jobs, while through 2020, emerging economies will add employment at nonfinancial S&P 500 com- 270 million households with discretionary panies remained constant. Even more strik- income that make them attractive to consum- ing, the average revenue per employee of er-facing companies. Global challengers stand the global challengers now exceeds that of to beneﬁ t from this shi , since nearly one- the nonfinancial S&P 500 companies. (See third are consumer-products or consumer-ser- Exhibit 3.) vices companies.

E  | Average Annual Revenues Are Larger at Global Challengers Than at S&P 500 Companies

Average annual revenue per company ($billions)

Average annual revenue per company ($billions) 30 26.5

25 21.0 19.2 20.0 20 19.0 17.9 18.6 16.6 17.3 17.5 15.3 15.8 15 14.0 14.5

10 9.8

Year of report 2006 2008 2009 2011 2013

Year of revenue 2005 2007 2008 2010 2011

S&P 500 Nonﬁnancial S&P 500 2013 BCG global challengers

Sources: Bloomberg; S&P Capital IQ; BCG analysis.

T B C G |  E  | Employment and Productivity Are Rising

Challengers added 1.4 million jobs ...... and became more productive Employment (millions) Revenue per employee ($thousands) 21 450 417 20 400 371 19 350

300 5 285

4 250 242

3 200 2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011 Nonﬁnancial S&P 500 2013 global challengers

Sources: S&P Capital IQ; Bloomberg; BCG analysis. Note: The employment and revenue data cover the 78 challengers for which financial and employee information were available.

Many of these challengers have embarked on sumer Products bought Indonesia’s Megasari an acquisition spree. For instance, in mobile Makmur Group. telecom, VimpelCom bought Wind Telecom for $6 billion in 2011. In travel, Chile’s LAN Through such deals, some challengers have Airlines bought Brazil’s TAM Airlines for risen quickly. But no challenger is guaranteed $2.7 billion, creating the largest South Ameri- success. A challenger is more likely to be can airline, Latam Airlines Group. In fast- pushed off the list by the next new rising star moving consumer goods, India’s Godrej Con- than to rise above it. Twenty-six of the 2013

E  | Global Challengers Are Rapidly Increasing Their Investments in R&D Top 100 companies receiving U.S. patents 2013 BCG global challengers

Average R&D expenditures by company ($millions) 2,000

14 1,800

1,600

226

200

0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Percentage change

Sources: S&P Capital IQ; U.S. Patent and Trademark Office patent archive; BCG analysis.

 | A  A BCG global challengers are new to the list, Many of the displaced challengers continue the largest reshuffling to date. Meanwhile, to thrive in their home markets. China Mo- since the initial list was published in 2006 bile, last named a global challenger in 2009, only seven companies—two this year—have remains a market-leading carrier at home. “graduated” by achieving sustained industry The China State Construction Engineering leadership. Corporation, a challenger in 2011, has continued to grow at home and abroad. It broke ground in 2011 on a $3.4 billion resort project State Ownership: From Help to in the Bahamas but has shifted more of its at- Hindrance tention to the domestic market. State ownership or control has been the birthright of many of the global challengers. But fewer of the companies on BCG’s list car- Fewer challengers are state ry that lineage than ever before. Only 26 of the 2013 BCG global challengers are state owned or state controlled controlled; this is down from 36 on the 2006 list. (See Exhibit 5.) than ever before.

While the state is still the visible hand in the economies of these markets, many companies At least five factors explain the setbacks of under state ownership or control have either state-owned and state-operated enterprises chosen not to go global or stumbled when on the global stage. First, their relative com- they tried. Since our 2011 report, companies petitive advantage resides in their domestic with greater success overseas displaced 12 markets, where the state may encourage state-owned or state-controlled companies them to focus. Second, private-sector compa- from the list of global challengers. Most but nies generally have had more success than not all of the former challengers were Chi- state enterprises in meeting the needs of con- nese. Nine state-owned or state-controlled sumers. Third, their people practices tend to companies are new to the list, demonstrating be less flexible than those of private enter- that some such companies continue to push prises, limiting their ability to leverage talent overseas. abroad. Fourth, they historically have been

E  | State Ownership and Control Are in Decline Number of state-controlled and state-owned challengers 36 34 6 31 29 4 10 26 9 8 Other

30 27 24 20 18 China

2006 2008 2009 2011 2013 Number of Chinese challengers 44 41 36 33 30

Percentage of state- owned or state-controlled 68 66 67 61 60 Chinese challengers

Source: BCG analysis. Note: The analysis does not include challenger graduate companies.

T B C G |  more conservative in putting capital at risk in uct portfolios to pursue opportunities in large M&A transactions overseas. Fifth and emerging markets, facing challengers on their finally, they can face resistance from stake- home turf. And some challengers, notably the holders in other countries as they seek to ex- conglomerate Alfa and the baker Grupo Bim- pand. While many state companies have over- bo, both of Mexico, are expanding into the come these challenges, others are at risk of home markets of multinationals. falling behind globally. Paradoxically, as competition between multi- To succeed outside of their home countries, nationals and challengers has become more state-controlled enterprises will need to at- cutthroat, these companies are also more like- tract talent, take risks, develop successful ly to find it desirable to enter partnerships. business models, and appease the concerns Bargaining power is more balanced, so part- of key stakeholders in their target markets. nerships no longer need to be established sole- ly on the basis of the low costs of challengers or the high gloss of Western brands but rather A New Era on a wide range of complementary skills. Increasingly, challengers and multinationals are competing head to head. Multinationals We have entered the era of allies and adver- have modified their cost structures and prod- saries.

 | A  A THE 2013 BCG GLOBAL CHALLENGERS

    the most The new list includes representatives from Tdiverse group of global challengers yet, the financial services (Citic Group and China with wider geographic and industrial UnionPay), health care equipment (Mindray), breadth than ever before. (See Exhibit 6.) and electronic commerce (Alibaba Group) in- They are hard at work transforming them- dustries. selves into global champions. (For details on the selection criteria, see the sidebar “Meth- odology for Selecting the BCG 2013 Global BCG’s 2013 list represents Challengers.”) the most diverse group of The Challengers by Country global challengers yet. The 2013 BCG global challengers are from 17 countries, 7 more than in 2006. (See Exhibit 7.) As in previous years, China and But the list is still heavy on industrial-goods India boast the highest numbers, with 30 companies (38) and resource and commodity and 20 global challengers, respectively. companies (20), which account for twice the Brazil is next with 13, followed by Mexico, share of the challengers list than these indus- with 7, and Russia, with 6. South Africa in- tries occupy on the S&P 500. The services sec- creased its number of challengers from three tor, with 24 entries, is still underrepresented in 2011 to five in 2013. Malaysia, with two, compared with the S&P 500 index. (See Ex- and Turkey, with three, increased their num- hibit 8.) ber of BCG global challengers by one each. The BRIC nations (Brazil, Russia, India, Chi- na), once home to 84 challengers, are now Value Creation: A Tale of Two down to 69. Many markets beyond the Eras BRICs are now producing global challengers Global challengers have generated long-term as well. value for their shareholders. Over the past 12 years, they have outperformed the S&P 500, the MSCI Emerging Markets Index, and their The Challengers by Industry global peers (multinationals from the same Sector industry and based in a mature market). The span of industries represented on the Their average annual TSR of 17.3 percent is 2013 BCG global challenger list is widening. nearly 3 times greater than that of the MSCI

