Multi-Polar World 2: The Rise of the Emerging-Market Multinational Contents

Foreword 1 Executive Summary 2 1. Coming of age 5 2. Who are the emerging-market multinationals? 8 3. Enablers and drivers of expansion 11 4. Navigating the multi-polar world 16 Capital: Acquiring strategic capabilities 17 Talent: Resolving the paradox 23 Resources: Managing the squeeze 29 Consumers: Harnessing future markets 35 Innovation: Broadening the spectrum 39 5. Growing pains 44 6. The path to high performance 47 References 50

 of these companies are already How do they source, manage household names: Samsung of South and retain talent in increasingly Foreword Korea, China Mobile and India’s globalized labor markets? How Reliance Industries Limited, for are they innovating? What is example; many others are about to the optimum pace of growth? become so. While these businesses In many instances, the conditions share the scale and ambition of their that have precipitated their dramatic developed-world counterparts, their arrival—factors such as super-local processes and patterns of growth knowledge, an instinctive feel for are often dissimilar to those of their other emerging markets, an ability competitors in the developed world. to reach base-of-the-pyramid They are success stories that are consumers and a familiarity with changing the narrative rules as they risk and uncertainty—will not go along. necessarily sustain their continued No business leader or policymaker growth. How they might adapt can afford to ignore the implications to the new realities of their scale of these stories, some of which could is a key part of this analysis. hardly be more dramatic. When the Nor are the implications of their Mark Foster Chinese oil company PetroChina growth strategies confined to floated on the Shanghai stock these companies. Their leading- Group Chief Executive market in November 2007, it became edge experience also must shape Management Consulting the world’s largest public company, the ways in which developed- with a stock market capitalization market companies look at the & Integrated Markets of almost US$1 trillion—double that world. The arrival of these powerful Accenture of its nearest Western counterpart. new competitors should not be Such events signal an enormous seen simply as a challenge to the Globalization, the formative idea challenge to received wisdom as well competitive position of developed- of our age, continues to affect our as a seismic shift in the economic market companies but also as a economic geography in ways that landscape. They are like nothing we significant opportunity—a rich we are only beginning to understand. have seen before. source of new ideas, capital and The rise of the multi-polar world is To understand how these movements business practices—as they pursue constantly reshaping our perspective. might look through the eyes of those high performance. For these No one can boast a fixed vantage effecting such change, Accenture reasons, we have identified business point on change. It is all around us has carried out extensive research implications for both emerging- and and arrives daily from unexpected and conducted in-depth interviews developed-market multinationals. points of the compass. with more than 40 leaders of key This report does not suggest there This Accenture study, based on emerging-market multinationals and is a silver bullet for how these extensive original analysis, draws international experts. The insights challenges should be faced. Their on our continuing research into into the genesis and rise of these complexity means there is no single High Performance Business and companies provide a revealing answer. Rather, this report analyzes our unique experience in driving snapshot of the globalizing economy the growth strategies of emerging- high performance in businesses and at perhaps its most critical juncture. market multinationals and identifies governments around the world. It These emerging-market businesses the challenges they will face on their examines a striking phenomenon are agreed on only one thing: there is journey to achieve high performance. of this new world order, one which no set blueprint for their future. The offers powerful insights into the questions they are asking themselves shape of things to come: the arrival show they are establishing models of multinational companies from of best practice and growth as emerging economies. the market imperatives change In many respects, multinationals before them. Should they follow are a defining invention of Western the same trajectories as Western Mark Foster economies. But like much else in multinationals or should they Group Chief Executive the multi-polar world, they are no continue to pursue their own Management Consulting longer the preserve of the West. The distinctive paths? Which geographic & Integrated Markets rapidly growing emerging economies markets are they investing in and Accenture are producing business giants of why? How should they compete their own at a staggering rate. Some for resources and new consumers?

 Executive Summary

Emerging-market multinationals with a period of plentiful supply • Resources—increasingly intense (EMMs)—companies based in of cheap capital, domestic policies competition for energy, commodities emerging markets with operations intended to liberalize investment and raw materials. in more than one country—are and advances in information • New consumers—rapid income expanding at a speed and scale technology. This dramatic growth creating up to a billion new to make even the largest Western expansion has occurred alongside consumers in emerging markets. multinationals take notice. Emerging the increasing economic power of economies now boast 70 companies emerging markets, a phenomenon • Innovation—the emergence in the Fortune Global 500 list of explored in detail in Accenture’s of new clusters of innovation the world’s biggest companies, up 2007 study, The Rise of the Multi- and specialization in emerging from just 20 a decade ago. Within Polar World.3 economies. the last year alone, the number The rise of the multi-polar world of emerging-market companies in Five key dimensions of the means that it is no longer sufficient the Fortune Global 500 grew by to view globalization solely or 1 multi-polar world nine. They have been expanding mainly through a Western-centric and acquiring new businesses The multi-polar world is characterized by increased prism. By contrast, this study at a frenetic pace, conducting inverts the lens to understand what more than 1,100 mergers and economic interdependence across five key dimensions: the multi-polar world looks like acquisitions, altogether worth from the standpoint of EMMs. It is 2 US$128 billion in 2006. • Capital—the rapid growth of the product of in-depth interviews Expansion is being driven by a emerging economies as sources of with more than 40 emerging- search for new markets, efficiencies, outward foreign direct investment market business executives and innovation and sources of inputs and destinations for portfolio experts from around the world, and, in some cases, by less tangible investment. extensive secondary research and elements of national prestige and • Talent—favorable demographics our experience of working with government policy. Timing also spurring rapid growth of emerging- companies across the world. has proved important. The rapid market workforces. emergence of EMMs has coincided

 Three extraordinary is true whether they are sourcing significant lessons and business capabilities skills from diaspora populations implications for their developed- (those dispersed from their original market counterparts. They exhibit EMMs are succeeding across all five homeland), cultivating local talent or a number of capabilities that fall dimensions of the multi-polar world customizing products and services to within the scope of the three critical and often have significant advantages local variations in consumer habits. areas that Accenture has identified over developed-market multinationals. as the building blocks of high A particular strength is their ability to They have the potential to change the performance. These building blocks maintain the look and feel of a small basis of competition in both Western are part of Accenture’s research into and emerging markets. This is because organization even when quite large—a High Performance Business, which they are: feat that can be attributed to limited is based on an extensive analysis of bureaucracy, an emphasis on local 6,000 companies around the world. Managing a broad range of risks management and generally flexible comfortably business models and processes. Market focus and position—business While EMMs are often cast as strategy decisions regarding where inexperienced newcomers to global Five models of international and when to compete competition, a more accurate expansion EMMs are particularly attuned to description would be that many are complex variations in consumer street-wise business operators. They Although there is no set blueprint habits brought about by differences are politically savvy in a way that governing the ways in which in culture and geography. As a result, belies their relative youth and smaller EMMs expand their business they adapt easily to local market degree of exposure to international internationally, our research variations and the attendant need markets. They have significant and experience has identified at to change products and branding to experience in building demand in least five different models. penetrate these markets successfully. often difficult conditions in their home Full-fledged globalizers: they tend Along their journey, EMMs grow their markets. Their ownership structures to be older, more established EMMs way into other emerging markets. often mean they can take a bolder, that have attained a scale and They often use local markets longer-term view of expansion. All geographic span on a par with the and diaspora populations as a these factors make them extremely biggest Western multinationals. springboard toward global expansion. well suited to navigate the hazards of Regional players: they aim to Huawei, a Chinese manufacturer investment in other emerging markets. break out of their domestic markets of networking equipment, has Such investment not only gives them in search of greater scale but, for set a growth strategy focusing a foothold in the consumer markets reasons of cultural affinity and on developing countries first and of tomorrow, but also provides an geographic proximity, they fix developed countries after. important stepping stone to broader their sights—initially at least—on expansion, allowing them to build As EMMs move out of their neighboring regional markets. capabilities in markets with which domestic markets, they also move they are familiar by dint of cultural or Global sourcers: they are interested up the value chain into higher- geographic proximity. principally in selling to their value-added activities. Companies domestic market but, because such as LG of South Korea and Mastering the art of improvisation of resource constraints at home, Acer of Taiwan have moved from producing components to selling Whether overcoming talent shortages they source internationally. through innovative educational branded goods in their own right. Global sellers: they are the mirror and training programs, incubating Distinctive capabilities—hard-to- image of global sourcers; they consumer demand through base-of- replicate capabilities that define how 4 primarily manufacture or source the-pyramid business models and businesses compete infrastructure investment, or adapting at home but seek new consumer EMMs are generally adept at products and technologies to local markets abroad for sales. incubating and tapping into new market conditions, EMMs are adept Multi-regional niche players: sources of demand, often through at turning apparently unpromising they tend to be smaller companies indirect means. CEMEX set up a situations to their advantage. operating across multiple regions in lottery scheme in Mexico where Keeping in tune with the importance niche sectors, usually on the basis of local families pay into a pool that of culture and localization innovative technology or processes. then pays out cement and building materials to the winning family. As more recent globalizers who On the path to high have retained deep roots in their EMMs improvise, filling capability home economies, EMMs have a performance gaps quickly and innovatively, keen sense of local culture that Many EMMs are well placed to whether for workforce training permeates everything they do. This achieve high performance—and offer or for supply-chain development.

 “In a world with just Reliance Industries Limited of India to inputs such as talent, energy, raw set up its own educational initiatives materials and capital—a difficult task one time zone—‘now’— and informal learning processes to in the face of increasing competition. counter gaps in the skills base. business must source /Competing with fellow EMMs materials, innovation, Finally, EMMs perceive and manage EMMs face competition not risk differently from developed- only from developed-market talent, logistics, market multinationals. They tend to multinationals but from each other. be more comfortable with a higher The propensity of EMMs to expand infrastructure and level of risk, often because of the initially into adjacent markets means production wherever frequently challenging environments that much of the competition they in which they have developed. face comes from other EMMs. they are best available.” Performance anatomy—common Managing regulatory and geopolitical mindsets relating to culture, risks Yang Yuanqing, Lenovo leadership and the workforce As EMMs grow, they will operate EMMs learn by seeing. Rapid across a complex tapestry of assimilation of their environment and regulatory regimes. While trade short learning loops are instrumental liberalization has opened global to their organizational agility. markets, EMMs will nevertheless EMMs also multiply scarce talent. need to be sensitive to the potential Many use innovative practices at all for protectionist backlash. stages of their talent management Staying local systems, from discovering new sources of talent within diaspora Adapting to the needs and tastes populations to developing human of local consumers has been a key capital by setting up customized strength of EMM development. As training courses and providing EMMs grow and serve increasingly healthcare services. They also deploy diverse consumer markets, they talent across a broad range of will need to maintain this local activities with opportunities for swift knowledge on an international scale. advancement. Filling innovation gaps Finally, EMMs take to heart the EMMs show themselves to be maxim, “think globally, act locally.” consummate improvisers when The international exposure of EMMs’ it comes to innovation. In the key leaders—many of whom have future, however, many will need been educated abroad or cut their to undertake innovation activities teeth in international business—has in a more replicable fashion and contributed to an almost palpable diversify from a focus on product global mindset among many of these development to include more companies. This global perspective invention and concept generation. is reinforced by the opening of Combining global scope with local EMMs’ home markets and the sheer focus necessity to compete internationally if they are to survive. The major The key challenge facing all accomplishment of many EMMs has aspirational EMMs is how to achieve been to do this while retaining a growth on a global scale while keen sense of what works locally. maintaining the local practices and mindsets that made them so Growing pains successful in the first place. Evolving business models that combine the However, according to our research, best of both worlds will be essential EMMs face six significant challenges if they are to prevent their growing in maintaining their extraordinary pains from becoming a constraint growth. on their expansion—and if they Gaining access to talent, capital and are to achieve and sustain high resources performance. Growth can be sustained only if EMMs can ensure continued access

 1. Coming of age

 China Mobile, Embraer, Mahindra & Mahindra, Reliance Industries Limited, Tata Group—perhaps unfamiliar to many people a decade ago, today such companies are the trailblazers for a new breed of multinational companies arising from emerging markets. They are internationalizing fast and leaving an indelible imprint on global markets, business models and competition.

