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.

BRIC, BIC or Alphabet Soup?

U.S. Vice President Joe Biden, well-known for his tendency to speak his mind, caused a political row last month when he suggested that Russia's best days were behind her. The furor over his comments put a spotlight on Russia's anemic economy, overdependence on commodities and its worrying demographic trends. The perception of Russia as the weakest member of the BRIC countries was reinforced when the Russian government announced recently that foreign investment in the country plummeted by 45% in the first half of 2009. Output is still falling, and the Russian economy is expected to contract 6.8% this year, a much worse result than the 2.8% decline in the U.S. and the surprisingly robust figures being posted by its 'BRIC' peers: Brazil, India and China.

The term 'BRIC' was coined by Goldman Sachs economist Jim O'Neill when he argued that these four largest emerging economies could become the dominant economic powers of the world by the middle of this century, eclipsing the economies of the Group of 7 industrialized democracies. The four nations have large populations and dominant positions in manufacturing (China), services (India) and raw materials (Brazil and Russia). Yet each of them has its problems. Corruption, persistent poverty and a groaning infrastructure are issues that afflict each of the BRIC nations to some extent. These are all obstacles that are worth overcoming, but only if there is a potential reward in the form of access to a vibrant, growing economy and consumer market. The difficulty of doing business in Russia, along with the more recent decline in economic opportunities has understandably caused many companies to prioritize the other 'BRIC' countries in their strategic growth plans.

Categorizations, such as the 'BRIC' countries, can be useful indicators of market size and economic power, but such designations cannot replace thorough due diligence regarding barriers to entry and other areas of business risk. The 'BRIC' club also eliminates some very interesting and sizable markets such as Mexico which trails close behind India in terms of GDP and provides nearly 10 times India's average per capita income. Firms would do well to consider a wide range of countries for revenue growth and determine a nation’s relevance to their own business strategies on a case-by-case basis.

Spotlighting the "B" in BRIC

The Council on Foreign Relation's recent backgrounder on Brazil calls out the country's increasing presence on the world stage on issues of trade and energy. The article points to currency stability and export-led growth as driving Brazil's robust economy, already the eighth largest in the world.

While most multinationals focus their attention on China and India, Brazil is certainly earning its keep in the BRIC (Brazil, Russia, India, and China) club. Like China and India, Brazil is expected to recover quickly from the global recession. Foreign investment has spiked in the country, drawing venture capital and significant investments from multinational giants such as Wal-Mart, Telefonica S.A., and Alcoa. Brazil's potential is not lost on China either. China has surpassed the United States to become Brazil's biggest trading partner.

There are several reasons Brazil may be an attractive target for multinational corporations. First, Brazil is a consumption-oriented society with a population that is wealthier on a per-capita basis than both India and China. Second, unlike the savings-oriented Chinese, Brazilians embrace credit - when they can negotiate zero or extremely low interest rates - as a method of smoothing out their often unpredictable earnings. This increases the affordability of goods and expands the market to include greater portions of the lower-income classes. Finally, 85% of Brazil's population is in urban areas. This concentration of demand makes it easier to get products and services into the hands of consumers. It may be worthwhile, therefore, for multinational corporations to take a close look at the "B" in BRIC when setting strategies for future growth.

Is the Rest of the World Ready for a Unified BRIC?

Leaders of the BRIC countries (Brazil, Russia, India and China) met last week in Russia for the first-ever summit between the leaders of these emerging-market giants. While trade between the four nations is not large enough to warrant a new trade bloc, they do share common interests in global trade that they might address more effectively as a group. The reported topic of this first set of meetings included a move to decrease the role of the US dollar in global commerce.

The combined strength of these economies is considerable. Already, they represent 15% of global GDP and 43% of the world's population. They also hold 40% of the world's gold and hard currency reserves. More importantly, these countries' annual GDP growth rates are forecasted to be double that of developed countries over the next five years. China is expected to overtake the US soon as the number-one consumer in the world, while India's rural market is an example of resilience and growth in the face of the global economic crisis. It is no wonder that global retailers are placing big bets in emerging markets, with much focus on the BRIC countries. The growing maturity of these economies is also hastening the emergence of a host of homegrown companies able to compete outside their home market.

For global businesses, the BRIC countries are an essential factor - as a group and individually - when setting growth strategies. Moreover, the large firms based in these countries are quickly becoming formidable competitors, as they grab up land and businesses in smaller emerging-market countries. Multinational corporations in developed nations would do well to broaden their BRIC country analyses to include the market opportunity and emerging competition in these geographies.

Emerging Markets First, Traditional Markets Second For IBM

This week’s nugget was buried in a New York Times article by Steve Lohr on the lowering of IT-spending projections for 2008. The article contained the complete text of a memo by IBM’s CEO Sam Palmisano to the company’s senior executives. In the memo, Palmisano describes a major change in strategic direction – IBM “will focus first on how to capture all the growth in emerging markets, and then adjust our plans to serve the more traditional markets appropriately.” Palmisano underscores IBM’s continued investment in Brazil, Russia, India and China (BRIC), and announces a $1.6 billion initiative to capture growth opportunities in other parts of Southeast Asia, Eastern Europe, the Middle East, Africa and Latin America. A special emerging-market-based group will drive the initiative, which Palmisano expects to contribute significantly to the company’s revenues by 2010.

Palmisano deserves credit for recognizing the near-term opportunity “beyond BRIC” and providing strong leadership on strategic growth in “second-tier” developing countries. He has a proven track record of backing up past announcements with solid action. The number of employees in India, for example, has increased 40% to 73,000 in a year, reflecting the company’s rapid growth in the region. The BRIC countries have yielded a compound growth rate of 22 percent since 2004. Despite this success, Palmisano clearly understands the importance of bracing senior management for a strategic shift away from more comfortable traditional markets. “This is quite a change in mindset,” he says in the memo, “but that’s what is required to exploit today’s most exciting growth opportunities."

The overt change in focus by IBM and others (Cisco, GE, Microsoft, Nokia) presents an opportunity for regional offices to contribute more directly to the corporation’s strategic direction. With a spotlight on growth opportunities in their local markets, senior leaders in those countries (whether they are from the local area or moved there by the company from abroad) can contribute to company growth by influencing how products and services should be designed to meet local needs and preferences. For IBM to be successful in emerging markets, it will require a sustained commitment to innovation and understanding local markets. The details of Big Blue’s new emerging-market growth initiative will govern its degree of success, but the announcement alone is a bold step in the right direction.
Also in the news:

• Nokia Village Solution due out in Q108
  Cisco WiMax focus on developing countries
• China-based Hasee enters low-cost PC market