T B C G |  E  | There Are 26 New Global Challengers—and 2 New Challenger Graduates

2013 BCG Global Challengers

Argentina • PetroChina Malaysia South Africa • Tenaris • Sany Group • AirAsia • Aspen Pharmacare • Shanghai Electric Group • Petronas • Bidvest Group Brazil • Sinochem • MTN Group • Brasil Foods • Sinohydro Mexico • Naspers • Camargo Corrêa Group • Sinoma International • Alfa • Sasol • Embraer Engineering • América Móvil • Gerdau • Sinopec • Femsa Thailand • Iochpe-Maxion • Trina Solar • Gruma • Charoen Pokphand Group • JBS • Wanxiang Group • Grupo Bimbo • Indorama Ventures • Marcopolo • Yanzhou Coal Mining Company • Mabe • PTT • Natura • Zoomlion • Mexichem • Thai Union Frozen Products • Odebrecht Group • ZTE • Petrobras Qatar Turkey • Tigre Colombia • Qatar Airways • Koç Holding • Votorantim Group • Grupo Empresarial Antioqueño • Sabanci Holding • WEG Russia • Turkish Airlines Egypt • Gazprom Chile • El Sewedy Electric • Lukoil United Arab Emirates • Falabella • Norilsk Nickel • Etihad Airways • Latam Airlines Group1 India • Severstal • Bajaj Auto • United Company Rusal China • Bharat Forge • VimpelCom • Alibaba Group • Bharti Airtel • Aviation Industry • Crompton Greaves Saudi Arabia Corporation of China • Dr. Reddy’s Laboratories • Saudi Basic Industries • China Communications • Godrej Consumer Products Corporation (Sabic) Construction Company • Hindalco Industries • China International • Infosys2 Marine Containers Group • Larsen & Toubro • China Minmetals • Lupin Pharmaceuticals • China National Chemical • Mahindra & Mahindra Corporation (ChemChina) • Motherson Sumi Systems • China National Oﬀshore • Reliance Industries Oil Corporation 2013 BCG Challenger Graduates • Sun Pharmaceutical Industries • China Shipbuilding Seven companies with large sustained global • Tata Chemicals Industry Corporation positions have moved beyond challenger status. • China UnionPay • Tata Consultancy Services Brazil South Africa • Citic Group • Tata Motors Vale Anglo American • Geely International • Tata Steel SABMiller • Goldwind • Vedanta Resources Indonesia • Haier • Wipro Wilmar International Saudi Arabia • Huawei Technologies Saudi Aramco3 • Johnson Electric Indonesia Mexico Cemex United Arab Emirates • Lenovo Group • Golden Agri-Resources Emirates • Li & Fung • Indofood Sukses Makmur • Mindray

Source: BCG analysis. New global challengers are listed in green. 1Latam Airlines Group is the result of a 2012 merger of Brazil’s TAM Airlines and 2011 challenger LAN Airlines. 2Infosys is the new name of Infosys Technologies, a 2011 challenger. 3Although Saudi Aramco was not a 2011 challenger, we have designated it as a graduate because it is already a global leader in the oil and gas industry and is on its way to becoming a global integrated energy player.

 | A  A METHODOLOGY FOR SELECTING THE BCG 2013 GLOBAL CHALLENGERS

We began our analysis by compiling a list of companies in which overseas revenues potential global challengers from companies either totaled 10 percent of total revenue or based in RDEs. As in the 2011 report, we $500 million. In export-oriented industries, focused on companies located in developing such as mining, oil, and gas, we also Asia, central and eastern Europe, the required companies to possess overseas Commonwealth of Independent States, the assets of at least 10 percent of total assets Middle East, Latin America, and Africa. or $500 million. We made a few exceptions when we strongly believed that companies Our initial master list of potential global would meet these thresholds in the next two challengers was drawn from local rankings years. A fi nal set of quantitative measures of the top companies in the geographic were related to growth and performance. markets listed above. As in previous years, we excluded joint ventures and companies We sought companies with credible with signifi cant overseas equity holders but aspirations to build truly global footprints, included state-owned companies that excluding those that could pursue only compete internationally. A few of the global export-driven models. Accordingly, we challengers are headquartered in global analyzed each company’s international fi nancial or commercial centers, such as presence, the number and size of its London or Amsterdam but their operations international investments, M&A activity take place primarily in RDEs. We have over the past fi ve years, and the strength of listed these companies in the markets that its business model. We also compared the house most of their operations. size of each company with the size of other challengers and multinational competitors Next, we applied a set of quantitative and in its industry. qualitative criteria. Companies needed to have annual revenues of at least $1 billion, We based our fi nal selection on these a threshold that ensures they have the criteria and feedback from industry experts resources to go global. We sought around the world.

E  | The Global Reach of the Challengers BCG 100 global challengers Number of challengers by country

10 13 17 18 19 Others 7 6 3 6 6 7 6 5 South Africa 7 6 Russia 12 7 13 7 Mexico 14 13 21 13 Brazil 20 20 20 20 India

44 41 36 33 30 China

2006 2008 2009 2011 2013 Number of countries 10 14 14 16 17 Source: BCG analysis.

T B C G |  E  | Industrial Goods and Service Sectors Topped the List—While Resources and Commodities Returned to 2006 Levels BCG 100 global challengers

Number of challengers by industry 4 Consumer durables 9 5 15 13 Fast-moving • Food and beverages (8) 14 14 consumer goods • Pharmaceuticals (4) 15 16 17 • Fossil fuels (9) Resources and 20 • Mining and metals (6) 24 commodities 21 • Steel (4) 20 23 • Telecommunications (5) 24 Services • Airlines (5) 20 23 • Construction and engineering (5) 17 17

• Engineered products (9) • Automotive equipments (9) 37 38 Industrial goods 32 30 32 • Chemicals (7) • Industrial conglomerates (5)

2006 20082009 2011 2013 Source: BCG analysis.

