Wednesday, September 8, 2010

The "Down-Market Opportunity" in Emerging Markets

With the rising popularity of smartphones, mobile operating systems have become a major battleground for technology and communications giants, and with growth slowing in developed countries, competitors are shifting their sights to markets that offer stronger prospects. Google recently revealed that it is gearing up for a major push for its Android OS in emerging markets. Working in conjunction with partners such as Taiwan-based MediaTek, Google seeks to place its system on low-cost phones not only in China and India but in emerging markets throughout Europe, Asia, Africa and South America. Google's VP of Engineering, Andy Rubin, refers to this as "the down-market opportunity", a reference to the growth opportunities offered by less developed countries, which have been emphasized during the recent global economic recession. This announcement coincides with reports that the economic recovery may be weakening in the US and fresh projections by the World Bank that developing countries will lead global recovery.

This idea of looking "down-market" for opportunities is not new, and it can be applied to country markets as well as consumer segments. Nearly ten years ago, Goldman Sachs tagged the largest emerging markets, Brazil, Russia, India and China, with its now-ubiquitous BRIC designation. Now that the big four have begun to fulfill their promise, a new tier of emerging markets with high-growth potential has emerged, and multinational firms are starting to take notice. Named "the CIVETS" by HSBC, the Economist Intelligence Unit (EIU) evaluated the prospects for this group of countries in a report issued earlier this summer. According to the EIU, Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa all have sizeable young populations, diversified economies, reasonably sophisticated financial systems, and relatively low public debt. The EIU forecasts that the group will post annual GDP growth of 4.5% over the next twenty years.

Although the BRICs will continue to dominate emerging market headlines, firms would be smart to pay more attention to developments outside of these countries. The emphasis that Google and others are placing on these next-tier markets demonstrates that companies seeking business growth strategies in the wake of global economic recession may benefit from a more diversified geographic focus. Rising middle-class customers in the CIVETS and other dynamic, smaller emerging markets may offer valuable growth in the coming decade.