With some notable exceptions, mid-size passenger jets.7 Bharat snapping up assets in a variety emerging-market multinationals Forge of India is the world’s second- of industries. In 2006 they were (EMMs) might be relative newcomers largest forging company.8 responsible for more than 1,100 to globalization, but they are quickly mergers and acquisitions, worth a In fact, the Fortune Global 500 list making up for lost time. According total of US$128 billion, in a variety of the world’s largest companies to the United Nations Conference on of industries across the world.11 now numbers 70 emerging-market Trade and Development, the top 100 companies among its ranks, up Two dozen of these were mega- companies from emerging markets in 9 2005 increased their foreign sales by from just 20 companies in 1995. In deals—those valued above 12 48 percent and foreign employment 2007 the number of EMMs in the US$1 billion. Mittal Steel’s US$32 by 73 percent—compared with about Fortune Global 500 increased by billion acquisition of European 10 percent growth in overseas sales nine, including four new entrants steel-maker Arcelor was the largest and employment recorded by their from China, as well as firms such as acquisition by any company in 2006 counterparts in developed markets.5 Mexican telecommunications giant and the largest ever by a company América Móvil and Polish petroleum- with origins in an emerging market.13 In many cases these new players are refiner PKN Orlen Group—proof of Other notable examples include reaching a scale that makes even the dizzying speed at which these the US$17.2 billion acquisition of the largest Western multinationals companies are expanding.10 Canada’s Inco by Brazilian mining take notice. When Chinese oil company Vale (formerly known as The impact of EMMs on industry company PetroChina floated on the CVRD), the fifth-largest deal in structures and ownership is no less Shanghai stock market in November 2006.14 Similar recent deals also 2007, it became the world’s largest dramatic. Many everyday brands in include Tata Group’s 2007 acquisition public company, with a stock Western markets are now owned of UK-Dutch Corus Group for market capitalization of almost by companies from the developing US$12.2 billion,15 and China National US$1 trillion—twice the size of world. Tetley—a famous tea brand Petroleum Corporation’s 2005 its nearest Western counterpart.6 in the United Kingdom now owned acquisition of PetroKazakhstan for Brazil’s Embraer has become one by the Tata Group from India—is US$4.1 billion.16 of the world’s largest aircraft just one example. EMMs have manufacturers and the leader in been busy on the acquisition trail,

 “We know that the bud is going to flower; we can’t quite see the flower petals yet, but we can see the partings of the bud.” R. Gopalakrishnan, Tata Group

An emerging-market lens To understand what globalization provide a unique insight into the looks like from an emerging-market rise of EMMs and the ways in which on globalization standpoint, Accenture undertook they are navigating and shaping the The rising international prominence extensive research into the rise multi-polar world in their journey to of these new players is both a of EMMs and conducted in-depth high performance. consequence and a cause of a phase interviews with more than 40 leaders In this study: of globalization characterized by of emerging-market companies increased economic openness and and leading international experts • Chapter 2 profiles the new the growing economic power of in this field. Companies included emerging-market players. emerging markets—a process that in our research range from well- • Chapter 3 considers the factors Accenture calls “the rise of the established, highly-internationalized enabling these companies to multi-polar world.”17 The multi- organizations to next-wave players internationalize so rapidly and the polar world is characterized by on the cusp of internationalizing broader motivations underlying their growing economic interdependence their business. Our interviews reflect expansion. across five dimensions: capital, the extensive geographic scope talent, resources, consumers and of the new players, encompassing • Chapter 4 examines how EMMs innovation. This new, deeper phase countries as diverse as Brazil, China, are navigating each of the five of globalization has further opened the Czech Republic, Hungary, India, dimensions of the multi-polar world. the door to EMMs; in turn, these Indonesia, Lebanon, Mexico, Poland, • Chapter 5 outlines the challenges companies are reshaping global Russia, Singapore, South Africa, faced by these new players in competition in each of the five South Korea, Venezuela and Vietnam. internationalizing their businesses. dimensions of the multi-polar world. Industry sectors covered include banking, consumer goods, energy, • Chapter 6 considers EMMs’ path to To many Western observers, EMMs high performance. remain enigmatic, their motivations industrial equipment, information and strategies unclear. Established technology, pharmaceuticals, mining, Western multinationals look upon telecommunications, transportation the rise of these new players and and utilities. wonder what it augurs for their These interviews, combined with markets and future business. extensive secondary research,  2. Who are the emerging- market multinationals?

 New emerging-market players encompass firms, a feature that can influence their approach to overseas expansion. a multitude of nationalities, industry Brazilian conglomerate Votorantim Group and Egyptian conglomerate sectors, ownership structures, stages of Orascom Group25 both have a development and operating models. history of family ownership. Diverse ownership structures mean that some EMMs are exposed to less This study defines an emerging- regional governments. Among the 70 public investor scrutiny—and less market multinational (EMM) as an emerging-market companies in the pressure for aggressive investment enterprise based in an emerging Fortune Global 500, around one-fifth returns—than their developed- market that has operations in at least are state-owned, the majority of market counterparts. This can give one other country. Emerging markets them from China.18 State ownership them greater freedom and flexibility include all “newly industrialized Asian is especially common in the case of in seeing through bold long-term economies” and “other emerging energy companies, with prominent changes in strategy or moves that market and developing countries,” examples including Petronas might stir controversy for publicly- as classified by the International (Malaysia), Saudi Aramco (Saudi listed firms. Monetary Fund. Beyond this Arabia), Petrobras (Brazil) and Pemex definition, the new emerging-market (Mexico). Ownership also can influence players defy easy classification, methods of expansion. Private and as they encompass a multitude Yet state ownership can mask family-owned companies might prefer of nationalities, industry sectors, significant differences in terms of making acquisitions in order to avoid ownership structures, stages of day-to-day control and operational ceding operational control as they development and operating models. independence. For example, China expand business abroad. allows a certain amount of foreign However, diverse ownership investment in some industry sectors. Thinking beyond the BRICs structures also can serve to hinder Examples include the listing of the EMMs’ international expansion It is customary to associate EMMs Bank of Beijing, in which ING has if, for example, a perceived lack with companies from the BRIC a 16 percent stake,19 or Tsingtao of transparency induces Western countries—Brazil, Russia, India Brewery, which is owned partly governments to take a protectionist and China. While these economies by the Chinese state (31 percent) stance or dims the enthusiasm of (especially China) are home to the and partly by US brewing company majority of the largest emerging- global investors. Another risk is that Anheuser-Busch (27 percent).20 China market companies featured on lists direct intervention by government or also is experimenting with different such as the Fortune Global 500 family owners in the management kinds of ownership structures, (Figure 2.1), many other parts of the of an EMM can cause its business setting up a special body to manage developing world also breed home- strategy to be misaligned with a state-owned assets21 with an eye to grown business champions, such as course that would otherwise be seen possible listings in some cases. It also South Korea (14 companies), Mexico as maximizing the economic value of is creating trial enterprises, such as (5 companies), Malaysia (Petronas), the enterprise. investment company HuaNeng Group, Poland (PKN Orlen Group), Saudi that bear full responsibility for profit Arabia (Sabic), Singapore (Flextronics Which industries do they and loss while remaining under the International), Thailand (PTT) and aegis of state ownership.22 operate in? Turkey (Koç Holding). These larger EMMs operate across a variety players can be seen as the advance Vietnam also has cut its own of industries, although the guard of a much bigger next wave distinctive path to creating new largest companies are generally of EMMs coming from countries as enterprises. In the 1990s it began from the resources sector. For geographically diverse as the Czech a process to create internationally- example, the main emerging- Republic, Egypt, Hungary, Indonesia, focused national champions,23 market energy companies, often South Africa, Venezuela and Vietnam. consolidating many state-owned dubbed the “New Seven Sisters,” enterprises from the same industry control almost one-third of the Who owns the new into strategic economic groups called world’s oil and gas production and General Corporations and devolving multinationals? more than one-third of its total management control from ownership. EMMs are characterized by a diversity oil and gas reserves.26 High-tech While some will remain under state of ownership forms that frame engineering and manufacturing control, others have been earmarked their approaches to international companies are prominent in South for full or partial privatization.24 expansion. A significant proportion Korea, Taiwan, Singapore and of these multinationals are partially Many of the new emerging-market Hong Kong SAR. An agricultural or fully owned by national or players are private or family-owned heritage also means many EMMs

 are in food processing and related What are the new models are common in the energy and industries, most notably in South of international expansion? commodities industries: witness America and emerging Asia.27 the international exploration No set blueprint or strategy dictates being undertaken by companies A typical large EMM operates the pattern of EMMs’ international such as China National Offshore across a broader range of industries expansion, which depends on Oil Corporation (CNOOC) and than does its developed-market industry, stage of company lifecycle, counterpart. This partly reflects the national background and a host of Reliance Petroleum Limited (India) greater incidence of the conglomerate other factors. From our research and to source oil to sell primarily structure, especially in South Korea experience, at least five different to their domestic markets. (e.g. CJ Corporation, SK), India models of expansion can be identified: • Global sellers are the mirror image (e.g. Reliance Industries Limited, of global sourcers. They manufacture Tata Group), Southeast Asia (e.g. • Full-fledged globalizers tend to be or source principally at home but Malaysia’s Sime Darby) and the older, more established EMMs that Middle East and Africa (e.g. Orascom have attained a scale and geographic look for sales from consumer markets Group in Egypt). But EMMs that span on a par with the biggest abroad. Russian energy company operate as conglomerates in their Western multinationals. Prominent SUEK sources and produces mainly in domestic markets typically tend to examples include Bharat Forge, Tata its home markets but sells overseas. Group and CEMEX. focus their international expansion • Multi-regional niche players in one or two sectors. Samsung, • Regional players aim to break out tend to be smaller companies for example, operates in many of their domestic markets in search operating across multiple regions in industries at home, such as insurance of greater scale but, for reasons specialized sectors, usually on the and textiles, but internationally of cultural affinity and geographic basis of innovative technology or competes mainly in electronics.28 proximity, they fix their sights—at processes. Examples include MDS least initially—on neighboring regional As developing economies expand, Holdings, a business services and markets. VinaCapital, a Vietnamese however, new waves of companies technology company originating in will emerge across a broader venture capital company expanding in Southeast Asia, follows this model, Lebanon that operates in Europe, range of industry sectors. Growing the Middle East, Africa and Central populations, higher levels of as do Polish bank PKO BP and Czech electricity provider CEZ. Asia, and Holografika, a Hungarian disposable income and increasing manufacturer of specialized 3-D environmental concerns mean that • Global sourcers are interested display technology that is “a small the consumer goods, healthcare, principally in selling to their global company,” according to CEO financial services and alternative domestic market, but they source Tibor Balogh. energy sectors will be among the internationally because of resource more prominent parts of this trend. constraints at home. Global sourcers

Figure 2.1: Emerging-market companies in the Fortune Global 500

Composition of the Fortune Global 500 Distribution of emerging-market companies’ total revenues (and number of companies)

By country/region of origin By industry 20 47 61 70

Chemicals, Conglomerate, Insurance, US$65bn (3) US$35bn (2) Other, US$83bn (3) US$176bn (6) Transportation, China, US$15bn (1) Taiwan, Industrial Equipment, US$838b n (24) US$133bn (6) US$91bn (5) India, Metals & Mining, US$148bn (6) US$123bn (6) Brazil, Communications, Energy, US$169bn (5) US$141bn (6) US$930bn (20) Mexico, Automotive, US$173bn (5) US$154bn (5) Utilities, 1995 2005 2006 2007 US$183bn (4) Russia, South Korea, Developed-market companies US$176bn (4) US$492bn (14) Banking, Electronics & High Tech, Emerging-market companies US$233bn (9) US$252bn (6)

Source: Fortune Global 500

10 3. Enablers and drivers of expansion

11 Ready access to affordable finance, progressive liberalization of trade and investment rules, and advances in information and communications technology have combined in recent years to give aspiring emerging-market multinationals more room to maneuver than ever before. But their decisions to expand abroad are driven by perennial business objectives—new markets, efficiency gains, increased innovation and security of inputs—and occasionally by factors of national policy and prestige.

Three conditions have facilitated Links between emerging markets to relax the rules. Capital controls the rise of emerging-market and the global economy have have been progressively loosened multinationals (EMMs): been strengthened and deepened in India over the last few years. by economic liberalization at the In 2007 restrictions were relaxed Increased economic liberalization international and regional level. further, allowing domestic companies and openness Although the Doha Round of to make foreign acquisitions of up The current trajectory of emerging multilateral trade liberalization to 400 percent of the acquiring economies and their companies has stalled, many countries have company’s net worth.29 owes much to a series of historical concluded regional and bilateral New global markets turning points when a number trade and investment agreements of the world’s largest emerging (Figure 3.1). Free trade areas such Globalization has opened up a host markets chose to liberalize their as MERCOSUR in Latin America of new possibilities and markets for domestic economies and embrace and the Association of Southeast EMMs. As one emerging-market a market system. In China, it Asian Nations (ASEAN), as well executive put it, “globalization was Deng Xiaoping’s program of as the expansion of the European opened emerging markets to the economic reforms initiated in 1978. Union, have further connected world but also opened the world to In India, it was the dismantling of emerging markets to the wider emerging markets.” Technology has the Licence Raj legislation—a set of world economy and to each other. underpinned this opening, giving EMMs opportunities to learn faster, bureaucratic economic controls—in The progressive removal of policy stretch their supply chains and serve the early 1990s. The fall of the Berlin and regulatory obstacles governing markets over distance. Wall in 1989 and the subsequent investment flows also frees EMMs collapse of the Soviet Union in 1991 from their shackles. In the past, More than US$3 trillion of foreign brought an end to another planned emerging economies imposed direct investment (FDI) was located economy. Events in these countries controls on money flows in and in emerging economies in 2006: unleashed market forces and further out of their countries to promote 26 percent of the world’s total liberalization, creating the conditions stability. Some still do. But with most stock of FDI, up from 21 percent necessary for private enterprise to emerging economies now on a more in 1990.30 Inward investment has grow and enter global markets. stable footing, they have been able accelerated the development of

12 Figure 3.1: Bilateral investment treaties (Number of signatories) 300 250 Emerging markets 200 Developed markets 150 Note: Bilateral 100 investment treaties promote and protect 50 foreign investment 0 between two countries 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 Source: United Nations Conference on Trade and Development

Figure 3.2: China's foreign exchange reserves (at year end, US$ billions) 1,600 1,400 1,200 1,000 800 *Up to September 2007 600 400 200 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007* Source: State Administration of Foreign Exchange, People’s Republic of China

emerging economies. Domestic of some of the bigger emerging “In the past we had two companies and individuals have economies are large enough to gained access to overseas talent, support sizable domestic companies. global engines—Europe technology, capital and management Some EMMs have also benefited and America. Now practices. Competition with from operating in protected developed-market multinationals industries. These two factors have we are seeing the also has sharpened the operations provided EMMs with a strong of EMMs, preparing them for the customer base at home, generating increasing importance challenge of overseas markets. the scale and funds needed for of a third engine, the Cheaper sources of capital overseas expansion. emerging-market Large trade surpluses, rising Why EMMs go global commodity prices, high savings rates engine, in fueling the The business imperatives and less restrictive monetary policies underpinning the push abroad global economy.” have underpinned rising levels of vary widely by country, industry liquidity and improved financing and stage of development. But Dr. Thomas Held, conditions for business. China’s our research, experience and foreign exchange reserves stood at Neptune Orient Lines interviews with EMM business more than US$1.4 trillion in 2007 leaders suggest five main drivers. and grew by more than US$1 billion a day (Figure 3.2), with approximately New markets US$300 billion of this earmarked for Perhaps the most common reason 31 foreign equity-related investment. why companies—whether developed The strong position enjoyed by or emerging—expand abroad is the many EMMs in their home markets need for new markets and customers has furthered their globalization for their goods and services. For Alan strategies. Although still in the early Svoboda of CEZ, the Czech electricity stages of development, the markets provider, the choice to go global was