Emerging Markets Index. The average annual C   F  G TSR of the S&P 500 and global peers, by com- M C parison, is negligible. (See Exhibit 9.) Aspen Pharmacare (South Africa) is the largest generic-drug manufacturer in the The picture changes dramatically when the Southern Hemisphere and has 18 manu- time frame is compressed to the past year facturing facilities located throughout (from late October 2011 to November 2012). the world. Its products reach more than During that time, the S&P 500 and global 150 countries. In 2011, almost half of its peers both outperformed the global challeng- $1.8 billion revenues were generated out- ers by wide margins, while the challengers side of South Africa. Aspen acquired 25 barely beat the MSCI Emerging Markets In- brands in Australia from GlaxoSmithKline dex. (See Exhibit 10.) for $268 million in 2012. Aspen has been one of the best-performing South African This recent weakness has at least two expla- stocks with a three-year average annual TSR nations. First, the global challengers above 100 percent. bounced back earlier from the global financial crisis, while the recovery of companies Golden Agri-Resources (Indonesia) is one of based in mature markets has been much the world’s largest producers of palm oil. In more recent. Second, declining stock prices 2011, 89 percent of its $6.0 billion revenues of several large challengers in the commodi- originated overseas. Over the past three ties sector have pulled down the average, years, Golden Agri-Resources has delivered masking the relatively strong performance average annual TSR of 14 percent, outper- of smaller players. forming other market players.

Godrej Consumer Products (India) is a con- New BCG Challengers sumer goods company with leading home- Among the most interesting challengers are care, personal-wash, and hair-care products. the 26 newcomers to the 2013 list. They are Its 2011 revenues reached $1 billion. Godrej grouped by the features that help describe has focused its acquisitions on emerging mar- their entry to the list of global challengers. kets. Recent acquisitions include Megasari

 | A  A E  | Global Challengers Outperformed from 2000 to 2012 . . .

Total shareholder return (TSR) index (Base=100) 1,000

800 Average annual TSR (%)

Global challengers 17.3 600

MSCI Emerging Markets Index 6.1 400

Global peers1 3.6 200

S&P 500 –0.2 0 20002001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sources: Thomson Reuters Datastream; BCG analysis. Note: The index base of 100 was set on January 3, 2000, and the data were analyzed through November 5, 2012. All indices were weighted by the market capitalization of their constituent stocks. The challengers delivered an even stronger TSR, about 30 percent annually, on an equal-weight basis. The index is based on data from 80 global challengers that were publically listed and from 388 global peers. 1Global peers are multinational companies that are headquartered in developed economies and operate in same industries as the global challengers.

Makmur Group in Indonesia, Darling Group enues of $10.2 billion. Grupo Nutresa, Inver- in Senegal, and Issue Group and Argencos in siones Argos, and Grupo de Inversiones Argentina. Suramericana constitute the core of the conglomerate, in which members have owner- Grupo Empresarial Antioqueño (GEA) (Co- ship stakes in one another but do not have a lombia) is a conglomerate with total 2011 rev- central headquarters. GEA is expanding be-

E  | . . . But They Underperformed the Past Year

Average annual TSR (%) Total shareholder return index (Base = 100) 120 S&P 500 17.2

Global peers1 12.8 110 7.8 Global challengers MSCI Emerging Markets Index 6.1

100

80 November January March May July September November 2011 2012 2012 2012 2012 2012 2012 Sources: S&P Capital IQ; BCG analysis. Note: The index base of 100 was set on October 22, 2011, and the data were analyzed through October 22, 2012. All indices were weighted by the market capitalization of their constituent stocks. The index is based on data from 83 global challengers that were publically listed and from 388 global peers. 1Global peers are multinational companies that are headquartered in developed economies and operate in same industries as the global challengers.

T B C G |  yond its Latin America base, and its products cal capability outside China. Citic also has are sold in more than 75 countries. strategic partnerships with global leaders such as Itochu and Deutsche Bank. Mindray (China) is China’s largest medical- equipment manufacturer. It had 2011 reve- MTN Group (South Africa) is Africa’s largest nues of $900 million, more than half of which mobile operator. It has 183 million subscrib- were generated overseas. Mindray’s business ers and licenses in 21 countries across Africa model is built around low cost and innova- and the Middle East. About 60 percent of its tion, allowing it to win market share from revenues originated outside South Africa. larger competitors. Naspers (South Africa) is the largest media Sun Pharmaceutical Industries (India) is company in the developing world, with reve- a global pharmaceutical company with a nues of $5.3 billion in fiscal 2012. The compa- strong presence in the U.S. generic markets. ny’s portfolio includes a 34 percent share of Its 2011 revenues reached $1.7 billion, 62 per- Tencent (China) and a 29 percent share of cent of which were generated overseas. It Mail.ru (Russia). has achieved an average annual TSR over 100 percent for the past three years and has VimpelCom (Russia) is the world’s sixth-larg- the largest market capitalization in the Indi- est mobile operator, as measured by the num- an pharmaceutical sector. ber of subscribers. In 2011, 40 percent of its $20.3 billion revenues were generated in Rus- sia, although the company is headquartered Alibaba.com is the world’s in Amsterdam. VimpelCom has also completed several large acquisitions, including the largest online trading plat- $6 billion purchase of Italy’s Wind Telecom and a majority stake in Egypt’s Orascom Tele- form for small businesses. com Holding.

P F G M F, C,  PetroChina (China) is the world’s largest D C publicly traded oil producer, with 2011 reve- Alibaba Group (China) is the largest e-com- nues of $313.3 billion. In the past two years, merce company in China, with 2011 revenues PetroChina has been on the acquisition trail, of $2.8 billion. Alibaba.com is the world’s spending $3 billion with Royal Dutch Shell to largest online business-to-business trading buy Arrow Energy jointly and $1 billion to platform for small businesses, while Alibaba’s buy assets from Ineos Group. Taobao Marketplace and Tmall.com are leading China-based consumer-to-consumer and Sinopec (China) is the largest producer and business-to-consumer sites, respectively. distributor of chemical products in China, with 2011 revenues of $397.4 billion. Sinopec China UnionPay (China) is the world’s sec- conducted several major overseas transac- ond-largest credit-card network by transactions and investments in 2011 and 2012, in- tion volume. It reported 2011 revenues of cluding the $2.1 billion purchase of Daylight $900 million. China UnionPay cards are ac- Energy, the $1.5 billion purchase of a 49 per- cepted in 125 countries and are responsible cent stake in Talisman, both of Canada, and for more than 80 percent of the cross-border the acquisition of a one-third stake in five transaction volume of Chinese credit cards. shale-oil and gas basins for $2.2 billion from U.S.-based Devon Energy. Citic Group (China) is a conglomerate with 2011 revenues of $49.3 billion. Citic is active Goldwind (China) was the world’s second- in M&A. Its subsidiary, Citic Securities, largest wind-turbine manufacturer in 2011, bought CLSA, an investment research and ad- producing 9 percent of the turbines world- visory firm, in 2012 for $1.25 billion. The ac- wide. In 2011, Goldwind spent $56 million on quisition strengthens the company’s analyti- R&D, or nearly 3 percent of its $2 billion in

 | A  A revenues. Goldwind has a presence in North ment of Nigeria to complete the biggest ce- and South America, Australia, Europe, Africa, ment factory in sub-Saharan Africa. and Southeast Asia. Tigre (Brazil) is the world’s third-largest mak- Trina Solar (China) is the world’s fourth-larger of PVC pipes, fittings, and accessories, with est solar panel manufacturer, with 2011 reve- 2011 revenues of $1.6 billion. Tigre’s success nues of $2 billion. Trina Solar’s vertical inte- is partly based on designing new prod- gration helps to improve its efficiency and ucts—500 are launched a year—to local mar- shorten product-development cycles. More ket conditions. than 80 percent of its sales are generated overseas. F  S Aviation Industry Corporation of China (AVIC) (China) is a state-owned aerospace Qatar Airways was named and defense company, with 2011 revenues of $40.5 billion. AVIC is investing heavily to be- the world’s best airline at the come a leading competitor in the commercial aircraft market. China is currently evaluating Skytrax World Airline Awards. a $16 billion plan from AVIC to fund jet-en- gine research.

