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.

Small and Medium-sized Businesses Gain New Attention as Pillars of Emerging Market Economies

China's state-owned banks are showing unprecedented increases in their lending to small and medium-sized businesses (SMBs). This expansion is part of a trend in which emerging-market governments are increasingly active in supporting the SMBs within their economy. Jamaica and Russia are also making a concerted effort to recognize and support SMBs and to help them grow, especially as millions of laid-off workers look for ways to rejoin the formal economy.

Giant multinational corporations (MNCs) such as Huawei in China and Wipro in India often get the lion's share of attention in discussions about emerging-market business. Yet, SMBs form the backbone of most of these countries' economies. Data from the World Bank indicates that SMBs employ about three quarters of all workers in countries as diverse as Turkey, Mexico, Egypt, China and Bangladesh. During economic downturns, the role of SMBs comes into sharper focus. They are often particularly hard hit due to their precarious financial position and reduced access to sources of credit.

SMBs in emerging markets are often underserved and overlooked by MNCs because it can be difficult to identify, size and characterize this target market. Additionally, MNCs are often unsure of how to reach developing-country SMBs or provide purchase financing, especially in nations with weak or non-existent credit systems (Google.org notes the "missing middle" between microfinance and traditional commercial finance). MNCs would do well to investigate local partners who could provide SMBs with innovative payment methods. Industry associations or specialized businesses can also be an effective avenue for targeting these often diffuse businesses. Such focused efforts may provide both MNCs and their SMB customers with the edge they need during these challenging economic times.

AMIA Conference puts spotlight on developing country Health Information Systems

by Brendan Smith

Historically a term that prompts more eye glazing than heart throbbing, medical informatics is suddenly a hot topic. This is in part because of President Obama’s decision to include $19 billion in the economic stimulus package to digitize American health records, which health experts hope will result in increased efficiency in the notoriously wasteful American health care system. But the idea of creating electronic medical records (EMR) has also gained traction in the developing world, where it is hoped that they could improve the continuity of care for patients while giving health officials a clearer picture of the health trends and problems in their countries.

Against this backdrop the American Medical Informatics Association’s (AMIA) Spring Congress took place last week in Orlando. While much of the activity centered on the role of informatics in the US health system, a global health track focused on health information systems in the developing world and the need for better coordination among donors and US-based organizations such as AMIA in helping poor countries to deploy and operate such systems. In her keynote address, Sally Stansfield, the executive secretary of the Health Metrics Network (HMN), noted the plethora of disease-specific and donor-driven systems and requirements that proliferate across the developing world and the negative consequences they have for developing unified, comprehensive systems.

One of the most interesting and provocative points Stansfield made in her talk is that developing country governments are now often in a position to say “no” to donor projects that don’t fit into the country’s master plan for development, and that they need to do exactly that, because, in her words, “the donors sometimes need the countries more than the countries need the donors”. This point illustrates a larger one about development aid. While well-intentioned, donor aid often works at cross purposes with countries’ larger development goals, furthering the agenda of individual donors rather than that of the nation at large and leaving countries with a welter of unconnected projects. While country governments surely need to put together comprehensive, unified development plans, donors must ask themselves how the initiatives they fund fit into those plans, rather than simply how these initiatives dovetail with their own agenda. The development of health information systems over the next several years may demonstrate just how effectively they are doing that.

Weathering the Recession in Emerging Markets

Vital Wave Consulting's CEO, Brooke Partridge, discussed how to Weather the Recession in Emerging Markets in today's seminar series event. The discussion revolved around:

How is the global recession impacting emerging-market opportunities? Most large developing countries will see a decline in their GDPs this year, but will quickly recover and will grow between 3% to 6% in 2013. India and China are, in particular, the two stars of the developing world, generally and during this recession. Latin America is defying its own history. In previous recessions, the region struggled to bounce back, but, over the last decade, many Latin American countries have implemented better fiscal policies that bode well for the region’s economy. Export-oriented economies in both the developed and developing world have been particularly hard hit by this recession.

Which trends and dynamics of emerging markets remain constant and should be addressed in emerging-market strategies?
Although we are in the midst of a global recession, it is important to keep perspective, there are still a great deal of emerging-market citizens with purchasing power. These individuals may be modifying consumption patterns, looking for less-expensive items and substituting for traditional brands/quality, but there is still significant purchasing occurring in these countries. In terms of purchases, in a series of interviews Vital Wave Consulting conducted with emerging-market citizens, everyone aspired to the three essentials: a stove, refrigerator and television...and increasingly the mobile phone. They felt they had a respectable standard of living with these products in their home.

What are the important aspects of business model design for emerging markets?More than technology or product innovation, business model innovation is the key to accelerating the purchase of products further down the economic pyramid. In recent years some new business models have proven effective for business growth in emerging markets, and they can be considered for application or modification in your own business - these include:

• Pay-per-use
• Smaller quantities for purchase
• Community purchasing
• Financing of even low-cost items Separation of economic buyer and end user

What are the internal dynamics within large companies that can impede success in emerging markets, and are also likely to become even more pronounced during and economic downturn? Many internal dynamics within large corporations are more powerful inhibitors to emerging-market growth than challenges in the markets themselves. And during hard economic times, these dynamics can become even more powerful and require yet more attention to overcome their impact. First and foremost is the issue of incentive structures. For example, growth in emerging markets requires well crafted success metrics imposed on all parties involved in the process to ensure the desired focus and behavior. This includes the sales force.