13 “Globalization an obvious one: “Foreign markets Taiwan’s biggest electronics were immediately on our mind when I company, Hon Hai, recently will expand our first joined the company. It was clear announced plans to invest US$5 that it was not possible to stay in the billion in Vietnam as it offshores opportunities and domestic market and be a successful some of its production to offset horizons. There will company in the long term.” rising costs.33 be a greater exchange Despite huge populations and However, moving business functions rapid rates of economic growth in to other locations is not the only of people while we emerging economies, their domestic way EMMs use their overseas consumer markets are often still in expansion to capture efficiencies. continue to search for their infancy. Aggregate consumption EMMs often have competitive cost synergies across our in India remains smaller than that structures that they are able to of Spain, a country with less than 4 scale when acquiring developed- business functions.” percent of its population.32 Fast- market companies and achieve growing, ambitious companies can major cost synergies. Tata Group’s Rajeev Dubey, Mahindra quickly run out of headroom. And acquisition of UK-Dutch steel group & Mahindra for companies operating in smaller Corus allowed the Indian company emerging economies with stable to apply its lower steel conversion populations, such as Chile, the Czech costs across Corus’ business. Republic or South Korea, the need to Higher value seek out new markets is even greater. The desire to move up the value The decision to invest in overseas chain is another important factor markets is also driven by driving EMM globalization strategies. companies’ desire to get closer Until now, the business models of to their customers. Partly, this is many EMMs have been based on to avoid trade barriers—such as cost competition. However, as rising tariffs and quotas—that reduce competition at home and abroad the competitiveness of imports. squeezes profit margins, the need But companies also want to becomes greater to capture more of get closer to their customers to the value chain or to move into more better understand their needs profitable activities. and preferences, and tailor their products and services to suit. Emerging economies have become the world’s workshop, manufacturing Efficiency gains the majority of mobile phones, Given the lower cost-base enjoyed by television sets and textiles. Although many EMMs (often including cheaper this is where these products are labor, land, raw materials and made, it is not necessarily where equipment), cost reduction is less of most of the economic value is a motivating factor in their overseas added. More often than not, the expansion. However, as emerging technology, intellectual property and economies mature, competition brands are owned by companies in is intensifying—and so are the developed economies. For example, it pressures to increase cost efficiency. is estimated that less than 1 percent of Chinese companies own the EMMs also face competition intellectual-property rights to the from outside their home markets. technology in their products.34 As a Western multinationals continue to result, developed-market companies offshore their business functions tend to earn the lion’s share of the to benefit from emerging-market profits. cost structures, thus eroding the cost advantages of EMMs. At the Many EMMs still lack the necessary same time, competition is growing tools to move up the value chain. from other emerging economies. As These can be developed organically input costs rise in China and India, but, as a short cut, many EMMs domestic and foreign companies expand abroad. This allows them alike are looking to benefit from the to acquire some of the assets next wave of emerging economies. (including high-tech manufacturing

14 and research facilities), capabilities National prestige “A number of (such as branding and marketing), With competition intensifying and products and services needed globally, governments in emerging companies are going to accelerate their shift up the value economies recognize the for technology or chain. As Bogusław Marzec of the important role of internationally Polish energy company PGNiG SA put successful domestic companies in trademarks or strategic it: “A lack of experience and a lack of underpinning economic growth and capabilities in the company are the competitiveness at home. A number assets of different biggest challenges we face.” of governments actively encourage forms, such as in New resources state-owned and private companies to expand internationally in order to Lenovo’s takeover of EMMs are also going global in search upgrade their operations and capture of the inputs needed to run their IBM’s PC business.” the associated benefits of technology businesses, whether labor, capital and know-how. China, for example, or raw materials. This is particularly Torbjörn Fredriksson, United initiated its “go out” policy in 2002, true of natural resources. With Nations Conference on a plan to create between 30 and 50 sharp rises in demand and spiraling globally competitive companies from Trade and Development prices, the battle to secure supplies the most promising state-owned is intensifying. It is especially acute enterprises.38 for industrializing economies that are reliant on imported energy. The A sense of national pride also often strategic and geopolitical importance accompanies the expansion of some of energy security means that many EMMs. China has made clear its EMMs operating in the energy aim to increase its influence in the industry are state-owned. Some global economy. While patriotic governments actively push their aims will rarely prove the decisive companies to go global to secure factor behind cross-border deals, the resources needed to sustain the many EMMs exhibit a distinct growth of their economies. national identity and a desire to bolster their countries’ place on China is at the forefront of the the world map. As Hilmi Panigoro battle for resources. In recent years, of the Indonesian energy company Chinese companies have taken stakes MedcoEnergi Internasional states, in oil production facilities in Algeria “an Indonesian company investing and Canada as well as natural gas massively overseas is a major move reserves in Iran and Saudi Arabia.35 for this country.” Similarly, Amit EMMs’ battle for resources extends Kalyani of Bharat Forge explains: beyond energy. For example, Chinese “We were partly driven by being an companies invested more than Indian company, proving to the world US$1 billion in foreign-listed mining that an Indian company is as good, groups in 2007, up from if not better, than anybody else. We US$829 million in 2006.36 Brazil’s are all very proud of being Indian and Vale (formerly known as CVRD) putting India on the map.” acquired a controlling stake in Canada’s Inco in 2006, becoming the world’s second-largest mining company by market capitalization.37 In natural resources, as in other industry sectors, EMMs’ international activity is clear.

15 4. Navigating the multi-polar world

Capital: Acquiring strategic capabilities Talent: Resolving the paradox Resources: Managing the squeeze Consumers: Harnessing future markets Innovation: Broadening the spectrum

16 Capital: Acquiring strategic capabilities

17 As liberalization and technological advances drive deeper integration of global capital markets, emerging-market investors are increasingly prominent, boasting a growing share of both foreign direct investment and portfolio capital flows. Our research and experience of working with emerging-market multinationals shows that they are following a distinctive path regarding where they invest, the capabilities they seek to acquire and the ways in which they invest.

Financial crises often have proved large foreign currency reserves to on emerging market-to-emerging to be defining events for emerging guard against future turbulence. market (or “E2E”) investment before markets and their corporate venturing into developed economies, Crisis turned into opportunity. Many sectors. The Asian financial crisis if at all. In 2005, the vast majority companies were able to restructure in 1997/8 quickly spilled over to of outward flows of FDI from China and reduce their high levels of Russia, then into Brazil and soon went to other emerging markets41 debt. As many developed-market overwhelmed most of Latin America. (Figure 4.1). South Korean companies multinationals drew back, indigenous The international capital flight like Daewoo, Hyundai, Samsung companies seized the opportunity that followed and the subsequent and LG have a significant presence to strengthen their domestic bankruptcies within the banking in India.42 South Korea is also the and regional positions. Regional sector and among corporations largest investor in Vietnam,43 and production networks mushroomed, China invests heavily in Africa in depressed output growth and often centered on rapidly expanding investment in emerging markets. sectors ranging from extractive trade with China. There was also a industries to financial services. Net private capital inflows to surge in the number of emerging- emerging economies fell from market multinationals (EMMs) E2E investment is a useful route to US$187 billion in 1996 to US$22 seeking opportunities in other global expansion for some emerging- 39 billion in 1998. Given mounting emerging markets. Foreign assets market companies. Many companies economic pressures, emerging of the 100 largest multinationals build experience in familiar markets markets were forced to undertake from emerging economies stood at before attempting to enter more reforms that reduced overall debt US$471 billion by 2005, a 40 percent mature markets. As Alan Svoboda of levels, overhauled regulatory and increase from 2004.40 the Czech electricity provider CEZ banking standards and introduced points out: “We go to territories that more flexible exchange-rate Navigating the “new Silk we understand, where we understand regimes. Buoyed by the strength synergies and risks.” Huawei adopted of Asia’s export sectors, most Road” a strategy of expanding to emerging emerging markets subsequently Our research and experience shows markets first and developed markets experienced substantial current that EMMs are more likely to begin later. The company began its account surpluses and accumulated their overseas activities by embarking globalization journey in Southeast

18 Figure 4.1: Outward flows of FDI from China (US$ billions)

18 Destination of outward flows of FDI from China in 2005

16 Emerging markets (73%) Other developed markets, 4% Developed markets (27%) 14 Germany, 5% South Korea, 24% 12 Australia, 8%

10 United States, 9% 8

6 Russia, 8% Kazakhstan, 4% 4 Sudan, 4% Algeria, 3% 2 Other emerging markets, 27% Malaysia, 2%

0 Note: excludes outflows to Hong Kong SAR, Macao SAR, British Virgin Islands and Cayman Islands. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: United Nations Conference on Trade and Development

Asia, then used the lessons learned to foreign investment by introducing “Geographic expansion to expand into other developing favorable policy environments and regions such as South Africa, Latin privatizing state-run enterprises, is toward what we call America and Eastern Europe before E2E investment is expected to entering developed markets.44 grow. Restrictions on foreign the next frontier of ownership have been relaxed in markets. There have This pragmatic approach to risk the telecommunications, financial is rooted in the growth stages of services and rail infrastructure been waves of them, EMMs. Many have survived tough sectors in various parts of Africa. like ripples going out conditions in their home markets, Countries in South, East and where infrastructural constraints Southeast Asia have introduced on a pond. There are and political unpredictability can tax policies in favor of investment. be the norm. As Professor Mauro India is attempting to create Special additional waves out Guillen of The Lauder Institute, Economic Zones across the country there just getting on University of Pennsylvania, says, that provide significant tax holidays “one of the major strengths of and exemptions on import duties for the growth path and emerging-market corporates is their investor companies.45 political savvy. This is the result starting to scale up.” of long experience in dealing with Leapfrogging to global Robert Eckelmann, interventionist governments in their markets own countries. It can be quite useful MDS Holdings when entering other countries.” A It is not exclusively about E2E higher incidence of state, private and expansion, however. Some EMMs have used their competitive strength family ownership also means that to expand globally. India’s Ranbaxy many EMMs are well-positioned to is now one of the world’s top 10 take a long-term view of the growth generic drug manufacturers;46 Tata prospects of emerging markets. Steel is the world’s fifth-largest As more developing countries open steel-maker by revenue;47 South

19 “You can go up the Africa’s SABMiller is the world’s acquire strategic assets abroad. For third-largest beer producer;48 and example, South Korea’s Hyosung escalator one step Brazil’s Vale (formerly known as Corporation bought Goodyear’s tire CVRD) and Mexico’s CEMEX are fabric operations in 2006.51 at a time through among the global leaders in their organic growth or take respective fields.49 A “string of pearls” three steps at a time But there are caveats. In the future, approach a heightened protectionist attitude, Yet while mega-deals capture the through acquisitions.” both in developed and emerging headlines, it is EMMs’ tendency markets, could greatly influence the to build up a series of stakes in R. Gopalakrishnan, Tata Group future direction of emerging markets’ different industries that provides outward investment. Indeed, some a better clue to their strategic Latin American countries have intentions. This “string of pearls” “The big Mexican recently adopted more restrictive approach allows EMMs to extend measures on foreign investment, their geographic footprint faster than multinationals started particularly in extractive industries. would otherwise be possible. When in Central America and Industrial and Commercial Bank Acquisitions on the rise of China (ICBC) took a 20 percent South America before Although investment in new facilities stake in Standard Bank of South moving into the United is an important part of EMMs’ Africa for US$5.5 billion, it invested cross-border expansion activities, in a business with operations in States, in many cases the majority of emerging-market 39 countries—18 in Africa and 21 FDI takes the form of mergers in other continents.52 ICBC also following Mexican and acquisitions (M&A), which bought an 80 percent stake in Seng immigrants. This might continue to increase (Figure 4.2). Heng Bank Limited of Macao SAR Joint ventures are typically avoided and finalized a deal for Halim Bank be a pattern—that because they are deemed to be Indonesia.53 they start in areas prone to pitfalls, as Professor Mauro When CITIC Securities Company, Guillen explains: “Joint ventures are a large Chinese investment bank, where they have some very complex to manage and the entered into a US$2 billion cross- advantage or that objectives of various parties are not shareholding deal with US securities always aligned.” Such characteristics firm Bear Stearns, CITIC gained are relatively close as a history of family ownership and access to Bear Stearns’s expertise familial organizational structures— in sophisticated debt instruments to the home country where decision making power is and other financial products, while before expanding vested in the company founder or his Bear Stearns got access to the Asian successors—might further motivate market in a mutually beneficial throughout the world.” the preference for acquisitions. deal.54 The forays of Chinese Rajeev Dubey of Mahindra & financial companies into regional Professor Mauro Guillen, Mahindra says: “We have been in the financial markets arise from a The Lauder Institute, driver’s seat in all the acquisitions we desire not just to intermediate their University of Pennsylvania have made.” vast liquidity—most deals are cash If acquisitions are the preferred based—but also to build on their method of expansion, what kind of financial sector risk management and deals are EMMs pursuing? EMMs operational capabilities. have recently raised their profile with a series of attention-grabbing mega-deals—those valued above US$1 billion. In 2007, CEMEX concluded the biggest takeover in the global building materials sector by acquiring Rinker, the Australian building materials supplier, for US$14.2 billion.50 China’s state- owned enterprises as well as India’s and South Korea’s privately owned conglomerates have continued to

20 Business implications Organize for growth but also private equity, hedge Beyond corporate governance funds and sovereign wealth funds For emerging-market EMMs will need to maintain the (see page 22), many of which also multinationals right mix of cultures, management originate from emerging markets. Companies are therefore subject Adapt the M&A model frameworks and leadership styles to sustain their growth without to an increasingly competitive The long-term success of M&A deals encountering serious difficulties. market for corporate control, with is not guaranteed, and they are corporate strategy and shareholder usually a difficult endeavor for any Operate within an evolving objectives in progressively closer company. In an environment where regulatory framework alignment. This also means that two-thirds of M&A deals fail to Going global requires learning how developed-market companies face deliver increased financial returns,55 to maneuver through a myriad of increasing competition for assets, EMMs should follow an M&A regional and international rules and thus potentially bidding up prices for model that builds on the respective regulations governing trade and acquisition targets. strengths of each party through investment, as well as sector-specific Exploit the opportunity for adaptation rather than prescription. and environmental requirements in emerging-market capital Given their relative inexperience, both regional and developed markets. some EMMs also should seek New sources of capital will provide expertise in M&A to identify targets, Manage protectionist backlash opportunities for developed-market structure deals and capture post- Waves of protectionist pressure multinationals through strategic transaction synergies. may hinder the capacity for partnerships and joint ventures, if multinationals to expand, particularly explored and nurtured in the right Master corporate governance in strategic sectors such as energy. way. In turn these will provide As EMMs globalize and become Consequently, multinationals may scope for brand expansion and more exposed to sophisticated need to explore different expansion development as well as wider market markets and consumers, attention strategies. The uncertainty raised by access. will increasingly focus on the role of governments as owners Innovate with new business models transparent fiscal reporting systems, and investors signals the potential organizational operations and for further protectionist pressure. Emerging-market FDI often embodies investor relations. This is particularly lower-cost business models and pertinent for those seeking to list For developed-market high rates of asset productivity on international stock exchanges or that can transform competition in raise capital in international markets. multinationals mature Western markets. As a result, Public relations expertise will be Be aware of increased competition developed-market multinationals necessary to manage interactions for assets from new entities will need to adopt more flexible and with external stakeholders and Developed-market multinationals innovative business models. sustain market position. need to recognize the emergence of a new cast of players in global capital markets—not only EMMs