B  D  W AirAsia (Malaysia) is Asia’s largest low-fare, Iochpe-Maxion (Brazil) is the largest Brazil- no-frills airline and a pioneer of low-cost trav- ian manufacturer of wheels and chassis, with el. It reported 2011 revenues of more than $1.6 billion in 2011 revenues. Iochpe-Maxion $1.4 billion and the lowest per-available-seat completed two major overseas acquisitions cost per kilometer traveled in the world. Air- in 2012: the purchases of Grupo Galaz for Asia’s recent orders for 375 planes from Air- $195 million and of Hayes Lemmerz for bus will allow it to take advantage of the ris- $725 million. ing demand for air travel.

Motherson Sumi Systems (India) is one of Etihad Airways (United Arab Emirates) is the leading manufacturers of auto mirrors the national airline of the United Arab Emir- and other components, with 2011 revenues of ates. The airline, which began operations in $3.1 billion, 70 percent of which originate 2003, carried 8.3 million passengers to 86 overseas. The challenger is a joint venture be- destinations in 55 countries and generated tween Samvardhana Motherson Group of In- $4.1 billion in revenues in 2011. It has more dia and Sumitomo Wiring Systems of Japan. than 90 aircraft on order, including 10 Airbus Unlike other Indian companies, Motherson A380s, the world’s largest passenger aircraft. Sumi has not slowed its pace of acquisitions. Etihad Airways holds equity investments in In 2011, Motherson Sumi acquired 80 percent airberlin, Air Seychelles, Virgin Australia, and of Peguform, the second largest supplier of Aer Lingus. vehicle door panels in Germany. Qatar Airways (Qatar) is the state-owned Sany Group (China) is the largest construc- flag carrier of Qatar with more than 120 des- tion-equipment group in China and the tinations throughout the world. In 2011 and sixth largest globally, with 2011 revenues 2012, Qatar Airways was recognized as the of $12.6 billion. In 2012, Sany acquired Ger- world’s best airline at the Skytrax World Air- man equipment maker Putzmeister for line Awards. $474 million. Turkish Airlines (Turkey) flies to more Sinoma International Engineering (China) countries—91—from a single hub than any is the world’s largest provider for cement other carrier. It also has the goal to become technology, equipment, and engineering ser- the world’s largest airline by 2023. In 2011, vices, with $4 billion in 2011 revenues. In 84 percent of its $7 billion revenues originat- 2012, Sinoma partnered with Dangote Ce- ed overseas.

T B C G |  Signs of Success: The Graduates quality products, harnessing their cash re- Two former global challengers graduated sources, and investing in R&D. from the list, meaning that they have achieved sustainable leadership positions in High-Quality Products. Many challengers are their global markets. In 2011, the first time still low-cost companies, but this label is more BCG designated graduates, there were five. likely to describe their business models than their product off erings. The Middle Eastern Emirates (United Arab Emirates) includes airlines, for example, operate low-cost struc- both Emirates airline (listed as a 2011 BCG tures while winning global awards for excep- global challenger) and a range of other port- tional service and quality. The low-cost folio companies, including dnata, a growing Ascend D1 quad from Huawei Technologies is airport-services operator. Emirates airline, among the fastest smartphones in the world. has reported 24 consecutive profitable years and has built a strong global brand. Its orders Capital Availability. Challengers took advan- for the Airbus A380 superjumbo airliner ex- tage of low equity prices from 2008 to 2010 by ceed by three times that of any other carrier. completing hundreds of cross-border acquisitions that provided access to international Saudi Aramco (Saudi Arabia) is the largest gas assets and management. They remain well and oil company in the world. It has extensive fi nanced and possess the resources and scale Saudi Arabian operations. In its quest to be- to make signifi cant strategic investments. come a global integrated energy business, it has ventures all across the world, including the U.S., Innovation. Global challengers increasingly China, Japan, South Korea, and Saudi Arabia. see the need to become more innovative and are rapidly increasing their research spending. About 46 percent of Huawei’s 150,000 The Capabilities Beyond Cost employees are in R&D. Mindray generates Advantage more U.S. patents per revenue dollar than The 2013 BCG global challengers are at a many global leaders. Many other companies turning point in their individual histories— in emerging markets are making similar and in the history of the economic develop- moves. In 2011, companies from China were ment of RDEs. Their cost advantage over granted more U.S. patents than companies in competitors from mature markets is eroding. Israel, Australia, Italy, Netherlands, Sweden, In response, they have been building new ca- and Switzerland. India also ranked in the top pabilities—such as manufacturing higher- 15 for the fi rst time. (See Exhibit 11.)

E  | China and India Are Gaining Ground as Recipients of U.S. Patents 2007 2009 2011 Japan Japan Japan Germany Germany South Korea Korea South Korea Germany Taiwan Taiwan Taiwan Canada Canada Canada U.K. U.K. France France France U.K. Italy China China Australia Israel Israel Netherlands Italy Australia Israel Netherlands Italy Sweden Australia Netherlands Switzerland Switzerland Sweden Finland Sweden Switzerland China Finland India 0 50,0000 50,000 0 50,000 U.S. patents granted U.S. patents granted U.S. patents granted

Sources: U.S. Patent and Trademark Office; BCG analysis.

 | A  A Many of the innovations are aimed at creat- neered an innovative role acting as a middle- ing new business models rather than tangible man between designers in developed mar- products. For example, Li & Fung Limited, a kets and Chinese manufacturers. (See the member of Hong Kong’s Fung Group, has pio- sidebar “Challenger-Led Innovation.”)

CHALLENGERLED INNOVATION

Companies in RDEs are getting serious Patent growth in China and India is about innovation. In the past five years, increasing by more than 30 percent the number of patents granted by the annually. Overall, challengers are respon- U.S. Patent and Trademark Office to sible for about 22 percent of the growth in companies based in RDEs increased at patents issued to investors in RDEs—even a rate more than three times faster though they represent less than 11 percent than that of companies in other countries. of the companies from RDEs that received If this growth continues, up to 25 percent U.S. patents in 2011. China’s Huawei of the patents issued in 2018 may origi- Technologies broke into the top 100 nate in RDEs—up from just 1 percent patenting organizations in 2011 when it in 2006. was issued 374 U.S. patents.