An audio recording and the sides from this session will be posted on the Vital Wave Consulting website (http://www.vitalwaveconsulting.com/) later this week.

In the interim, we invite more comments and discussion on this topic.

Service/Wireless Device Bundles Have Potential in Emerging Markets

The two largest carriers in the United States, Verizon and AT&T, are ramping up efforts to woo more 3G-service customers by subsidizing already low-cost netbooks. This weekend, Verizon began offering the $300 HP Mini 1151NR for $200 after a mail-in rebate and a 2-year service plan. Service plans range from $40 per month for 250MB monthly download, up to $60 per month for 5GB of downloads. The plan is similar to AT&T’s, which will offer similar deals starting this summer. AT&T and Sprint Nextel (service provider for the Kindle reader) have both created new business units to expand their networks through new wireless devices.

Companies that have attempted to bundle services with wireless devices, both in mature and developing countries, are working hard to find the right business model. In the US, consumers may balk at committing to $1000 to $1,500 in service plans over two years to save $100 on a machine that connects readily (and at no cost) to public Wi-Fi signals, albeit for lower data speeds. In emerging markets, companies like MTS (Russia), Telefonica (Latin America), and Orange, Vodafone, and T-Mobile (Asia and Eastern Europe) have had to find willing, reliable subscribers among consumers with a shallow credit history and a preference for pre-paid mobile phone services.

Nevertheless, several factors make service/wireless device bundles an attractive opportunity in emerging markets. First, the wireless infrastructure in many urban areas is maturing rapidly due to continued investment and a strong competitive landscape, prompting increased demand for mobile web-enabled devices. Second, a comparatively low monthly service charge is a proven method of overcoming high initial capital costs and the lack of easy financing and credit faced by many emerging-market consumers. A decade ago, Telmex radically increased Internet penetration in Mexico by bundling PCs with fixed-line Internet services. And consumers in countries like Brazil and Mexico have amply demonstrated a willingness to buy consumer electronics in installments through retail outlets like Casas Bahia and Grupo Elektra. These retailers are leading candidates for partnership with service providers and device manufacturers, since they have already invested heavily in credit and payment tracking systems. Finally, hardware and software companies may also be supportive of service/device bundles if they get legitimate, branded versions of their products into the hands of a particularly wired sub-segment of the market. Operators will still have to do their homework to identify the right markets and craft pricing and partnership agreements that make everyone happy. But a well-conceived service/wireless device model may be a winning idea for many companies with the goal of increasing their revenues in emerging markets.

Txt to Citizens...

by Karen Coppock
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Citizens across Sri Lanka learned of rebel leader Prabhakaran's death via a text message sent out by the Sri Lankan government. The message was also broadcast on TV.

More than 50% of Sri Lankan's own mobile phones while only around 5% own PCs. This ratio is pretty typical of emerging markets where mobile phones dominate due to their low cost (often facilitated by business model innovations such as pre-paid calling, calling party pays, please call me back services) and utility (in a study Vital Wave Consulting conducted on mobile phones in emerging markets, everyone from maids to dry cleaning store employees to tamale street vendors cited the importance of the mobile phone for their business and earning potential).

When developing solutions for emerging markets, keep in mind that even the Sri Lankan government sees the mobile phone as a key component of its outreach strategy.

Check Assumptions When Marketing to Emerging Markets

Two Harvard Business School professors argued last week that, despite the economic crisis in the United States and elsewhere, companies should not slash marketing budgets too severely, and that even reduced marketing funds can yield good results if spent appropriately. Their formula for success includes staying focused on core customers, combining research efforts with trusted partners, cutting advertising programs selectively, and – of note to Vital Wave Consulting – shifting the research focus to emerging markets.

The professors argue that emerging markets are a better target for market research because “the costs of research in emerging economies are less and the payoff from incremental insight can often be greater. [Also,] brand preferences and consumption levels in emerging markets such as China, India and Brazil tend to be more fluid.” These assertions invite a little scrutiny, however. Research in emerging economies does not necessarily cost less. In developed countries, there are inexpensive tools and a robust market research industry. In emerging markets, the lack of secondary data often necessitates primary research, which can be time-consuming, labor-intensive and costly due to the limited reach of basic research tools such as phone lists and Internet connectivity. It is true that the payoff from incremental insight in emerging markets can be greater; mature markets are much more familiar and there is a great deal more reliable data available. By contrast, many multinational technology companies have less reliable data and know comparatively little about emerging-market customer segments, local languages and cultures, or the business environment. Good research can help companies make crucial decisions on all elements of market entry and expansion. Brand preferences and consumption levels in emerging markets can be fluid, but in some instances brand preference is very steady due to nationalistic support for local heroes (e.g., Baidu’s stubborn market leadership over Google in China). In other cases (e.g., mobile operators), “fluidity” or churn can be ascribed to price sensitivity, unlocked mobile phones and a flurry of new entrants to the market.

The basic argument by the Harvard business scholars is correct – despite the economic downturn, now is not the time to abandon near-term and long-term opportunities in emerging markets. But the companies that realize the most from their emerging-market strategies will be those that allocate appropriate resources to market research, understand the limitations of available data, and address the challenge of overcoming those limits. Knowledge of the market dynamics in emerging markets and a research-supported strategy will save critical time and resources.