Figure 4.2: Cross-border M&A deals where the purchaser is from an emerging market (total value of deals, US$ billions)

140

120

100

80

60

40

20

0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20

Source: United Nations Conference on Trade and Development

21 A new breed of investor: sovereign wealth funds

As EMMs continue to expand, In general, these funds seek long- However, sovereign wealth funds a new phenomenon has arisen. term investments, but the direction have sometimes been criticized for Sovereign wealth funds—state-owned of flows appears to be shifting from their investment strategies. Rocketing investment organizations that invest low-yielding US Treasury securities to oil prices and the subsequent fiscal in other countries—are contributing equity stakes in large and prominent surpluses point to further acquisitions, to the broadening and diversification developed-market companies. but the opaque nature of some funds of the global investor base. These is heightening fears about their Although they invest in a range of burgeoning funds, whose values have motives. This lack of transparency industries, sovereign wealth funds been boosted by surging commodity has led some to suggest that certain have recently taken a close interest prices and current account surpluses, funds are not necessarily seeking in financial services companies, are starting to shape the flows of to maximize returns from their a move that seems to have been capital from emerging markets to investments but looking to make prompted in part by the liquidity developed markets. strategic acquisitions. crisis affecting global capital Although they have been around markets. Singapore’s Temasek The resulting backlash is already since 1953,56 sovereign wealth Holdings invested US$4.4 billion being felt in developed markets as funds (sometimes known as in investment bank Merrill Lynch the European Commission examines stabilization funds) have gained in December 2007.62 It already had the funds’ effect on Europe’s capital global prominence only recently. invested US$2 billion in Barclays markets. A protectionist backlash They are currently valued at US$2.5 Bank and holds a 17 percent stake in developed markets might force trillion.57 Of the seven largest, six are in Standard Chartered.63 China sovereign wealth funds to turn emerging-market funds, including Investment Corporation paid toward other emerging markets, Abu Dhabi, Singapore (Temasek and US$5 billion for a 9.9 percent stake where growth is booming and Government of Singapore Investment in US investment bank Morgan capital markets have the potential to Corporation (GIC)), Kuwait, China Stanley in December 2007.64 generate higher returns. (China Investment Corporation) and Singapore’s GIC, one of the largest Russia.58 Each accounts for more funds, has taken a US$8.9 billion than US$100 billion in assets.59 stake in UBS,65 while the Abu Dhabi The China Investment Corporation, Investment Authority has acquired set up in 2007, currently holds a 4.9 percent stake in Citigroup.66 around US$200 billion of funds and While these are highly publicized is likely to grow, given the size of deals, other less transparent deals China’s foreign reserves— currently are raising concern, especially more than US$1.4 trillion.60 where sovereign wealth funds seek With growing investment power, stakes in strategic assets such as these funds have been investing the telecommunications, energy or heavily in equity and bond markets infrastructure sectors. in both emerging and developed In the last two years, sovereign markets, as well as providing a wealth funds have invested US$139 source of liquidity for hedge funds billion, consisting of 127 individual and private equity funds. deals, with 37 of those deals worth Soaring oil prices since 2002 have US$1 billion or more.67 Increased accelerated investment flows from liquidity and competition for assets petrodollar funds into developed could potentially generate asset price markets. The countries of the Gulf inflation. This was evident in the Cooperation Council accounted for escalation in the share price of the US$540 billion in capital outflows London Stock Exchange as the Qatari between 2002 and 2006, with 2006 Investment Authority (QIA) and the outflows equivalent to a quarter Bourse Dubai vied for the exchange.68 of the US current account deficit, or more than 80 percent of China’s external surplus.61

22 Talent: Resolving the paradox

23 The market for talent has gone global: workforces Growing demand for a small pool of suitable graduates means that in the emerging world are already four times competition for all levels of talent is only going to get fiercer. Wage larger than those in the West and are expected pressures will bite as well. Average to be five times larger by 2020.69 These new wages in 2007 were increasing at an annual rate of 20 percent in workers are increasingly skilled, as the number Venezuela, 14 percent in India and 11 of graduates in emerging economies grows percent in Russia76 (Figure 4.3). steadily. But despite an ostensible abundance of Changing demographics also alter the talent picture for EMMs in talent, leaders of emerging-market multinationals different ways. Aging populations, shortages of women in some tell us that talent is their biggest challenge. countries and health problems will Why is this, and how are they responding? each affect certain emerging-market workforces. China’s workforce will Favorable demographics mean that out: “Today a young graduate fresh shrink in the decade after 2015 most of the future increase in the out of any college in India has so as a result of an aging population 77 global labor force up to 2050 will many opportunities in front of and declining birth rates, whereas occur in the emerging world. Yet the him—ranging from getting a job in India’s will grow (Figure 4.4). The C-level executives we talked to from outsourcing or IT or going for higher average age in India will be 29 years in 2020, compared with 37 in emerging-market multinationals studies—that attracting talent within China.78 Labor shortages in China will (EMMs) overwhelmingly cited this milieu is getting tougher and affect employee turnover and wage talent as a key challenge. Josué tougher. The higher up the hierarchy, increases across the whole of Asia. Christiano Gomes da Silva of the worse it gets.” Coteminas, a major Brazilian textiles Despite these challenges, EMMs are Where are the shortages? and clothing manufacturer, has successfully addressing the issues of described talent as “probably The shortage of talent is particularly attracting, developing and retaining the scarcest resource on Earth acute at the management level. the right people. today.” In this seemingly abundant In India and China, one legacy of environment for talent, why are the Licence Raj and the Cultural Expanding regional and EMMs having such problems? Revolution is a lack of management- global talent pools One reason is that talent pools are age talent with a keen grasp of shallower than they appear at first market forces. Two out of five Looking beyond traditional local glance. High numbers of students are Chinese companies find it difficult sources to fill senior-management positions graduating, but not all are suitable Our research among business leaders in China.72 Turnover rates at the for work in international business. of EMMs reveals that they are manager level in China are 25 Professor Abraham Koshy of the looking beyond the obvious talent percent higher than the global Indian Institute of Management, pools to increase their potential labor Ahmedabad suggests, “there is a average.73 Much of the workforce supply. In their domestic markets, supply-demand gap when it comes to lacks relevant experience, either in they find ways to recruit from a talent—not in terms of total numbers terms of years worked or exposure broad range of universities. Tata but in terms of quality.” Only five of to the business practices and culture Consultancy Services (TCS), a leading the top 100 MBA programs are in 74 of multinational companies. Indian IT company, created a list of the emerging world.70 Universities Antoine van Agtmael of Emerging more than 200 institutions of higher in these countries often fail to train Markets Management LLC notes that education from which to recruit.79 graduates appropriately for business, “emerging-market multinationals focusing too much on theory and need people who are integrators, Looking abroad rote learning and not enough who can inspire and lead multi- Meanwhile, TCS’s main domestic on fostering creativity, applied disciplinary teams.” In many parts of competitor, Infosys, partly 71 knowledge or teamwork. Asia, competition for talent already addresses this problem by looking Another reason is that rapid goes beyond the traditionally thorny abroad. In planning to hire Chinese economic growth has increased the areas of science and engineering graduates over the next few years, opportunities for the best recruits. undergraduates and management- the company took a selection Dr. Anand C. Burman of Dabur level talent; there are also severe of recruits back to its Mysore India Limited, one of India’s largest shortages of lawyers, accountants, headquarters, where training consumer goods companies, points aircraft pilots and doctors.75 includes English classes.80 This

24 allows Infosys to source employees Figure 4.3: Wage inflation in emerging markets more cost-effectively while (annual percentage increase) widening its recruitment net. This trend is multidirectional. Huawei, 20.2% Venezuela a Chinese networking equipment 22.0% manufacturer, has hired more than 14.5% 700 Indian software specialists, Argentina and the Chinese region of Jiangsu 16.5% is hiring from India to help it 14.0% India start a provincial IT industry.81 15.0%

Valuing multicultural leadership 11.0% Indonesia EMMs often have a good balance 12.0% between domestic and foreign 10.5% talent in leadership positions. Russia 11.0% As cultural diversity is often the 8.0% natural starting point for many China 9.0% EMMs, they potentially have a 8.0% head start over some developed- Philippines market multinationals. Our research 9.0% 2007 indicates that generally EMMs are less concerned than Western Source: Towers Perrin, Global Compensation Planning Report 2007 2008F multinationals about having an employee from the parent market in charge of operations in each country. Young-Suk Sunwoo of Hansol Paper, a South Korean paper goods manufacturer, explains that when selling in another market, “a key factor to success is having a capable, local person in charge.” Yang Yuanqing of Lenovo adds, “I Figure 4.4: Change in working-age population in B6 economies work from the United States. My (millions) company’s CEO is an American based 160 in Singapore. Other top executives are based around the globe. A 140 meeting of Lenovo’s senior managers 120 looks like the United Nations General Assembly.” Similarly, Petr 100 Šulc of the Czech pharmaceutical company Zentiva says, “strong local 80 management is very important. We 60 cannot do business in a country from outside that country, and 40 it cannot be done by someone who has no experience, contacts 20 or knowledge of the market.” 0 For top-level recruitment, many -20 firms specifically engage in a India China Brazil Mexico South Korea Russia truly global talent search. Indian company Bharat Forge has a policy Note: Based on medium variant population projection 2005-2015F B6: "Big six" economies = Brazil, China, India, Mexico, Russia, South Korea of looking globally for leadership 2015F-2025F 82 positions. The booming market Source: United Nations Population Division for international headhunters is further evidence of this trend.

25 “Talent is probably Sourcing from their diaspora Using talent multipliers to the scarcest resource In many cases the diaspora maximize talent of emerging nations can be a EMMs are employing talent on Earth today.” rich source of talent, bringing strategies typical of companies understanding of cultural diversity engaging in rapid growth. They tend Josué Christiano Gomes and international business practice to be less bureaucratic and more da Silva, Coteminas back to their home countries. More willing to take risks. EMMs also than 20 million people of Indian draw on human capital strategies origin live overseas,83 while the developed by Western companies “In the long run, the Chinese diaspora numbers more than over the last century, aware of biggest threat to the 35 million.84 Many companies and the differentiating power such countries actively woo this group strategies can confer. The result is emerging-market dream by going to graduate recruitment often meritocratic companies with is that they might not be fairs in the West and maintaining inherent flexibility in the face of links with executives. Meher talent shortages and high rates able to capture enough Pudumjee of Thermax, a global of employee turnover. Yet EMMs talent domestically.” solution provider in energy and face unique challenges stemming environmental engineering, suggests, from their rapid ascent and from Dr. Simon Commander, London “with our Indian salary levels having domestic market conditions. Business School and European climbed significantly in the last Filling gaps in education and health Bank for Reconstruction few years and the kind of growth provision taking place in India, one possibility and Development One challenge that many EMMs of attracting talent is to get non- face is the need to provide adequate resident Indians back to India.” education, skills training and health However, there can be potential benefits for workers. downsides. Those who return can be As emerging markets and EMMs resented by their colleagues,85 and move into higher-value-added only a relatively small proportion sectors, they need workers with actually return. Of the one million relevant skills and business Chinese students who studied abroad knowledge. However, there are still between 1978 and 2006, only about gaps in the provision of education a quarter returned to China.86 But and training. State spending on the rate is now increasing87 due to education in China is half the 90 the heightened attractiveness of average for OECD countries. working in their home country. Emerging-market governments are constrained in their ability to tackle Searching for skills and cost savings skills shortages in their economies, EMMs also make use of global particularly in the short term, as talent clusters to move up the value educational reform takes a decade or chain and minimize costs. Some two to filter into the workforce. companies hire lower-cost workers As a result, companies that have from other countries. China’s matured in these markets are more Chongqing Dongli Manufacturing likely to take the initiative in filling Ltd is building factories in northern talent gaps themselves. Some invest Vietnam, where wages are up to in future talent via local primary 30 percent lower than in China’s and secondary education. Standard Pearl River Delta.88 Others recruit Bank of South Africa invests heavily 91 or acquire workers in developed in educational initiatives. Embraer, economies with the skills needed the Brazilian aircraft manufacturer, for top-level technical work.89 These runs an innovative secondary school companies maximize their own for underprivileged children. It also is creating pre-fabricated physics high-skilled labor force and invest laboratory stations that enable the in talent overseas to get the best curriculum’s engineering module minds for research and development. to be replicated in other schools.92 Initiatives like these help increase the