T B C G |  NEW ADVERSARIES A CUTTHROAT COMPETITIVE ENVIRONMENT

 “- ”—  vices companies that were born in countries Tin emerging markets, slow or no growth traditionally driven by commodities. in mature ones—has allowed global challengers to become stronger relative to multina- Indian companies Bharti Airtel and Godrej tionals. They are expanding their business Consumer Products have leveraged their in- portfolios, reaching the rapidly expanding sights from the challenging Indian market to consumer class in emerging markets, explor- expand into other developing markets—nota- ing new businesses based on the rising con- bly, Africa. Bharti Airtel began its domestic nectivity of the emerging world, and moving mobile-phone service in 1995, when India into underserved fast-growing markets. only had 1 million phone lines—all of which were landlines. It is now the nation’s largest mobile provider and an emerging force in Af- Moving into New Businesses rica. Godrej allows local managers in Africa Many challengers are expanding into new to set local marketing and sales strategies businesses and across the value chain. In and to tailor their offering, such as top-selling 2011, Wipro enhanced its sector expertise by hair products, to local needs. acquiring the oil-and-gas IT practice of U.S.- based Saic, and in 2012, Wipro acquired Pro- Emerging markets frequent require products max Applications Group, an Australian ana- tailored for local conditions. One example lytics company specializing in trade is the chotuKool—an inexpensive, environ- promotion, a promising opportunity for mentally friendly, and portable refrigerator growth as consumer spending rises in India. made by a sister company of Godej Consum- Meanwhile, Mindray has broadened its prod- er Products. ChotuKool, which means “little uct line and entered the health-care-IT space cool,” weighs less than eight kilograms and through acquisitions. addresses the rural Indian market and its in- termittent power supply. It is battery-operated, consumes less than half the power used Captivating the New Consumer by a regular refrigerator, and uses high-end Many challengers have learned to cater to insulation to protect its contents if the batter- consumers across emerging markets. Vimpel- ies die. Com, a telecom provider founded in Russia that generates 40 percent of its revenues in Challengers are also experimenting with inno- the country, and Naspers, a South African vative banking and financial services. Alibaba media company, are two fast-expanding ser- Group, the Chinese e-commerce player, has

 | A  A created Alipay, an escrow-payment system. such as eBay. Alibaba.com had more than The buyer does not release payment until he 5 million U.S. users as of mid-2012. has received and validated the merchandise. Alipay helped unleash explosive growth in e- Even traditional industries, such as airlines commerce by overcoming mistrust in online and credit cards, are facing competitive transactions and low credit-card adoption. In threats created by digital connectivity. AirAsia 2010 Alipay surpassed PayPal as the world’s was the first Southeast Asian carrier to intro- largest online third-party payment platform, duce e-ticketing in 2002. In 2011, it partnered ranked by number of users. with Expedia, the first venture between a low-cost carrier and an online travel agent. Many challengers have ex- China UnionPay, while still small, is providing financial services in more than 125 countries panded to Africa, the Middle globally. It has a running start in winning the emerging-market consumers as they migrate East, Southeast Asia, and toward financial services. Latin America. Exploring Frontiers of Fast Meanwhile, in Mexico, mobile telecom pro- Growth vider América Móvil has partnered with Over the past six years, China and India have BBVA Bancomer to offer banking services become the most common targets for multi- through its mobile network, much like mobile national corporations looking to expand over- operator Safaricom did in Kenya with M-Pesa. seas. Many of the global challengers, howev- Elsewhere, VimpelCom has partnered with er, have expanded their sights to Africa, new Google to offer Google Play content. Charges growth spots in the Middle East, Southeast are debited from consumers’ prepaid ac- Asia, and Latin America. counts, circumventing the lack of credit card availability in developing countries. Africa. With more than 1 billion people and $3 trillion in total GDP, Africa is a larger market than Brazil or Russia. While some Capturing the Digital Opportunity global consumer companies, such as Unilever, The digital divide between mature and fast- Nestlé, and Coca-Cola, entered the market growing markets is starting to shrink. By 2016, decades ago, Africa has become a more 3 billion consumers—or 45 percent of the recent focus of consumer-oriented challeng- world’s population, will use the Internet. ers. Godrej Consumer Products, for instance, Nearly 800 million of them will be Chinese, has acquired several hair-care businesses in about the same number of Internet users in South Africa and the Tura brand in personal France, Germany, India, Japan, the U.K., and care in West Africa. At Bajaj Auto, Africa the U.S. combined. accounts for 41 percent of its overseas sales of light motorbikes—exceeding sales in its Companies are taking advantage of this con- overseas markets in Asia. nectivity. Naspers, founded as a newspaper company in South Africa in 1915, has Heavy-industry companies are also arriving in emerged as a global player in the media and Africa to meet the growing demands of a con- the Internet markets through its stakes in tinent under construction. For instance, Sany Tencent and Mail.ru. Group, the Chinese mining-machinery company, signed its first equipment contract in Afri- Alibaba Group’s Alibaba.com, China’s busi- ca in 2010. Chinese contractors now account ness-to-business e-commerce leader, has ex- for 37 percent of the African construction panded its presence in the U.S. in 2010 by ac- market, according to African Business maga- quiring Vendio, an e-commerce site, and zine. Nearly 42 percent of the contractors’ Auctiva, which provides listing and marketing overseas revenue now comes from Africa, the tools to vendors on e-commerce websites magazine reports.

T B C G |  In telecommunications, the global challeng- countries as Chile, endowed with remarkable ers have focused heavily on Africa as it skips natural resources, expand real annual GDP in fixed lines altogether and goes straight to mo- excess of 4 percent in the post-2009 recovery. bile. Huawei and ZTE—two Chinese equip- In BCG’s new Sustainable Economic Develop- ment makers—have leveraged their experi- ment Assessment, an approach to systemati- ence working with low-income or rural cally assessing and comparing the socioeco- markets at home to develop products for Af- nomic development across 150 countries, rica. India’s Bharti Airtel entered the conti- Brazil made the greatest improvement over nent by acquiring the African operations of the past fi ve years. Several other Latin Kuwait’s Zain. It then applied its knowledge American nations, including Peru and Uru- of low-cost markets to expand organically guay, are also in the top 20 nations. Mean- through its subsidiary Airtel Africa. while, Chile, Colombia, and Peru have forged an alliance that is binding together their Southeast Asia. Southeast Asia is on the fi nancial and commercial markets. move. For most of the past decade, the region has been enjoying a surging economic Hot Spots. Though best known for their renaissance. Nearly 100 million people will larger economies, the Middle East and Latin enter the consumer class by 2015, most of America both have smaller markets with them in Indonesia, the Philippines, Thailand, strong growth. Real GDP in Qatar and Colom- and Vietnam, driving projected annual bia, for example, has expanded by more than growth of 12 percent in consumer spending. 4 percent annually over the past fi ve years, outpacing regional heavyweights Saudi Latin America. This region is also growing Arabia and Brazil. Prospects for both coun- sharply. Strong commodity prices helped such tries remain bright.

