Brazil, Russia, India and China, the so-called BRICs, have for some time been big, fast-growing countries that represent the primary targets for those companies seeking new sources of growth. Indeed, economists are largely united in their belief that global economic gravity is shifting from developed economies to today’s emerging markets. But the rise of the G20, which includes several non-BRIC economies, as the premier forum for discussing global economic issues, serves as a reminder that the shift of power to emerging markets is a bigger story than just the rise of the BRICs.
This report identifies some of the key markets that companies are looking to target in their pursuit of growth globally. It also outlines the ongoing shift from using these countries as a source of low-cost production to instead accounting for the bulk of new consumer demand. Finally, it reviews the approaches that companies are taking to realise their ambitions within these markets.
Some of the key findings of this report are highlighted below.
Emerging markets are now viewed as sources of new consumer demand, ahead of simply being low-cost production hubs. About three-quarters (76 per cent, up from 67 per cent in our 2009 survey) of respondents see emerging markets as a source of new business growth, compared with just 23 per cent looking for a low-cost manufacturing base. They are looking for new consumers and though relatively few of these are rich, they are numerous. McKinsey, a consulting firm, estimates that by 2020 some 900 million people in Asia will enter the middle class, which it defines as US$5,000 per capita in purchasing power parity (PPP) terms – enough to have significant disposable income, although mostly well below Western levels.
‘Frugal innovation’, aimed at creating cheaper and simpler products for poorer consumers, is also generating new sales in rich markets. Only one-quarter of companies intend to rely on their existing products and services in emerging markets, with most intending to customise their offerings (and prices) specifically for these new markets. Many firms, such as Fiat and Nokia, develop products aimed at particular emerging markets or regions, usually with an aim of making them cheaper and simpler. In turn, many of these products are later modified and exported into wealthier markets, at a premium on emerging market rates. Both Renault and Tata have developed vehicles for emerging markets which are now being adapted for sale in developed markets.
Vietnam is a top destination for investment as companies seek new sources of growth beyond the BRICs. Companies are now prioritising a range of second-tier countries alongside their well-established operations in the BRIC countries. In all, 71 per cent of respondents agreed that emerging markets beyond the BRIC countries collectively offer an opportunity too big to ignore. Asked to name their top three countries for investment over the next two years, Vietnam (selected by 19 per cent) was second only to China (20 per cent), edging out India in third place (18 per cent). This is the third consecutive year that Vietnam has been selected by executives as their number one investment target outside of the BRIC countries. Brazil was chosen by 14 per cent of respondents, putting it approximately in line with Indonesia (15 per cent) and South Africa (13 per cent). Russia, hard hit by the global recession, was chosen by just8 per cent of respondents, making it less popular than Mexico (11 per cent), and roughly on a par with Turkey (9 per cent) and Nigeria (8 per cent).
Local companies in emerging markets are sought after for partnerships and alliances. Despite a greater ease with the risks of new places, the need to tap into local knowledge and contacts quickly remains strong. As such, the majority of executives partner with local companies when entering a new market, specially for smaller businesses. Large companies are about twice as likely to buy their way into a new market as their smaller rivals, although this approach is still subsidiary to partnering. Just 15 per cent of survey respondents say they intend to make a greenfield investment in their most important target country, compared with about 40 per cent planning either a joint venture or partnership.