26 market readiness of the workforce. are implementing such programs “We train people by Employees will be better trained to develop the next generation of and educated for employment in a leaders. Singapore Airlines Cargo moving those with modern economy. As Mukesh Ambani identifies potential replacements for of Reliance Industries Limited key position-holders and structures useful skill sets to train observes, “the next generation is their movements and training clusters of employees, plans across the organization.98 hungrier for success.” who in turn train other Many EMMs have responded to EMMs also have realized the current shortfalls in skills by creating importance of international clusters. Knowledge is customized training programs, either experience at the management in-house or in collaboration with a and leadership levels of any disseminated firsthand university. The Indian Institute of globalizing company. “People are and spreads fast.” Management, Ahmedabad recently starting to realize that overseas tailored a management development experience is becoming a pre- José Antonio Fernández program for executives at RPG, requisite for career advancement,” Carbajal, FEMSA an Indian conglomerate.93 The says Garth Saunders of The South Russian energy company SUEK runs African Breweries Limited. a corporate university focused on Others find creative ways to maximize 94 management skills. Wipro has the talent of existing employees. set up training centers in India, José Antonio Fernández Carbajal Singapore, the United States and of FEMSA, the largest beverage Mexico, in addition to its web-based company in Latin America, describes 95 World Campus initiative. its innovative talent multiplier tool: The challenge for EMMs relates “We train people by moving those not only to education but also with useful skill sets to train clusters to the health and well-being of of employees, who in turn train other employees. The problem is two- clusters. Knowledge is disseminated fold. Communicable diseases firsthand and spreads fast.” already affect workforces in Exploiting synergies from their local markets. At the same conglomerate structures time, developed-world diseases like diabetes and obesity are The conglomerate structure common increasing, brought about by to many EMMs also is employed to multiply talent across different fast-growing consumerism. Many sectors. According to Mukesh EMMs have developed their own Ambani of India’s Reliance Industries schemes to address the problems. Limited, the company takes 100 of its Telkom, Africa’s largest integrated brightest graduates every year and communications company, runs a then puts them through a six-month voluntary HIV/AIDS counseling and orientation. “Afterwards,” he says, testing program that has gained “each of our groups presents them the support of more than half with potential career opportunities— its employees.96 These programs treasury, international marketing, are important not only in serving polymers, polyesters, and oil and gas. the local community but also in Different things appeal to different terms of their business impact. people.” The program gives all parts The investment is paying off, with of the business a chance to attract lower rates of absenteeism and top-level recruits. higher levels of productivity.97 Such schemes are also attractive to potential recruits, bolstering Responding to the a company’s “employer brand.” idiosyncrasies of domestic Targeting future leaders talent markets Leadership shortages call for targeted Creating innovation mindsets leadership strategies, where high- Creating an innovation mindset performing recruits are tapped early is hard to do in countries where for promotion and receive training to hierarchy and tradition are highly speed their development. Many EMMs valued. Many EMMs deliberately put

27 a premium on an entrepreneurial traditionally disagree over soccer— Manage talent across markets working culture. Alexander Landia but we don’t have problems, as we EMMs will have to cope with explains that at SUEK, “there is treat each other as partners.” mismatches across all markets: in room for managers to develop the West, shortages of technical their own ideas. These approaches Talent is a critical issue skills, an aging and shrinking will not be silenced by superiors Talent is a critical issue for EMMs, workforce and complex employee but welcomed, challenged and which are aware that they face relations; in emerging markets, reviewed.” India’s Tata Group runs significant challenges. But they under-developed “softer” regional contests for innovations are often well placed to source, capabilities such as management in products and processes that multiply and retain talent in emerging skills, teamwork and innovation. roll up to the national level. At the economies, and a significant number annual Tata Innovation Day the are resourceful in creating and finding Diversify sources of talent company then celebrates success local talent outside normal channels. As demographics will not remain and reviews lessons learned.99 As they continue to grow, there will favorable in all emerging economies, Providing opportunities for be new challenges: new markets, companies need long-term talent advancement new cultures and new regulatory strategies that put a premium on Employees often prefer to work for environments. They and their Western training and retention. They also local companies, which potentially counterparts will need to maintain need to continue to look to new offer faster career development. Alan innovative approaches and constantly geographies and demographics to Svoboda of CEZ, the Czech electricity sharpen a focus on talent strategies diversify talent sources and avoid provider, maintains that it attracts that will help define competitive edge. relying too heavily on certain people because it is “an international potentially shrinking pools. company, but small enough so Business implications that an individual’s good work is For developed-market seen and he or she can rise fast.” For emerging-market multinationals Laszlo Urban of Hungary’s OTP Bank multinationals Compete for the best talent similarly argues that the benefit of Take a holistic approach working for the bank, as opposed to Developed-market multinationals a Western multinational, is that its EMMs are moving deftly to deal have become accustomed to getting head office is in Hungary. “People with the challenges of talent in the the cream of the talent crop wherever are making decisions here, and they multi-polar world. Their more holistic they go. However, as EMMs expand are designing strategy here. The approach—incorporating measures and mature, they will increasingly vie chances to go beyond the border and to improve quality of life as well with Western companies for the best as competitive remuneration— become an international expert are talent, both in their own economies translates well to other emerging- here,” he notes. This trend is often and in developed markets. It will market settings. Maintaining these reinforced by patriotic sentiment. become increasingly important to be competencies will give them an edge The vast majority of new MBA seen as part of the social fabric of in these markets and potentially graduates in China plan to pursue local communities. careers there and, increasingly, in dealing with future challenges within Chinese companies.100 in other countries where there is a Learn from the challengers shortfall in education, training and Steeped in Western recruiting models, Showing sensitivity to different healthcare provision. cultures developed-market multinationals Create an employer brand must now turn their attention to EMMs are often very understanding the idiosyncrasies of emerging of cultural differences. Garth EMMs source from the same talent pools as their Western counterparts. markets. They have an opportunity Saunders of The South African to institutionalize the best of the Breweries Limited points out that, In competition with Western creative practices being carried out “South African managers are used to multinationals’ formidable brand by EMMs, such as partnerships with working with a diversity of cultures, recognition and the attractive academia, public-private collaboration making them good managers in experiences they can offer, emerging- to fill skills gaps, and the widespread new countries.” Another example market firms must continue to use of rotations to build exposure of this sensitivity comes from José emphasize their own unique propositions to potential recruits to varied cultures and different Antonio Fernández Carbajal of and create a compelling brand as management techniques. FEMSA: “In our Brazil operations we an employer by emphasizing their hire many nationalities, including open entrepreneurial cultures and Argentinians. It could be difficult, as opportunities for swift promotion. some cultures don’t get along very well—Argentinians and Brazilians

28 Resources: Managing the squeeze

29 The twin forces of massively increased demand Seeking security of demand Resources companies in emerging and volatile supply have driven prices of energy markets are experiencing a major and other resources to near-record levels—and export boom from the growing demand from Asia for resources and created significant opportunities and challenges resulting high commodity prices. But for emerging-market multinationals. How are they are hedging against commodity price swings by securing demand for they navigating increasingly interdependent their products. This is particularly important for state-owned global markets for energy and other resources? companies, whose domestic prices are often far below market levels. Strong demand for resources, in materials and oil.” Organizations Companies like Gazprom, the Russian their own backyard and beyond, that are consumers of energy and energy company, need to look abroad has propelled the rise of resources commodities have become more for profitable growth. companies in emerging markets. active in their efforts to ensure their The recent surge in commodity supply. Amit Kalyani of Bharat Forge Diversifying geographic markets prices—not just in energy but also of India points out: “We need to While the sourcing of energy has in minerals and metals—has boosted secure access to natural resources. often been a global undertaking their revenues and opened new We have got some small iron ore for these EMMs, sales so far have opportunities. Oil companies from mines, but we need more than that.” been more domestically focused. emerging markets, often state- This trend is changing, however. As The resources crunch is not confined owned, now rival the dominance Alan Svoboda of CEZ, an electricity to just the energy and extractive of major developed-market provider in the Czech Republic, industries. For many companies it producers;101 in 2007 PetroChina confirms, “we can trade surplus encompasses a broader range of became the world’s largest public power with our neighbors. The resources from metals to agricultural company by market capitalization.102 market doesn’t stop at the border.” and other natural products (Figure Resources companies have been 4.6). Dr. Anand C. Burman of Dabur Moving into downstream activities quick to take advantage of these India Limited, which specializes Many national oil companies soaring prices and expand their in health and beauty products, have begun to move further production at high speed. They observes, “energy is not such a into downstream activities and also are making major investments. problem; our real challenge comes distribution channels overseas. Brazil’s Vale acquired Inco of Canada from nature.” And the growth in Brazil’s Petrobras has acquired for more than US$17 billion in the alternative energy heightens resource fuels businesses in Paraguay and largest acquisition yet made by a constraints in other industry Uruguay.104 Russia’s Gazprom also 103 Latin American company. These sectors. Daniel Servitje of Mexican looks to reshape its distribution investments have been supported bakery company Grupo Bimbo says, channels to secure demand. The by the marked improvement in “agricultural commodities have company, which supplies a quarter profitability by emerging-market increased in price significantly in of the European Union’s natural multinationals (EMMs) in extractive the last few years. The move toward gas needs,105 has bought energy industries (Figure 4.5). Consequently, biofuels will make it worse for the companies in Europe and invested EMMs in resources industries have food industry.” in pipeline and distribution projects emerged as new, confident global Water scarcity is also a growing to run key transit routes. players. As Mukesh Ambani of issue, as it becomes increasingly India’s Reliance Industries Limited Even established downstream difficult to secure clean water due notes, “our concept as a company players are innovating to lock in to poor local infrastructure, rapid is that we are able to compete with budding demand. China Petroleum economic growth and changing every other company in the energy and Chemical Corporation (Sinopec), agricultural practices. Dr. Burman market.” China’s second largest oil producer, of Dabur India Limited notes, “there teamed with McDonald’s in early But while those selling or delivering is going to be a further resource 2007 to open a drive-through fuel resources benefit from higher crunch in terms of water.” For water- and restaurant complex in Beijing commodity prices, resource- intensive industries, the problems are and has plans to open more sites intensive organizations feel the even greater. Garth Saunders of The in other major Chinese cities as effect. Young-Suk Sunwoo of South South African Breweries Limited says it seeks to tap into the country’s Korea’s Hansol Paper highlights the company is already reacting to booming automotive market.106 the problem: “The most difficult help combat this. “We are constantly thing in running a business these working to reduce the amount of days is the increasing cost of raw water we use,” he says.

30 Securing long-term and bilateral Figure 4.5: Profitability of Fortune Global 500 companies contracts with downstream providers (profits as a percentage of revenue) To guarantee future demand, EMMs in resources industries seek long- 12% term supply contracts with energy 2005 companies that have big distribution 2006 and retail operations. This protects 10% 2007 their political and financial interests, which are straining against growing 8% protectionism, and makes it more difficult for buyers to diversify their 6% energy suppliers.

Gazprom has signed bilateral 4% contracts with some of the biggest energy companies in 2% Europe, including Gasunie of the Netherlands and Gaz de France.107 0% Joint relationships can also foster Emerging-market Emerging-market Global average further business opportunities. companies in companies average Gazprom and Eni, an Italian energy extractive industries company, have established a Source: Fortune Global 500 company to build an underwater pipeline linking Russia to Europe, giving Russia more access to energy markets in southeastern Europe. As part of its close cooperation with Eni, Gazprom has gained access to the company’s lucrative gas distribution network in Italy.108 Seeking security of supply Figure 4.6: Rising commodity prices (indexed: November 2002 = 100) EMMs are key players in the international search for security of energy supply. Like developed- 600 market multinationals in similar positions, they are achieving this by 500 diversifying sources, as well as by Copper building alliances and partnerships 400 with a local development angle. Crude oil As Bogusław Marzec of PGNiG SA 300 points out, “in Asia, Middle East and 200 Africa, it’s essential to establish good Wheat relations with the authorities there in order to do business.” 100 Additionally, EMMs’ international 0 expansion is often mandated, or at Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 least promoted, by their national governments, which are keen to Source: International Monetary Fund secure the resources needed to sustain fast economic growth. Foreign policy also is used to build close relationships with resource-rich countries and allow EMMs to form international links.