 | A  A NEW ALLIES CHALLENGERS GOING GLOBAL

  ,  nature of the Three Different M&A Strategies Ichallengers’ M&A activity has changed: The history of M&A by the 2013 BCG global They are now completing fewer deals than challengers has three chapters—the two they did prior to the 2008 ﬁ nancial crisis, years prior to the September 2008 onset of but their deals are larger and aimed at the financial crisis, the two years during the establishing global leadership. The number crisis, and the two subsequent years of tur- of overseas deals completed by the 2013 moil. Companies within the same industries challengers fell from 130 in 2007 to 99 in and countries have tended to respond in simi- 2011, but the average deal size increased lar ways to the global economic climate. We from $484 million in 2007 to nearly $1.1 bil- describe their movements as expanding in lion for deals announced in 2012. (See Ex- the turmoil, integrating after the crisis, and hibit 12.) returning home. (See Exhibit 13.)

E  | Global Challengers Are Completing Fewer But Larger Deals

Average disclosed deal size ($millions) Number of deals 1,500 150

6 100 1,000

50 99 23 500

38 0 0 2001 2003 2005 2007 2009 2011 2001 20032005 2007 2009 2011 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012 through through September September Announced Closed

Sources: S&P Capital IQ; BCG analysis. Note: Data for 2013 BCG global challengers.

T B C G |  E  | A Tale of Three Countries

China: expanding in Brazil: integrating India: returning the turmoil aer the crisis home Total deal value ($billions) Total deal value ($billions) Total deal value ($billions) 30 346 –22 30 30 –28

20 20 20 –85 Cross-border M&A 79 –80 10 10 10

0 0 0

Total deal value ($billions)Total deal value ($billions) Total deal value ($billions) 30 30 30

20 20 20 Domestic M&A 75 160 –5 66 10 10 –59 10 36

0 0 0 Challengers leveraged the crisis Challengers bought companies Challengers have returned home to acquire companies overseas during the crisis but are now to protect themselves from integrating them uncertainty overseas Percentage change Before the crisis—September 2006 to August 2008 During and aer the crisis—September 2008 to August 2010 During the economic turmoil—September 2010 to August 2012

Sources: S&P Capital IQ; BCG analysis.

Expanding in the Turmoil. Services companies activity during the fi nancial crisis and are seized the global fi nancial crisis as an oppor- now digesting those deals. The value of tunity to build their overseas presence. They outbound deals by Brazilian deals went from increased the total value of their cross-border $5 billion before the crisis, to $9 billion M&A by 107 percent from 2006 through 2008 during the crisis and immediately a erward, and from 2010 to 2012 while reducing the and $2 billion in the most recent period. value of domestic deals by 76 percent. Godrej Consumer Products has not made any sizeable deals since its acquisition of Indone- During that time, VimpelCom became the sia’s Megasari Makmur, its largest ever, in sixth-largest global telecom company largely May 2010. through acquisition. Its $6 billion deal to buy Wind Telecom, including a 52 percent stake Returning Home. Some challengers, especial- in Orascom Telecom Holding, added 123 mil- ly commodity players and Indian companies, lion mobile subscribers. were active before the global fi nancial crisis but have pulled back. Commodity companies, Global challengers from China also increased especially from Russia, reduced their cross- their overseas M&A activity during the finan- border deal value by 43 percent between the cial crisis. The value of their outward-bound 2006–2008 pre-crisis periods and the most M&A deals rose from $7 billion in the two recent 2010–2012 period. Instead, many of years prior to the crisis to $30 billion in the two them are doing domestic deals. At the end of following years, before settling at $23 billion in 2012, United Company Rusal moved to the last two years. Sany Group’s acquisition of acquire several Russian aluminum companies. Putzmeister is emblematic of this trend. The value of outbound deals by Indian chal- Integrating A er the Crisis. Many challeng- lengers has declined from $26 billion in the ers, notably consumer goods and Brazilian first two-year period to $3 billion in the third companies, increased their outbound M&A two-year period. They are seeking to augment

 | A  A their capabilities by integrating a series of While reliable statistics on the growth of part- smaller domestic acquisitions. (See the side- nerships are scarce, the nature of many re- bar “The Allure of Home.”) cent partnerships demonstrates how these relationships are evolving to become game Examining the six years altogether, commodi- changing. ties challengers still completed the largest number of cross-borders deals: they closed Technology Exchange. China National 34 percent of all deals completed by challeng- Chemical Corporation (ChemChina) and the ers even though they represent only 20 per- U.S. company DuPont formed a 50-50 ven- cent of this group. ture in 2012 that combines DuPont’s leading ﬂ uoroelastomer technology with Chem- China’s integrated manufacturing. The Game-Changing Partnerships venture will produce ﬂ uoroelastomer gums As the nature of M&A and dealmaking chang- and precompounds, most likely in a new es, so does the relative importance of partner- plant in China. ships with large, established companies from mature markets. The growing strength of the New Markets. Indian auto player Bajaj Auto global challengers means that these partner- and Kawasaki, a Japanese maker of motorcy- ships can be negotiated on more equal terms. cles and other vehicles, have entered an alliance to jointly market their products. Traditionally, partnerships between global Bajaj and Kawasaki have been partners in challengers and multinationals have focused various ventures for about 30 years but have on access to resources, brands, markets, tech- rarely collaborated on marketing or selling. nologies, and low costs. These types of collab- The two companies launched a pilot in the orations will continue, but challengers and Philippines in 2003 that will be expanded to multinationals will increasingly come togeth- Indonesia in 2013 and possibly to Brazil. er to develop new products, exchange—rather than transfer—technology, and enter new New Products. Indian pharmaceutical compa- markets. ny Dr. Reddy’s Laboratories has entered into

THE ALLURE OF HOME

Not all challengers have found an easy macroeconomic trends explain the shi : path to profi tability overseas. Many rising demand for capital, poor overseas challengers—and emerging market demand, and shi ing currency values. countries more broadly—have slowed their overseas investments. Some countries are First, the domestic demand for capital in reducing their foreign-investment exposure emerging markets—particularly fi xed and refocusing on domestic markets. assets—is bringing money back from overseas. Brazil’s Petrobras, for example, This movement of capital back home and announced recently that it was close to the infl ow of capital from developed fi nalizing the sale of $6 billion in assets in economies have helped to level the playing the Gulf of Mexico to raise funds to develop fi eld between mature and emerging fi elds in Brazil. markets. Prior to the fi nancial crisis in 2008, mature markets averaged more than Second, the economic crisis in Europe and $1.1 trillion in inbound investment annu- U.S. has led companies to re-evaluate ally, twice the amount invested in emerging investments in mature markets. Third, markets. By 2011, parity had almost been depreciation of local currency, particularly in reached. Mature markets received $748 bil- Latin America, has decreased the purchasing lion in inbound investment, while emerging power of many companies overseas. markets received $684 billion. Three

