Schumpeter
Firms from the developing world are rapidly catching up with their old-world competitors
IT IS remarkable how soon the idea that firms from emerging economies pose a serious threat to multinationals from the rich world has become old hat. “The novelty has become the norm,” concludes the latest annual report on these “new challengers” by the Boston Consulting Group (BCG). But familiarity does not make that threat any less real.
Five years ago, when BCG first reported on the rising stars of the developing world, the rich world was still reeling from the shock of the purchase of IBM’s personal-computing business by Lenovo, a Chinese company. That this acquisition proved something of a dud may comfort those in the old guard who suspect that the ambitions of these newcomers to enter the global stage exceed their ability to perform. Yet it has not diminished those ambitions. After a brief fall following the financial crisis of 2008, the number and size of cross-border acquisitions by the challengers rebounded strongly in 2010. In the past decade 60% of the foreign purchases by these developing-country multinationals have been of companies in the rich world; in the past two years the proportion was 70%.
In part, this may reflect the fact that the emerging economies recovered more quickly after the financial crisis, allowing their corporate champions to return more quickly to the acquisition trail. BCG has analysed 100 leading firms from emerging economies. The BRICs dominate: BCG looks at 13 companies from Brazil, six from Russia, 20 from India (six of which are part of the Tata empire) and 33 from China, with the rest spread widely. The list includes the world’s largest baker (Grupo Bimbo of Mexico), meat producer (JBS of Brazil) and aluminium manufacturer (United Company RUSAL of Russia), as well as the second- and fifth-biggest telecoms-equipment firms (Huawei Technologies and ZTE, both from China).
These 100 companies are looking lively. In the past decade they have seen their revenues grow by 18% a year on average, three times faster than non-financial firms in the S&P 500. And they have managed to expand fast without sacrificing profit margins, which at 18% were six percentage points higher than those of their (non-financial) peers in the S&P 500.
BCG argues that this is because they have managed to resolve three trade-offs that are usually associated with corporate growth: of volume against margin; rapid expansion against low leverage (debt); and growth against dividends. On average the challengers have increased their sales three times faster than their established global peers since 2005. Yet they have also reduced their debt-to-equity ratio by three percentage points and achieved a higher ratio of dividends to share price in every year but one. This is despite two significant exceptions: in pharmaceuticals, where the challengers have tended to make low-margin generic drugs; and in consumer goods, where they have focused on low-cost products, leaving the higher-margin niches to established global brands.
All this is impressive, but it seems implausible that these trade-offs have been “resolved”. More likely, they have been temporarily suspended during a period of unusually rapid growth. Indeed, having sprinted to catch up, the challengers may be about to discover that the real race has only just begun.
BCG identifies five trends that will determine how the tiger cubs fare against the old tortoises in the next few years. While China continues to spend heavily on infrastructure, its low-cost construction and heavy-equipment companies will surely prosper. They are not only building roads and bridges in China; one firm has won a contract to build a casino in America and more will doubtless follow. Likewise, with demand for scarce resources soaring, the miners and other commodity-based firms that have grown huge during the past few years—including several from Russia—may soon be positively elephantine.
The other three trends ought to worry the challengers a little. So far, a handful of emerging-market firms have defied the conventional wisdom that conglomerates are inherently inefficient. But will they continue to do so? As more and more of a conglomerate’s activities take place far from head office, inefficiencies will surely creep in. Still, old multinationals such as America’s GE insist that new technology and management techniques allow them to run sprawling operations efficiently. The challengers can surely use the same tools.
Tigers struggle to build brands
Building global consumer brands may prove tricky. So far, the tiger cubs have had more luck acquiring established brands (just as Lenovo bought IBM’s PCs, Grupo Bimbo bought Sara Lee’s North American bakery business) than persuading rich-country consumers to fill their baskets with the local favourites of Chinese or Egyptian shoppers. Whether such acquisitions make sense depends on the price.
Perhaps the most interesting trend is the challengers’ growing reliance on partnerships. More and more, they are hooking up not with established multinationals but with other emerging-market firms, to share knowledge, penetrate new markets and spread the risk of especially hair-curling investments. And when the challengers do join forces with well-known multinationals, they increasingly do so from a position of strength.
Yet for all that, many established multinationals believe they can hold their own. Several are learning from the emerging-market challengers how to be innovative and frugal at the same time. They may not be hiring at home, but many are expanding rapidly in the developing world. For instance, according to the Times of India, IBM is now the country’s second-largest private-sector employer. So don’t write off the old guard yet
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