31 “We need to look for Diversifying sources of supply Resources companies also form EMMs in resources industries—often alliances and consortia to gain global resources.” heavily backed by their home stable access to resources. China’s governments—have made major major tin producer, Yunnan Tin, Amit Kalyani, Bharat Forge strides to ensure that supply is and Singapore’s KJP International 113 secure by pursuing new sources are producing tin in Indonesia. internationally. They also have In addition, a consortium of moved out of their traditional oil companies—consisting of energy sectors into high-cost, riskier Uzbekneftegaz, LUKOIL Overseas, projects supported by sustained high Petronas Carigali Overseas, oil prices and growing demand. China CNPC and Korea National Oil National Petroleum Corporation Company—have signed a production- (CNPC), China’s largest oil producer, sharing agreement for geological is joining China’s next-largest oil exploration and development of 114 companies, Sinopec and China hydrocarbon fields in Central Asia. National Offshore Oil Corporation Energy companies also engage in (CNOOC), to invest in Canada’s tar joint ventures with local companies sands, which have become more when it is not possible to quickly gain economically viable to develop given access to natural resources alone, the current high price of oil.109 given foreign ownership regulations When securing access to natural or language barriers. One example resources, EMMs in resources is CNPC’s joint investment with 115 industries sometimes have a local firms in Iran and Venezuela. competitive advantage rooted in Engaging in mutually beneficial their country’s diplomatic relations. partnerships Consequently, they may suffer EMMs find innovative ways fewer hindrances when investing in to secure their supplies. China politically sensitive locations. Sudan Development Bank, which is backed sells more than two-thirds of its oil by the government, has partnered to China,110 while CNOOC will search with United Bank for Africa, for oil in Sudan with Indonesian not only to seek local operators company Pertamina.111 to channel money into African As a result, direct competition projects but also to secure the between EMMs as well as resources needed to feed China’s between EMMs and developed- rapidly growing demand.116 market companies is increasingly Resources EMMs also bring in intense. China Metallurgical new competitive bid strategies. Group, a state-owned Chinese Accustomed to working in extractive construction company, won the industries, resources multinationals right to develop a large copper are comfortable being involved in the deposit in Afghanistan with plans progress of the local area, making to invest US$3 billion, beating great efforts to assist the economic bids from Russia as well as from development of the host country developed-market multinationals.112 in order to secure contracts. Unlike Forming new alliances companies from developed markets, EMMs have shaped a new this aid comes with few conditions configuration of alliances and attached. Chinese firms secure relationships in the hunt to secure access to copper, iron ore and oil resources. National oil companies in Africa by building infrastructure, (NOCs) are no longer reliant on telecommunications systems and international oil companies for power generation. technology and capital. Instead, they build new relationships with independent service companies and offer lucrative deals. As a result, many independent service companies with specialized technology are more willing to deal with NOCs directly. 32 To manage the squeeze, some EMMs Pioneering new processes “We have to diversify that are users rather than sellers EMMs find that new technology of resources work with growers partnerships not only provide the suppliers to improve and producers to secure their required R&D capabilities but also our negotiating supplies. Dr. Burman of Dabur India create valuable opportunities to Limited recounts the company’s shape future energy trends. Sasol, a position and minimize response to the rising price and South African company prominent deteriorating quality of kuth—a raw in developing high-quality synthetic supply risks.” material used in many products and fuel technologies, invests in Bogusław Marzec, previously gathered from the wild. pioneering processes with Chevron The company worked with farmers, that convert coal into gas and PGNiG SA producers and non-governmental then convert gas into clean, liquid organizations based in Nepal to farm hydrocarbon products.120 Petrobras, kuth and secure its production. the company instrumental in the development of Brazil’s ethanol Diversifying into fuel program, develops partnerships sustainable resources around biofuels—including recently Three forces push EMMs to look with the Norwegian company beyond traditional fossil fuels Statoil—to further boost this into more sustainable resources. burgeoning industry and expand 121 First, demand for energy is biofuels into its chemicals business. increasing across the world, driven Watching future regulations by economic growth. Second, Expected tightening of regulation energy security concerns have regarding climate change will be intensified, particularly regarding an increasingly important issue over-reliance on resources for EMMs. As Chong Beng Tan of imports. Finally, consumers are Singapore Airlines Cargo puts it, “the progressively demanding eco- challenge is to reduce greenhouse friendly products and services. gas emissions while improving Investing in alternative energy operational efficiency.” Adds Alan sources Svoboda of CEZ: “The carbon market EMMs are already making waves is very important for us. We look in producing and using alternative for new technologies and the right energy sources. India’s Suzlon, generation mix, while keeping an eye one of the world’s leading wind on future development of regulatory turbine suppliers, won control of policies.” These companies have the German wind power firm Repower opportunity to become key players after a battle with French rival in this field as their home countries Areva.117 Chinese companies like strive to reduce carbon emissions. Suntech also are becoming major Additionally, regulations might global players in solar energy. cover many stages of the supply chain, something that EMMs must While they hold promise, new bear in mind when designing their energy sources require massive future product lines. Doug Baillie of investment and substantial research Hindustan Unilever Limited points and development (R&D) costs. Some out: “It’s not just our company’s use EMMs have begun to invest heavily of resources that matters. We need in these technologically demanding to look at the footprint of the whole businesses. Mahindra & Mahindra product cycle. If our customers can plans to launch hybrid vehicles use less water with our products, it and vehicles that use biofuels and benefits the environment.” battery power.118 R&D centers also have become more popular. India’s Oil and Natural Gas Corporation (ONGC) has nine independently managed centers specializing in key areas in the oil and gas sector.119

33 Business implications For developed-market “High coal prices multinationals For emerging-market have underpinned Build close ties multinationals Energy companies need to maintain the expansion of our Focus on efficiency good relations with emerging-market business since 2002, While some EMMs have benefited energy companies, including NOCs from the windfall of high and their governments. Close ties along with increasing commodity prices, they still need with these companies will place exports related to to focus on building efficient them in a better position to secure cost structures to maintain supplies, given the return of resource the growth in Asia, competitiveness if prices fall. nationalism in places such as Latin especially China.” Develop business relations America and Russia. Since the resources industries Develop partnerships to innovate Alexander Landia, SUEK are often viewed as strategic Developed-market multinationals and are politically sensitive, good should be open to the possibilities of relations with host governments— partnering to develop new resources especially in the West—should and products. EMMs are in a be a strategic priority. position to influence future industry Manage price volatility trends, and developed-market multinationals should take advantage Non-energy companies will benefit of collaboration opportunities. from mechanisms to deal with future volatility in raw material prices and Increase green capabilities the rising cost of energy in their Green credibility with customers and overall costs. They also should not be markets is increasingly important. afraid to look at alternative solutions Developed-market companies should to gain competitive advantage—for not underestimate the impact of instance, by developing products future best practices and innovations that use less energy. in energy management that might Search for innovative solutions reside in EMMs, whether energy or non-energy companies. EMMs have the potential and corporate agility to leapfrog competitors and take advantage of attractive business opportunities that might emerge from innovative solutions. As emerging markets look to new processes to meet the rapidly rising energy demand of their citizens, these companies might be in a better position to understand the needs of their consumers and able to do business with lower operating costs, giving them an advantage over developed-market companies.

34 Consumers: Harnessing future markets

35 The ways emerging-market multinationals low-income mobile phone users to buy airtime in small quantities. incubate and sustain demand, harness cultural The company generated revenues of more than US$2 million a differences and compete in a global marketplace day within 10 months.130 have planted the seeds for future success. Product adaptation Many EMMs create new markets Rapid economic growth, expanding Neptune Orient Lines recognized that by adapting an existing product so populations and rising incomes its operations in India were affected that it taps into the preferences and have opened up a wide vista of by inadequate transportation needs of a new consumer segment. opportunities in consumer markets between major cities and seaports. They either amend the functionality in emerging economies. Emerging- The company responded by of a specific product so that it meets market multinationals (EMMs) developing rail operations between a market need or deliver an existing have left no stone unturned when Mumbai and the ports, making product sold elsewhere at a price identifying new markets. Indeed, it easier for people to access its that is more widely affordable. they are often proactive in creating services.125 those markets themselves, utilizing Arvind, one of the world’s largest EMMs have helped grow new their local knowledge. denim manufacturers, found Indian markets by putting in place financial domestic denim sales limited. At and physical infrastructure. Brazilian Incubating demand US$40 to US$60 a pair, the jeans retail chain Casas Bahia extended were too expensive for many When CEMEX, the Mexican cement its customer base by using a low-income consumers, and the company, discovered that its poorer credit rating system that allows distribution system reached only a customers were unable to secure base-of-the-pyramid consumers few towns and villages. In response, credit to purchase its do-it-yourself to buy its products. Despite these Arvind introduced a ready-to-make products, the company came up consumers’ limited and changeable kit of jeans components priced at with an innovative lottery scheme. income flows, the default rate about US$6. These were distributed Participating families contribute to has proven relatively low, and to local customers through a a pool that then pays out cement the firm has created a sizable network of local tailors, many in and building materials to the 126 new pool of loyal customers. 131 winning family.122 This example small rural towns and villages. illustrates the philosophy of many Business model innovation By repurposing existing products EMMs. Unwilling to sit back and A keen sensitivity to local needs can to appeal to as many different wait for the market to develop, help EMMs devise business models consumers as possible, EMMs can EMMs proactively create new that release hidden demand. América prime the pump of demand at limited market space.123 Mukesh Ambani Móvil’s pay-as-you-go cell phone additional cost. of Reliance Industries Limited cards have been developed especially aptly sums it up: “Let’s create the for low-income customers in order Capitalizing on Culture purchasing power. Once they have to tap into a significant and growing Underpinning the different forms money, they will become Reliance’s market.127 Tata Group has adopted of demand stimulation is a deep consumers. We help to grow income a comparable strategy for slightly understanding of local consumer and create brand loyalty.” more affluent consumers, unveiling in needs—in particular those January 2008 the US$2,500 “People’s consumers at or near the base of This incubation of latent demand Car” to reach a larger market through the pyramid—and an ability to use takes three forms: lower prices.128 this knowledge to target products Infrastructure development and services more effectively. Access to appropriate technologies In a number of emerging markets, has also helped EMMs find Our research and experience EMMs have proved adept at innovative methods of targeting shows that EMMs are establishing the infrastructure base-of-the-pyramid consumers. achieving this in two ways: required to create new markets. To broaden access to its services, Super-localization China Mobile has fostered growth Bolivian financial services company in rural markets as the high- and PRODEM FFP has introduced ATMs Local sensitivity in terms of medium-income sectors for that recognize fingerprints, use emerging-market geography, history telecommunications equipment in color-coded touch screens and and culture has proved to be a China have become increasingly speak in three local languages.129 differentiator through which EMMs saturated. The company established Smart Communications Inc. in the often build successful relationships mobile applications and terminals to Philippines introduced an over- with customers. EMMs understand drive future growth among lower- the-air recharge technology and that single, unified, national markets income consumers.124 Likewise, pre-paid pricing plans that allow rarely exist, as Jong-Soo Seo of

36 South Korea’s CJ Corporation India Limited targets consumers in “Let’s create the observes: “The first critical success Pakistan and Bangladesh.135 Likewise, factor is customization of the FEMSA believes its experience in purchasing power. Once product or the company’s image for emerging economies positions it the local market.” well to expand into other such they have money they markets. As José Antonio Fernández Samsung introduced washing will become Reliance’s Carbajal of FEMSA explains, “we machines in India with a memory will look to expand into high- consumers. We help back-up facility to deal with power risk, high-growth countries in failures as well as a special “sari to grow income and Asia where our knowledge and wash” program.132 Technology firm capabilities from markets in Latin Lenovo also strives to understand create brand loyalty.” America also would apply.” local variations in consumer Mukesh Ambani, habits by dividing China into 108 Mexican company Grupo Elektra grids within 18 sales regions in has gone further and demonstrated Reliance Industries Limited order to be closer to its markets that some capabilities of EMMs and customers.133 This deep can be transferred across more understanding of emerging-market disparate emerging markets. The “Rural area digitalization consumers can be hard to replicate. company has announced an alliance Compared with the situation in with Chinese car manufacturer plays an important developed economies, little market FAW Group Corporation through role in demand research data typically exist which cars made in China on consumer tastes and buying will be sold in other emerging generation and behaviors, which gives EMMs markets in Central America.136 corporate citizenship with local knowledge a distinct information advantage. Developing a portfolio of enhancement.” Exploiting cultural ties brands Lu Xiangdong, China Mobile EMMs prove that knowledge of local Brand is a powerful asset for consumer tastes and preferences tapping into new consumer markets. can be transferred on both a However, it also can be an area “We work very closely cultural and a geographical basis where EMMs lag behind their to provide a significant stimulus Western counterparts. In 2007, with consumers to to new markets. Often this growth only three EMMs—South Korea’s takes advantage of the cultural ties Samsung, Hyundai and LG—featured improve our product that exist between domestic and among the top 100 global brands.137 portfolio mix and diaspora populations around the EMMs now aim to drive and sustain world. Michal Handzlik of Polish their growth through effective brand ensure that we offer bank PKO BP notes: “In our foreign strategy, both within emerging expansion strategy, the company markets and globally. the right products in targets mass clusters of Polish Within emerging markets, rising the right geographies.” emigration.” Dabur India Limited incomes provide opportunities for also sells to customers in the United EMMs to tap into new, wealthier Daniel Servitje, Grupo Bimbo Kingdom and United States, owing to consumer segments that are the large Indian populations in these increasingly brand-conscious. In two countries (a combined total of the case of China, the projected 134 more than 2 million in 2006). future growth in spending power Making good use of these ties of both the middle class and provides a safe way to extend affluent consumer segments growth beyond the domestic market. is considerable (Figure 4.7). Further, it provides a way to test the However, higher levels of disposable waters within the developed world, income bring different needs and with diaspora populations often tastes, as well as higher consumer acting as a company’s springboard expectations of products and into new market segments. services. Accenture research in EMM growth also takes place China has identified six consumer within adjacent markets that are segments, each with distinct values, well known to the company. Dabur attitudes and behaviors.138 Additional Accenture research shows that

37 “While Lenovo is proud Figure 4.7: China’s household income distribution (number of households, millions) of our Chinese heritage,

the most important Affluent 23.8 128.7 5.2 (More than US$10,000) flag for any global 10.0 52.1 49.6 company is its brand.” 107.9 130.3 Middle class (US$5,000 - US$10,000) Yang Yuanqing, Lenovo 266.2 99.2 Aspiring customer satisfaction in emerging 196.9 (US$2,500 - US$5,000) markets is often low and that consumers are switching service 64.3 Poor 139 (Less than US$2,500) providers with high frequency. 1997 2007 2017 Factors such as environmental Source: Euromonitor; Accenture analysis impact are becoming more important—98 percent of consumers interviewed by Accenture in Brazil, Business Implications For developed-market China and India think climate multinationals change will directly impact their For emerging-market lives, compared with 73 percent in Target consumers 140 multinationals Europe. These developments add A super-global, one-size-fits-all Capitalize on competitive advantages complexity to the emerging market approach will not work. To succeed consumer base, requiring EMMs to EMMs are well positioned to expand in emerging markets, developed- adjust their brand strategy to access at both the regional and global level. market multinationals need to better different segments. In doing so, they must continue to understand how emerging-market When going global, EMMs pursue make the most of their “super-local” consumers are differentiated and three principal brand strategies. First, advantage to meet consumer needs what their needs are. Further, they they look to extend their existing and build consumer demand. cannot rely on traditional, direct brand to markets where it is likely to Understand evolving consumer tastes routes to market. They also should use resonate with consumers. Mexico’s social networks and strengthen their EMMs will need to target their Grupo Modelo has extended the reputation through word of mouth. products and services carefully reach of its Corona beer to become a to capture a broad spectrum Innovate in all business areas global market leader and the fastest- of consumers, addressing growing beer import in the United Western multinationals should both low-income consumers States, where it has been positioned target their efforts carefully in as well as the growing, more as a premium product.141 emerging consumer markets. The aspirational middle class. local-knowledge advantage enjoyed Second, EMMs often adopt a Increase brand recognition through by EMMs, coupled with their cost strategy of acquiring established investments advantage, makes this a difficult brands in the developed world area to win. Local adaptation, to leapfrog immediately into an As EMM brand recognition improves, business models based on innovative established market space. When EMMs should allow products to be pricing and financing mechanisms, Tata Group acquired Tetley Tea for developed and improved to keep and public-private partnerships (for US$432 million in 2000, it provided pace with consumer expectations example, in infrastructure provision) the Indian conglomerate with access by investing in quality-management are important examples of best to large European markets.142 mechanisms and research and practices for Western multinationals development functions. Third, EMMs frequently tailor their striving to expand their business in brands to the various markets they emerging markets. are serving—in both emerging- and developed markets—to meet local preferences. For example, Chinese company TCL sells under its own brand in emerging markets like India and China but under the brands “Thomson” in Europe and “RCA” in North America.143

38 Innovation: Broadening the spectrum

39 Traditionally strong in tailoring Western products to serve customer needs in their home markets, a small but growing number of companies from emerging markets now participate in original research, tapping into global innovation networks and benefiting from knowledge spillovers. But more focus on generating new ideas and organizational structures to enable innovation is needed to sustain long-term growth.