T B C G |  a deal with Germany’s Merck to jointly than just raw materials, in their supplier develop inexpensive versions of cancer relationships with multinationals. Mexichem, therapies that are losing their patent protec- the Mexican chemical company, and Occiden- tions. Dr. Reddy’s will take the lead in early tal Chemical (Oxychem), a U.S. chemicals product development and testing while ﬁ rm, are exploring the construction of an Merck will handle manufacturing and late- ethylene plant. Oxychem would convert the stage trials. This division of labor represents a ethylene produced by the plant into vinyl reversal of roles. Typically the company from chloride monomer (VCM) that it would sell the emerging market has done the manufac- exclusively to Mexichem. VCM is a key turing, while the mature-market company has ingredient in PVC products, a key product done the product development, but Dr. line for Mexichem. Reddy’s has ample experience in developing low-cost medicines. Of course, like M&A transactions, partnerships have their own challenges. (See the New Supplier Relationships. Global challeng- sidebar “The Dilemmas of Partnership.”) ers are starting to provide expertise, rather

THE DILEMMAS OF PARTNERSHIP

Partnerships off er many advantages to partnership, the expectations of all parties, challengers and established companies, the degree of control of all parties, and an but diff ering cultures, policies, and growth exit strategy. These core elements o en get trajectories can complicate or destroy these overlooked. (See the exhibit “Questions You arrangements. If managed poorly, a Should Answer Before Partnering.”) partnership can limit growth of the two companies rather than expand their reach. Partnerships o en enable one party to enter a new market. But the terms of the deal Both sides need to have a fi rm and consis- sometimes constrain one party from making tent understanding of the scope of the alliances with other entities or entering

Questions You Should Answer Before Partnering

Partnership phases Key elements Key questions • What are the key ﬁnancial targets and expectations? • What will be the focus industry and range of products? Scope • What will be the geographic scope of the market? Strategic alignment • What will be the exclusivity conditions for the partners? Expectations • What will be the role of the partners in the joint venture? from partner • What are the expected contributions from the partner?

Setup • What will be the degree of control in ownership? • What will be the equity split? Degree of control • What will be the degree of control in management? • Who will control the CEO position?

Operations • What are the exit scenarios and mechanisms? Exit strategy • How will the value created be monetized? • What will be the preferred duration for the joint venture?

Source: BCG analysis.

 | A  A THE DILEMMAS OF PARTNERSHIP (Continued) diff erent markets. Too o en allies become opportunity. A breakup in the Middle East adversaries. Companies need to fully cost each party billions of dollars in understand the second-order and long-term anticipated payments. eff ects of any proposed partnership. Fortunately, well-cra ed partnerships, such External stakeholders also play an impor- as the arrangement between Sara Lee and tant role in the dynamics of partnerships. Godrej Consumer Products, can lead to a Lawmakers and regulators can make smooth dissolution. In 2011, Sara Lee decisions that radically change the eco- (which has since split into two companies) nomics of a deal. These risks need to be sold its share in its Indian joint venture carefully managed. with Godrej because it no longer fi t the U.S. company’s strategic direction. The breakup Breaking up is also hard to do. The dissolu- was uneventful because the original tion of a partnership can damage one or agreement clearly anticipated such an exit. both parties beyond the lost business

T B C G |  REASSESSING GLOBAL RELATIONSHIPS

    order, global challeng- ple, the shortage of experienced managers in Iers are becoming stronger and multination- Africa leads to poor effi ciency and productiv- als are seeking fresh sources of growth. ity of both global and local companies in Challengers and established multinationals many African countries. Even in China, which are increasingly chasing the same consumers graduates a large number of university and customers. But there are also opportuni- students each year, talent management was ties for them to join forces. Those that fi gure the most commonly cited concern among HR out when to compete and when to collabo- and business executives in China. rate will be better off than those that decide to go it alone. Meanwhile, governments can encourage economic development most Challengers need to strength- eff ectively through policies that recognize the importance of their homegrown challeng- en their skills in postmerger ers but also allow foreign companies to participate. integration.

Opportunities for Challengers Successful postmerger integration remains The future success of the 2013 BCG global a key challenge. As more challengers use challengers is not guaranteed. Just half of the M&A to vie for industry leadership, they global challengers selected in 2006 continued will need to get stronger at smoothly fold- to make the cut in 2013. To reach the next ing large companies into their own and level of global expansion, challengers require managing the talent, operational, and or- greater capabilities, greater engagement with ganizational complexities that come with both private and public entities, and greater acquisitions. access to new growth opportunities. Strengthen stakeholder management. As Build capabilities beyond cost advantage. challengers increase their overseas footprint, The success of global challengers will increas- stakeholder management becomes even ingly rest on innovation, operational excel- more important. Political, nongovernmental, lence, quality, branding, and customer and regulators are critical stakeholders. service. These capabilities need to be backed Challengers should treat these stakeholders by organizational capabilities such as talent as if they are partners—or run the risk that management and brand-building. For exam- they become opponents.

 | A  A Opportunities for Multinationals challengers can create jobs in mature mar- The global challengers are competing more kets. In the U.S., several members of the effectively in more markets and for a greater Chinese 2013 BCG global challengers are variety of products and services than ever be- becoming major employers. Wanxiang fore. This means that multinationals should America has 6,000 employees. In the ﬁ scal be entering and building positions in emerg- year ending in March 2011, Tata Consultancy ing markets with localized strategies and Services alone hired 1,150 people in the U.S. partnering with these companies when it will In 2012, Tata-owned Jaguar Land Rover cre- help them get ahead. ated 2,500 jobs in the U.K. The Tata group of companies collectively employs about 45,000 Develop localized approaches in emerging people in the U.K., making it the largest markets. Many multinationals have enjoyed manufacturing employer in the country. success in emerging markets through localiza- tion and the redesign of their product line. Yum! Brands, the owner of Pizza Hut and By cooperating with challeng- KFC, has reinvented its menus for the Chi- nese market. ers, multinationals can gain

