This article is part of a series on what makes global companies great. Last week, we gave an overview of how widespread distribution networks contribute to a global company’s success. Next week, we’ll dig deeper into India’s rise as a center of innovation.
Developing economies are no longer mere satellite markets for Western multinationals. Today, they are becoming central drivers of growth for many global companies and creating formidable homegrown competitors.
Multinationals Cater to Emerging Consumers
The global consumer base has increased to roughly 3 billion people today from 1 billion in 1980, with emerging markets playing a significant role in that growth. This decade, 300 million additional households will enter the consuming class, and management consultant McKinsey estimates emerging-market consumption will reach $30 trillion, roughly half of all global spending.
Global companies are faced with an increasingly diverse customer base with a strong appetite for the trappings of middle-class life, many of which translate across borders and cultures. “A company’s ability to deploy [products] in a number of markets is what we are looking for,” says Capital Group portfolio manager Gerald Du Manoir.
But before they can be successful in multiple markets, global companies need to understand the wants and needs of emerging-market consumers and how to market products accordingly. Unlike wealthy countries, for example, younger consumers in the developing world tend to earn more than their older counterparts. That, in turn, means that they have the most purchasing power, making them the most important consumer group in emerging markets.
Global consumer product companies Nestlé and Unilever market both global brands and products made exclusively for local markets. But multinationals also develop new products specifically in the markets where they will be used. Unilever’s PureIt water purifier was developed in India and then sold in Brazil, Mexico, Indonesia and Nigeria. Products sometimes even go from the emerging world to the developed world, instead of the other way around. After selling its Denizen blue jeans label in India, China and Mexico, Levi Strauss launched it in the U.S.
The Importance of Being There
Both global and local brands are succeeding in emerging markets, meaning that “wise multinationals are targeting challengers [in emerging markets] as key customers and partners,” the Boston Consulting Group wrote in a recent report.
They should also view them as competitors. Firms in the developing world can often survive on thinner margins than Western companies, allowing them to compete on price and take market share, says Capital Group investment analyst Georgios Damtsas.
Cincinnati-based Procter & Gamble — home to Tide detergent, Pampers diapers and Gillette shaving products — struggled with price points and a more-centralized operation than its rivals. Faced with sluggish sales growth, P&G divested brands around the world to boost profitability.
Failing to identify regional trends can also be costly. Nokia, which once dominated India’s cell phone market, lost market share when local upstarts rolled out phones featuring two SIM cards. Consumers in some developing economies, such as Nigeria and India, prefer dual SIM cards so they can switch between providers depending on network coverage and promotions.
Emerging Markets Spawn Global Competitors
Competition has never been greater. The number of Asian companies with more than $1 billion of revenue increased six-fold to more than 1,000 companies from 2003 to 2013, while the number of billion-dollar companies almost doubled to 700 in Latin America, Africa and the Middle East, according to the Boston Consulting Group.
Tencent, China’s biggest social networking and online games company, is one of the world’s most valuable internet companies. It recently began expanding overseas and already generates 7% of its annual revenue outside of China. Huawei Technologies, another Chinese company, is the world’s largest telecommunications equipment maker and the third-largest smartphone manufacturer behind Apple and Samsung Group. Nearly two-thirds of its revenue comes from overseas.
Assessing emerging markets companies means understanding the quirks of local markets. Georgios Damtsas, who covers both Indian consumer companies and European multinationals, cautions that revenue growth in the emerging world sometimes merely reflects inflation-related price increases. Inflation, in turn, tends to devalue the local currency and erode the bottom line.
In the end, the continuing growth in emerging markets consumption presents both huge opportunities and challenges for multinationals, as well as a more complex picture for investors. The bottom line, however, is that multinationals that commit to local markets and are savvy enough to navigate both local preferences and business conditions are the ones that rise above the competition.
To find out why distribution networks still play a large role in determining the success of global companies, read Global Companies: Power of Deep Distribution Networks.
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