“Innovation is the only Emerging-market multinationals figured out what the consumer (EMMs) are sometimes regarded needs, rather than blue-sky way in which we can as imitators, not innovators— innovation.” This approach makes adapting Western products, economic sense: in the early really differentiate from pharmaceuticals to mobile stages of market development, ourselves and set phones, to sell in their own the returns from adapting existing markets. This might be true to technologies and products—as ourselves apart in a some extent, but their approach to opposed to inventing entirely globalized world.” innovation is in itself innovative. new ones—tend to be greater. Mastering the art of Tweaking and tailoring Josué Christiano Gomes improvisation Haier became a leader in China’s da Silva, Coteminas white-goods market, despite heavy At the core of many EMM innovation competition, mainly because of its strategies is an understanding of expert knowledge of the nuances customer needs in light of cost of the Chinese consumer and its constraints, culture and customs, ability to develop products tailored for which pragmatic solutions to those needs. For example, Chinese can then be devised. As Milton consumers in rural markets used Vargas of Brazil’s Banco Bradesco the company’s washing machines pointed out, even people with to clean vegetables such as sweet limited means “like innovation potatoes. Haier modified its product and relate it to an organization’s designs so that vegetable peel agility and competence.” would not clog the machine’s pipes. Mukesh Ambani of India’s Reliance The company then affixed large Industries Limited found that stickers on the modified washers, “working backwards from a goal with instructions on how to wash works better, so we’ve always vegetables safely using the machine.

40 The next generation of washing in its trucks so that ready-mixed changing consumer markets of the machines can even produce goat’s concrete could be delivered emerging world offers a significant milk cheese.144 efficiently throughout Mexico.148 lever for aspiring EMM innovators. These consumer markets are likely to The “Jaipur Foot” is another example Experience in operating in emerging inspire and drive future innovation of product development where markets and developing products across the whole value chain, local knowledge is used to invest to meet the needs of some of the potentially establishing the global in just enough know-how to meet world’s largest and most dynamic consumer trends of the future. the needs of emerging-market consumer markets is a great starting consumers. This US$30 prosthesis point—not to mention a strategic Emerging-market innovators has already transformed the lives advantage—for EMMs. More than While many EMMs are content to of millions of land-mine amputees 80 percent of the world’s six billion concentrate their efforts on—and in the developing world including people live in emerging economies, benefit from—development, some Afghanistan, Cambodia, India and with China and India each boasting do capitalize on their favorable 149 Pakistan. Not only is the artificial billion-plus populations. operating environment to generate limb a great deal more affordable for Consumer markets present original ideas, conduct research and emerging-market consumers than its challenges as well as opportunities. develop new products and processes high-tech alternative, it also enables Consumer spending in China, from first principles. Further aided greater mobility and precisely suits India, Brazil, Russia, Mexico and by moderate but increasing business the local ways of eating, sitting and South Korea will be greater than R&D investment, globalizing R&D praying without shoes.145 that in the G6 economies by 2025 activity and related knowledge Organizational innovation (at purchasing power parity).150 spillover effects, the cyclical evolution from D to R&D is starting Practical creativity in EMMs The expectations of increasingly to dispel traditional perceptions of is not just limited to product demanding consumers in emerging EMMs as low-tech imitators. development. Innovation extends markets, with growing disposable to processes and operations as part incomes, will need to be met through A select number of EMMs are of a search for cheaper, simpler and cutting-edge research and market- moving rapidly up the value chain—in more flexible business models. In tailored products. some cases even ascending to the designing the Scorpio sports utility top of their industry. Mahindra & vehicle, Mahindra & Mahindra Moving from “D” to “R&D” Mahindra’s Scorpio was awarded handed over a significant part While EMMs have demonstrated car of the year in 2003 at the CNBC of the process to suppliers that their versatility in development (or Autocar Awards, beating competition carried out the design, testing, “D”), a large opportunity still exists from Mercedes-Benz and Toyota. validation and materials selection. to adopt more research capabilities. Among other attributes, the car was This was almost unheard of among Elements of the current operating celebrated for its stylish exterior.152 global carmakers. The company environment in emerging economies Engineers from Brazil’s Embraer, one simply provided performance provide fertile ground for EMMs of the largest aircraft manufacturers targets and budgets and brought to move from improvisation and in the world, devised a new “double together the separate components emulation toward a greater focus bubble” fuselage design, with more to create the end product.146 on original research. National than 40 airlines providing input.153 governments support—even push— South Africa’s Sasol, the world’s Poor infrastructure in some enterprises to innovate, placing largest producer of synthetic emerging markets often necessitates strategic bets on certain industries fuels, recently started using a new innovative ways to reach and and companies. technology to convert natural service the consumer. Indian solar gas piped to South Africa from energy company Selco based Having spent the last two Mozambique.154 Even stalwarts of the technicians locally to sell, install decades establishing itself in the generic-drugs industry in emerging and repair products and to provide manufacturing sector, China now markets are moving into higher- ongoing maintenance and micro- wants to move from “made in China” value activities. An anti-malarial finance loans to its mostly remote to “invented in China.” China’s drug developed by Ranbaxy, the first and rural customers.147 CEMEX, National Science and Technology originally-researched molecule in one of the world’s largest cement Development Plan (2006-2020) aims India, will reach the market by 2011. manufacturers, is renowned to increase research and development Two Indian companies, Glenmarck for unconventional thinking, (R&D) expenditures to 2.5 percent and Dr. Reddy’s, both have molecules especially when it comes to of GDP by 2020 to reduce China’s in various stages of development.155 operational efficiency. The company reliance on foreign technology.151 revolutionized the traditionally At the same time, access to the old-fashioned and low-tech cement sizable, increasingly affluent and industry by installing GPS equipment

41 Figure 4.8: Top companies in developed and emerging markets by R&D investment, 2006

Global Country/ Global Country/ Developed-market US$m Emerging-market US$m rank region rank region

1 Pfizer United States 7,153 10 Samsung Electronics South Korea 5,784 2 Ford Motor United States 6,777 60 LG Electronics South Korea 1,690 3 Johnson & Johnson United States 6,706 67 Hyundai Motor South Korea 1,467 4 Microsoft United States 6,703 132 Petroleo Brasiliero Brazil 684 5 DaimlerChrysler Germany 6,497 162 PetroChina China 514 6 Toyota Motor Japan 6,420 172 Gazprom Russia 469 7 GlaxoSmithKline United Kingdom 6,369 173 Hynix Semiconductor South Korea 467 8 Siemens Germany 6,236 175 Taiwan Semiconductor Manufacturing Taiwan 464 9 General Motors United States 6,212 181 CVRD (now Vale) Brazil 453 11 Intel United States 5,528 183 Korea Electric Power South Korea 450

Note: Source data converted from pounds sterling to US dollars using average exchange rate for 2006 of US$1 = £0.54

Source: UK Department for Innovation, Universities & Skills (DIUS) and the Department for Business, Enterprise & Regulatory Reform (DBERR), R&D Scoreboard 2007

EMMs also have begun to augment Nevertheless, the impact of greater engage in increasing levels of the financial resources they dedicate emerging-market R&D investment R&D activity tend to be the larger, to R&D, signifying the increasing should not be overestimated. Much more established companies. They importance attached to innovation. of this capital will still be allocated complement their increased spending Multinationals from developed solely to the development phase of by tapping into geographically markets still make up the majority innovation, with research remaining dispersed innovation hubs as well of global R&D expenditure. Nine almost an exception rather than the as by benefiting from knowledge of the top ten corporate spenders rule among EMMs. For example, in spillover from foreign companies. on R&D come from the developed 2006 the World Bank carried out world (Figure 4.8). Western company a survey of 2,300 manufacturing Aspiring to innovate R&D spending of US$428 billion enterprises across 16 Indian states globally and found that only 27 percent significantly overshadows the US$22 A handful of EMMs have begun to carried out formal R&D.160 Despite billion attributed to EMMs.156 move some of their R&D capabilities hubs of innovation and expertise overseas to access established However, the growth of R&D among springing up on the doorstep of innovation centers. These activities EMMs is impressive. R&D expenditures EMMs, it is the developed-market are often driven by the desire by Chinese and Indian companies grew multinationals, not EMMs, that are to absorb knowledge and gain by more than 30 percent in 2006,157 often responsible for engaging in access to new markets, talent while Russian energy giant Gazprom research as well as the development and expertise. Tata Motors has of these clusters—and they still reap and Taiwan’s BenQ grew their R&D an engineering research center in the majority of rewards as a result. expenditures by 101 percent and 95 Pune, India, employing more than 158 percent respectively. EMMs have Of 17,000 patent applications 1,400 scientists and engineers. It also begun to raise the stakes in terms filed in India in 2004-2005, only cooperates with leading international of R&D spend as a proportion of sales. 3,500 were by Indian nationals.161 design houses in Italy and recently In 2006, R&D expenditure by South Of the 49 most active filers in set up a technical center in Warwick, Korea’s Realtek Semiconductor was India in the past decade, 44 United Kingdom.163 Huawei of China equivalent to nearly 20 percent of its are either foreign companies or has overseas R&D centers in India, sales revenue.159 subsidiaries.162 Those EMMs that Russia, Sweden and the United

42 States.164 Coteminas of Brazil has Stay close to the consumer “There is a realization R&D centers in Brazil and the United Maturing and growing consumer States and is setting up a third markets at home and unfamiliar that innovation, with 165 center in Asia. ones overseas may require EMMs its own intellectual Another strategy used by some to adopt additional methods to stay EMMs is to acquire new or close to the needs of the consumer. property rights, is complementary innovation By increasing market research and important. However, capabilities, as explained by Amit engaging consumers in the evolution Kalyani of Bharat Forge: “Our of a new product, EMMs could such progress takes strategy for acquisitions is one of build on existing understanding complementary and supplementary and develop synergies across their time. Self-developed involvement, to give us access to business functions. technology and products, technologies, customers Help shape national systems of and markets that we don’t have.” innovation innovation are still in Absorbing knowledge from As EMMs move from emulation to the early stages.” collaboration with developed-market invention, it will become increasingly multinationals is another avenue important to strengthen links He Jianqiang, that EMMs explore, particularly with government, academia and Dongfang Boiler in the pharmaceutical industry. public research institutions in Ranbaxy updated an agreement their home countries (and in other with GlaxoSmithKline (GSK) in which relevant countries) to shape and Ranbaxy will conduct initial research build an innovation ecosystem “True innovators and GSK will focus on clinical that encourages, protects and development and commercialization. rewards innovation. This will understand that As part of the partnership, include better enforcement of their mindset has Ranbaxy will retain the rights to intellectual-property rules. commercialize products in India.166 to be global.” Nicholas Piramal India Limited For developed-market and Merck & Co. also recently multinationals Antoine van Agtmael, announced R&D collaboration to Understand the art of improvisation Emerging Markets discover and develop new oncology drugs.167 Both EMMs and developed- Developed-market multinationals Management LLC market multinationals gain should adopt a wider view of significant benefits from such an innovation in both emerging and approach. While developed-market developed markets. Placing greater multinationals secure access to a focus on the development stages of large sample of trial participants, innovation will help these companies patients and potential revenue, achieve an awareness of when EMMs gain insight into managing cutting-edge innovation is required complex cross-disciplinary research and when a “just good enough” projects. approach will suffice. Integrate with local networks and Business Implications consumer markets For emerging-market It is imperative to become embedded in the local innovation landscape. multinationals Developed-market companies Develop organizational structures for need to build stronger links with innovation local universities, think tanks and As EMMs compete more and more governments, as well as collaborate on the global stage, they need to with policymakers and EMMs to foster develop efficient organizational an innovation-enabling environment networks, systems and mechanisms within emerging economies. that can transform a new idea into a series of replicable processes and a profitable product or service.

43 5. Growing pains

44 The speed of growth experienced by emerging- be made mean that the intensity of competition mirrors the pace market multinationals has been one of their most of growth. EMMs will need to be continuously alert to this shifting striking characteristics, yet it also presents their configuration of competitors. most significant challenge. Across a range of Geopolitical risk dimensions, they need to understand the potential As EMMs grow and operate obstacles and barriers they might encounter as across geographic boundaries, they face an increasingly complex they expand on the global stage of competition. cast of regulatory and policy actors. The impact of different Accenture research in this area Further, the emergence of new players regimes can be felt at the local, reveals that emerging-market in global capital markets, such as regional and global levels. multinationals (EMMs) face six sovereign wealth funds and private At the local level, EMMs must challenges to sustained growth: equity funds, means that EMMs face navigate often opaque regulatory increasingly intense competition for practices with little assistance. Input constraints assets and acquisition targets, just as These shifting sands make it Growth can be sustained only as their Western counterparts do. In this tricky for market entrants to long as there are sufficient inputs to crowded marketplace of investors, plan, consolidate and grow on a maintain momentum. As our analysis simply having ample capital at your sound basis. It also means that has shown, EMMs face significant disposal does not guarantee the knowledge of local regulatory challenges in accessing and securing ability to acquire assets. practices represents a significant their developmental lifeblood across source of competitive advantage a range of production factors—from Greater competition and a key area in which EMMs talent to energy and from raw EMMs are growing in size and should invest time and resources. materials to capital. number. Their entry into the At the regional level, a tapestry global economy means they face As Don Lam of Vietnam’s of different rules and regulations competition on all fronts—both from VinaCapital, a venture capital firm, exists, partly the result of slower developed-market multinationals observes, “the first challenge when multilateral trade liberalization as and from each other. Our research expanding is finding the right talent.” the current Doha Round of World indicates that EMMs are particularly In the course of our interviews, a Trade Organization talks stalls. concerned about competition large number of executives identified EMMs will need to understand and from their fellow EMMs. China a lack of available talent as the navigate this arena carefully if they is seen as perhaps the strongest primary barrier to growth. Despite are to expand. player, with Young-Suk Sunwoo major improvements in education of South Korea’s Hansol Paper At the global level, EMMs must play systems and increased levels of saying, “the biggest competition by rules that often have been set commercial acumen, there are still we face is from China.” Similarly, by developed-market economies simply not enough people with the José Augusto Cardoso Mendes and institutions. Reform can be necessary skills, experience and of the Brazilian petrochemical slow. EMMs must be sensitive to mindset. As a result, labor costs company Braskem notes: “We are the reactions they might encounter are rising rapidly in many emerging seeing more competition from as their expansion continues into economies, and there are serious new players from places such developed markets. The rapid growth problems with employee turnover. as India and the Middle East.” of emerging markets has not been To combat these challenges, EMMs universally welcomed; in some need to build a compelling “employer This fear of competitors in their quarters it has given rise to direct and brand” that acts as a powerful tool own backyard is not surprising given indirect protectionism. The definition to recruit, develop and retain talent. the local focus of many EMMs, of “strategic” industries has evolved particularly in the early stages of Securing raw materials and as Western governments resist their development. But the very commodities also has become the attempts by EMMs to acquire characteristics that made these increasingly difficult, owing not least developed-market companies. multinationals competitive in the to increased competition for finite first place now threaten their ability As Ko Kheng Hwa of the Singapore resources against a backdrop of to expand globally. The ability to Economic Development Board says, often fragile infrastructure.168 While source from the best new locations “rising levels of protectionism could many EMMs have overcome these and the nimbleness with which ruin the globalization dynamics that challenges, their approaches may not such game-changing moves can emerging markets are leveraging.” work in the longer term.