Other multinationals are targeting mid-sized access to new markets and cities for growth. For example, Ford opened resources. its ﬁrst dealership in Samarinda, Indonesia, a town of less than 1 million in Borneo, in 2007, and sales rose 30 percent over the next two Challengers have often contributed to job cre- years. In India, Tommy Hilﬁger expects to ation after entering a market through M&A add 500 stores, many in mid-sized cities, or a partnership. A joint venture between through a joint venture over the next five Cnooc and Chesapeake Energy to acquire years. In China, retail giants Best Buy, Carre- and manage oil and gas assets has created four, and Wal-Mart are rapidly adding stores 4,000 to 5,000 new U.S. jobs. in mid-sized cities. Develop regional specialties to drive local Seize the potential for partnership and investment. Governments in both mature growth. Cooperation and partnership with and emerging markets can play a positive global challengers can provide access to role in helping to develop regional hubs of new markets and resources, allow for the expertise. The Malaysian government has exchange of technology, and create econo- been setting up public institutions such as mies of scale. Wise multinationals are technical schools, industrial training insti- targeting challengers as key customers and tutes, and skills development centers to meet partners. the growing requirements of the industrial sector. These hubs can encourage outside investment and job creation. Opportunities for Governments Governments, especially those in mature Encourage economic development. Challeng- markets, should recognize challengers as a ers are contributing innovation, capital, and positive force for growth in jobs and invest- jobs to the countries in which they operate. ment. Rather than imposing restrictions, gov- Huawei, for example, sourced about $6.6 bil- ernments should be actively encouraging ac- lion in parts from U.S. companies in 2011. quisitions and investments, developing Governments should embrace and leverage regional hubs in order to attract overseas in- the innovation that challengers can bring to vestment, and avoiding excessive nationalism regional development. and protectionism. The Sustainable Economic Development As- Allow cross-border M&A and investment sessment can assist governments in economic without undue restrictions. Under the right development by showing where they should conditions, acquisitions and investment by be focusing their energies.

T B C G |   2013 BCG global challengers are up their game. Meanwhile, multinationals Tgame-changers in their global industries. must both compete and partner with these They are meeting the needs of customers in challengers in order to thrive. the world’s high-growth markets, and they bring greater choice to customers every- We are just at the dawn of a major new era where. Challengers are now an established of global competition—of challengers and fact of global business. But if they aspire to multinationals, of allies and adversaries. global leadership they must continue to step

 | A  A FOR FURTHER READING

The Boston Consulting Group publish- From Wealth to Well Being: The Connected World: The Internet es other publications that may be of Introducing the BCG Sustainable Economy in the G-20 interest to senior executives interested Economic Development A report by The Boston Consulting Group, in globalizing their operations. Recent Assessment March 2012 examples include: A report by The Boston Consulting Group, November 2012 2012 BCG Southeast Asia Challengers: The Companies Leadership in a Two-Speed Piloting a Soaring Region Economy: Conversations with CEOs A Focus by The Boston Consulting Group, on Straddling Diﬀ erent Worlds March 2012 A report by The Boston Consulting Group, November 2012 BCG 2011 Global Challengers— Companies on the Move: Rising The 2012 BCG 50 Chinese Global Stars from Rapidly Developing Challengers—End of Easy Growth: Economies Are Reshaping Global Fast-Growing Companies Face Industries Headwinds as They Expand A report by The Boston Consulting Group, A Focus by The Boston Consulting Group, January 2011 September 2012 The African Challengers: Global Unlocking Growth in the Middle: Competitors from the Overlooked How Business Model Innovation Continent Can Capture the Critical Middle A Focus by The Boston Consulting Group, Class in Emerging Markets May 2010 A Focus by The Boston Consulting Group, May 2012 The 2009 BCG Multilatinas: A Fresh Look at Latin America and How China’s Digital Generations 3.0: The a New Breed of Competitors Are Online Empire Reshaping the Business Landscape A report by The Boston Consulting Group, A Focus by The Boston Consulting Group, April 2012 September 2009

The Andean Three: A New Source of Latin American Dynamism An article by The Boston Consulting Group, March 2012

T B C G |  NOTE TO THE READER

This is BCG’s ﬁ  h report in the global We thank our colleagues Gary Callah- Michael Meyer challenger series. While the center- an, Mary DeVience, Angela DiBattista, Partner and Managing Director piece of these publications is the list Belinda Gallaugher, Grace Kuo, Mark BCG Singapore of 100 companies, the main purpose Voorhees, and Linda Wei for their con- +65 6429 2500 of the research and analysis is to un- tributions to the writing, editing, de- [email protected] derstand the evolution of those mar- sign, production, and marketing of the kets and how challengers and multina- report. David C. Michael tionals can compete within them. Senior Partner and Managing Director More than ever, RDEs are critical to For Further Contact BCG San Francisco the success of all companies with glob- For further information about the re- +1 415 732 8000 al aspirations, and we hope this report port, you may contact one of the au- [email protected] has brought these markets to life. thors. Andrew Tratz Acknowledgments Arindam Bhattacharya Global Manager We would like to thank the many exec- Partner and Managing Director BCG Beijing utives at the global challengers who BCG New Delhi +86 10 8527 9000 agreed to be interviewed. Their in- +91 124 4597000 [email protected] sights contributed to the evolving story [email protected] of the rise of global challengers. Masao Ukon Thomas Bradtke Partner and Managing Director The research and analysis for this re- Partner and Managing Director São Paulo +55 11 3046 3533 port were conducted by a global team BCG Dubai [email protected] of BCG consultants based primarily in +971 (0) 2 6529 600 RDEs and under the direction of Whit- [email protected] Bernd Waltermann ney Haring-Smith in Hong Kong: Jan Senior Partner and Managing Director Contreras in Monterrey, Andy Jiang in Tenbite Ermias BCG Singapore Shanghai, Aarti Kochhar in Mumbai, Partner and Managing Director +65 6429 2500 Jason Mooty in San Francisco, and BCG Johannesburg [email protected] Matheus Schmidt in São Paulo. A glob- +27 11 881 5511 al network of knowledge team mem- [email protected] bers, led by Abdeljabbar Chraïti, provided invaluable support: Benny Chui Whitney Haring-Smith in Hong Kong, Lori Spivey in Miami, Project Leader and Evelyn Tan in Singapore. Vital re- BCG Hong Kong search was also provided by Miriam +852 2506 2111 Benedi Díaz, Noemi Biro, Silmara Cos- [email protected] ta, Marcin Galczynski, Franziska Höger, Salma Laalej, Kanchanat U-Chukanok- David Lee kun, Oskar Wilczynski, Pavel Zahradil, Partner and Managing Director and Nomava Zanazo. BCG Hong Kong +852 2506 2111 We would also like to thank our col- [email protected] leagues for their invaluable contributions: Marcos Aguiar in São Paulo, Eduardo Leon Jorge Becerra in Santiago, Ted Chan in Partner and Managing Director Hong Kong, Agustín Costa in Buenos BCG Monterrey Aires, Nikolaus Lang in Munich, Chris- +52 81 8368 6200 toph Nettesheim in Beijing, Burak [email protected] Tansan in Istanbul, and Jan Dirk Wai- boer in Moscow.

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