45 “Emerging-market This new operating environment has Higher-value innovation the potential to hamper EMMs’ journey As well as growing in size and toward global expansion. Working multinationals must reach, EMMs must continue their with—and anticipating responses progression up the value chain learn to integrate from—regulators in different markets to access new consumer markets will be a key challenge if EMMs are their emerging- and consolidate competitive to shape and adapt to changes in advantages. Their earlier innovation market strategies into global trade and investment rules. capabilities were born of necessity, Given the increasing interdependence global strategies.” reflecting a willingness to adapt and of today’s global economy, such improvise to overcome barriers. Dr. Xiang Bing, actions will need to become part of EMMs’ core business in a way Now their challenge is how to Cheung Kong Graduate that they might not be today. structure creativity and replicate School of Business, China high-end research. While well More diverse customers established as centers of product development, EMMs will increasingly One of the key strengths of EMMs has need to move into the spheres of “The greatest challenge been their ability to tailor products invention and concept generation. and services to their local customer is not globalization Broadening the innovation spectrum bases. As Francisco Djalma de Oliveira will continuously challenge EMMs. It itself but how to deal of Banco do Brasil says, “a good requires a delicate balance between understanding of the new market, the maintaining freedom to improvise with globalization in local culture and the ‘local reality’ is in product development while essential.” In many areas, growth has a manageable way.” implementing structured processes been founded on the exploitation of for idea generation and invention. Professor Wang Zhile, historical and cultural ties. However, this traditional strength also presents a Research Center on Going global but remaining Transnational Corporations, new challenge. As EMMs grow across geographic and cultural borders and local Ministry of Commerce, move up the income chain, they will The tension surrounding innovation People’s Republic of China face a more diverse set of consumers highlights the fundamental challenge with contrasting needs and tastes. of future EMM growth: how to As EMMs enter new, wealthier achieve growth on a global scale economies and as their own domestic while maintaining the local focus markets develop, they will be exposed that has made them successful in the to a growing middle class, which has first place. Doing so will require new, different needs and, increasingly, flexible operating models that combine different tastes. EMMs must stay local knowledge and practices with in touch with changing preferences global functions and capabilities. (and pre-empt them), at the same While aspiring to the global stage time ensuring that they continue to traditionally occupied by developed- tailor goods and services to local market multinationals, EMMs cannot cultural norms. A one-size-fits-all afford to lose sight of the key skills and approach will be neither desirable nor practices that helped them grow. Deep sustainable. local knowledge, products tailored to consumer needs and constraints, adaptability and entrepreneurial zeal have all helped these companies achieve significant growth in recent years. If they can avoid stifling these abilities in the quest for scale, they will be well positioned to achieve—and sustain—significantly greater growth in the future.

46 6. The path to high performance

47 While diversity is one of the defining Laos—markets that present the greatest opportunities for them.173 characteristics of today’s emerging-market Moving up the value chain multinationals, our analysis suggests that they Not only are EMMs growing out, they also share a number of common features. These are also moving up the value chain into higher-value-added activities. traits cut to the core of their performance and Companies like LG of South Korea and Acer of Taiwan have progressed offer clues to their future growth prospects. in recent years from producing component parts to selling branded What capabilities do emerging- by canvassing feedback and then goods in their own right. market multinationals (EMMs) acting on it quickly. As a result, exhibit when viewed through the the products they develop are Distinctive capabilities lens of high performance? Do they based on needs and meet consumer Inducing demand show recognizable traits or do they requirements closely. Further, EMMs display a relentless and take a wholly new route to growth EMMs are ready to establish often highly innovative approach and global expansion? leadership teams that reflect the to incubating and tapping into broader cultural make-up of the Accenture defines a high- new sources of demand, based markets in which they operate. performance business as one that on investment in infrastructure, Not only does this bring to bear outperforms its peers consistently business model innovation and market-specific knowledge and over the long term. Our experience adapting sophisticated technologies expertise, it also serves as a sign in working with clients and our High and products to meet local needs of the companies’ willingness to Performance Business research, and spending power. Because of adapt to the local environment. which covers more than 6,000 the low levels of disposable income companies, establishes that high- Focusing on other emerging markets that usually characterize their performance businesses differentiate EMMs demonstrate a clear focus on domestic markets, they often must themselves by balancing, aligning achieving and consolidating local stimulate demand. Examples include and renewing three essential building growth as a springboard for prudent CEMEX’s lottery scheme for lower- blocks of high performance: global expansion, most often into income families to access building materials174 and China Mobile’s • Market focus and position— other emerging markets where provision of telecommunications business strategy decisions regarding cultural and geographical synergies services for rural customers.175 where and when to compete. are likely to exist. China’s Huawei followed a strategy of focusing Improvising capabilities • Distinctive capabilities—hard-to- on emerging markets first before replicate capabilities that define how When facing a gap in their expanding into developed markets, businesses compete. capabilities, EMMs are quick to consolidating growth in Southeast improvise a customized solution. Asia, South Africa, Latin America and • Performance anatomy—common Reliance Industries Limited has set Eastern Europe.171 mindsets relating to culture, up its own educational initiatives leadership and the workforce.169 In growing into new markets, these and informal learning processes.176 multinationals often tap into pools Innovation demonstrates a Market focus and position of diaspora populations. Prior willingness to overcome barriers Adapting to the market knowledge of customer preferences, as they are encountered, EMMs have been highly effective and of business and cultural norms, engaging as necessary in what at assessing and adapting to diminishes the risks. Dabur India might otherwise be seen as non- local customer preferences. For Limited sells goods not just in India core business activities. but also to people of Indian origin example, to better understand the Managing risk and uncertainty needs of low-income customers in living in Bangladesh, Pakistan, the EMMs are comfortable with higher Mexico in the late 1990s, CEMEX Middle East and North Africa, Gulf levels of risk and uncertainty assembled a team of employees states, the United Kingdom and the 172 because of the environments in who agreed to spend 10 hours United States. The importance which they have developed. Many each day for 12 months in a poor of cultural affinity is also seen in companies from Eastern Europe have neighborhood of Guadalajara.170 investment flows, where EMMs are willing to place strategic bets emerged against the backdrop of a The feedback loop for customer on growth in adjacent markets. transition from a closed, planned preferences is short. EMMs aim Vietnam’s VinaCapital invests economy to one that is more to be flexible enough to exploit in neighboring Cambodia and liberalized and market-oriented. their markets as fully as possible

48 Similarly, India’s political and EMMs also deploy their human It remains to be seen whether they economic journey in recent years capital across a wide array of can combine growth with flexibility has made many Indian companies experiences and challenges—through and a local mindset—the likely keys more resilient to turbulence at rotations abroad, for example, that to becoming the high-performance home and more willing to take develop skills in a new environment— businesses of tomorrow. bold steps abroad. For example, and provide opportunities for swift Jindal Steel of India was recently advancement. awarded development rights by the Global mindset with a local focus “A lot of people say Bolivian government to one of the world’s largest iron ore mines.177 EMMs share some common that the 19th century Oil and Natural Gas Corporation, attitudes that make them effective also of India, has interests in at entering other markets. Leaders was the British century Sudan, Libya, Iran, Iraq and Syria.178 who have been educated abroad or and the 20th century EMMs are helped by the fact that who have experience of working in their stakeholders—in particular, international business help engender was the American government and regulatory bodies— a global mindset among many are typically focused on promoting of these companies. This global century. Now we must economic growth, with international focus is further underpinned by make the 21st century links often playing an important role. the liberalization of their domestic markets and the necessity of the global century.” Performance anatomy competing on the global stage to ensure survival. At the same time, Professor Jean-Pierre Learning by seeing however, they have been able to Lehmann, IMD and EMMs demonstrate a keen preserve local knowledge and The Evian Group willingness and ability to learn practices that give them a distinct rapidly and assimilate lessons competitive advantage, although from their local environment. Their maintaining this will be increasingly organizational agility means that tricky as EMMs grow in size. they learn fast and act quickly. They also are able to look to The path to high developed-market multinationals for examples of best practices and performance to observe the challenges those It is clear from this snapshot companies have experienced when that EMMs are well positioned entering the same markets. In this to achieve and sustain growth. way they assemble corporate best Given their different stages of practices from around the world. development, they can look to developed-market multinationals Multiplying scarce talent for best practices and also for Talent management is a key the pitfalls they should avoid. component of a high-performance Perhaps the most significant business. While ensuring a balance challenge they now face is one which between home-grown talent and is familiar to many developed-market talent from overseas, EMMs use multinationals: how to maintain the innovative practices at all stages of local mindset and flexibility that their human capital strategy. They made them so successful in the first develop human capital potential via place while increasing scale and internal training and development reach—factors that can work against programs that link with educational original sources of competitive establishments and tailor skills advantage. development to specific business needs, and by providing health and The story of EMM development welfare services. has not been one of leaping into the unknown waters of the global They discover talent in a variety of economy. Most EMMs have adopted under-tapped sources, including a canny, step-by-step approach diaspora populations, such as the that builds on existing strengths increasing number of Chinese and capabilities and replicates them students who have studied abroad at an incrementally greater scale. but are now returning to China.

49 References

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52 Acknowledgements

We would like to extend our We would like to sincerely We would like to thank the gratitude to the following thank the following individuals following individuals for their companies for participating in for their support and insights: contributions to this study: this study: • Professor Jean-Pierre Lehmann Tim Adams, Victoria Barker, • Banco Bradesco (Professor of International Political Francesca Caminiti, Terry Corby, Economy, IMD; Founding Director, The Claire Davies, Michelle Ganchino, • Banco do Brasil Evian Group) Ben Geschwind, Stéphane Girod, • Bharat Forge • Dr. Simon Commander (Director, Thea Hinde, John Jackson, • Braskem Centre for New and Emerging Marek Mitek, Jeffrey Playford, Markets, London Business School; • CEZ Senior Adviser, European Bank for Carter A. Prescott, Charlotte Raut, Eoghan Slye, Kamil Sveda, • China Mobile Reconstruction and Development) Bob Thomas and Oscar Vasco. • CJ Corporation • Torbjörn Fredriksson (Head, Policy Issues Section, Division on We would also like to gratefully • COMEX Investment, Technology and Enterprise acknowledge the support of numerous • Coteminas Development, United Nations Accenture executives around the Conference on Trade and Development) • Dabur India Limited world who assisted in setting up and • Antoine van Agtmael (Chairman and conducting interviews for this report. • Dongfang Boiler Chief Investment Officer, Emerging Markets Management LLC) • Empresas Polar About this study • Professor Mauro Guillen (Director, • FEMSA This study was prepared from The Lauder Institute, University of sources and data which Accenture Pennsylvania) • Grupo Bimbo believes to be reliable but it makes no • Hansol Paper • Professor Abraham Koshy (Professor representation or warranty, express of Marketing, Indian Institute of or implied, as to their accuracy • Hindustan Unilever Limited Management, Ahmedabad) or completeness. Any figures and • Holografika • Professor Wang Zhile (Director, statistics used in this study were • Lenovo Research Center on Transnational up-to-date at time of writing and Corporations, Ministry of Commerce, are subject to change without • Mahindra & Mahindra People’s Republic of China) notice. All necessary consents and • MDS Holdings • Dr. Xiang Bing (Dean, Cheung Kong permissions were obtained in respect Graduate School of Business, China) • MedcoEnergi Internasional of any individual comments cited. • Neptune Orient Lines Project team However, the views and opinions expressed in this publication are • OTP Bank Joanna Brown, Kit Burdess, those of Accenture only and do not Tim Cooper, Ladan Davarzani, • PGNiG SA necessarily reflect those of any of the Henry Egan, John Glen, • PKO BP participating companies in the study Iain Griffiths, Katharine Hirst, or any other third party referenced • Reliance Industries Limited Marilyn Kamanyire, Mamta Kapur, in the report. Such opinions should • Singapore Airlines Cargo Nijma Khan, Charmian Lam, not be construed as providing Caroline Leung, Armen Ovanessoff, • Singapore Economic Development professional advice, recommendations Alice Pearl, Clare Potter, Mark Purdy, Board or endorsements, or relied upon Matthew Robinson, Andrew Sleigh • The South African Breweries Limited as such. Neither Accenture nor its and Livia von Roetteken. • SUEK employees accept responsibility Senior Executive review group for any loss or damage arising • Tata Group from reliance on the information Oliver Benzecry, Woodruff Driggs, • Thermax contained in this publication. Mark Foster, Daniel London, • Vale (formerly known as CVRD) Lourenco Mendonca, Narendra • VinaCapital Mulani, Paul Nunes and Mark • Zentiva Spelman.

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