24 Nov Succeeding in Emerging Economies
By Devadas Krishnadas
The future of global growth lies in the potential of emerging economies. BRICS – Brazil, Russia, India, China and South Africa – represent the 5 major emerging markets, which various economists and financial institutions have predicted will dominate the global economy by 2050. For this reason, enterprises seeking growth opportunities naturally want to know how best to activate that potential.
However, governance, regulatory, social and cultural challenges can sometimes impede businesses from committing investments or transforming their investments into commercial success.
There is no silver bullet, nor a one-size-fits-all solution to these challenges. Nonetheless, in this article, I identify 5 key principles as a guide towards investing and operating in emerging economies.
Five Key Principles
1. First, having a deep appreciation of unique market attributes is crucial.
Emerging economies tend to have a mix of unique characteristics, namely: rapid growth, a rising middle class, market volatility and a high projected investment potential. These characteristics make them distinct from advanced economies.
While this can be challenging to investors who are eager to do business in emerging economies but find the divergence in the conditions to be vastly different from advanced economies (where they typically originate from), having a deep appreciation of the specific market and its context is critical, before deciding on any significant commitments.
This is to also avoid making expensive missteps based on superficial assumptions. Conducting an independent market analysis and leveraging the knowledge and experience of a local partner will be one of the key steps.
2. Second, an economy should not be perceived as monolithic.
Market needs vary within an economy, so an acute understanding of this is important and should not be underestimated. As the term “emerging” suggests, these countries are often going through a transitional period marked by rapid urbanisation and high rural-to-urban migration. They tend to have complex and uneven business conditions between urban areas (such as the capital city) and non-urban areas (such as secondary cities, suburban and rural regions).
These complexities and differences are some things that investors need to account for and ‘price in’ when devising their market entry strategy and business operating models. Segmenting the market further can often help to narrow down where to place the emphasis in market outreach and in deciding where to axe or limit the exposure, should the margins be questionable. Thus, an economy should not be perceived as monolithic.
How Unilever Reaches Philippines’ Rural Consumers
Often, in developed markets and urban areas, hypermarkets and large grocery retailers dominate. This is not the case in emerging economies such as the Philippines. Up to 90% of all Filipino retailers are mom-and-pop stores (or sari-sari shops) located within local communities and hard-to-reach villages.
For consumer goods businesses to reach these rural customers, their market strategy needs to target these smaller retail channels. However, doing so would be resource-intensive and costly. To overcome this, Unilever recruits larger stores to effectively become sub-distributors to the mom-and-pop shops. The former gets discounted Unilever products, while the latter gain more access to Unilever’s brands. This has proven to be a successful strategy as it doubled Unilever’s rural coverage and significantly reduced their distribution-related costs.
3. Third, emphasising long-term gains for country investments.
A challenge for emerging economies is that the capital they attract is often a mix of ‘sticky’ capital and ‘hot money’ – which can sometimes be undesirable for the economy. The danger this poses to their foreign exchange, price stability, equity markets and supply chain for essential goods is non-trivial.
Thus, an investor who can persuade governments that they are committed to investments with a long-term horizon and which produce positive knock-on effects – such as job creation, knowledge transfer and human capital development – will be perceived more favourably than speculative investors, even if the latter were to bring with them the prospect of larger sums of capital.
PepsiCo’s $1b Green Investment in China
In 2009, PepsiCo announced that as part of its $1 billion investment into China, it would be opening the first overseas “green” plant. Located in Chongqing city, the plant will conserve 30% of water and 20% of energy compared to its existing plants in China. It created around 1000 new jobs, and this would only be the first one built out of 5 in the next 2 years.
“This plant reflects our deep and long-term commitment to China,” said Nooyi, PepsiCo’s (then) Chairman and Chief Executive Officer. “It is also an important milestone in our green journey, on which we are partnering with the Chinese government, industry and others to continue to promote the health and longevity of our planet.”
In line with its long-term market strategy, PepsiCo also established 8 sustainable demonstration potato farms in China that introduced advanced irrigation technologies to farmers located in the Greater China region. This case shows how PepsiCo contributed significantly to the Chinese economy – through the creation of new jobs, development of suburban areas and advancing agricultural research.
4. Fourth, collaborating with local government to support common goals.
Emerging economies often have weak or immature institutions, meaning they lack the capacity to undertake sophisticated, complex but much needed reforms or setting of national priorities. Examples of such nationwide goals are wide-ranging and can include raising healthcare standards, uplifting general welfare; adopting industrial standards; and ensuring that sustainability considerations are a feature of their economic development, amongst others.
Therefore, partnering the local government and relevant authorities through public-private partnership opportunities to promote capacity building, human capital and knowledge development, are of critical importance. Proactively establishing such relations should also be seen as an investment rather than a cost.
By co-creating solutions with the government to help realise and deliver on these national priorities, it also empowers enterprises to shape the regulatory environment in a way that supports the ease of doing business at large.
Mondelez International Promoting Good Health in Brazil
Mondalez’s brands – Oreo, Ritz, Tiger, Toblerone and Cadbury (to name a few) are widely known internationally and the company has been investing heavily in emerging markets for many years.
In Brazil, Mondalez’s Health in Action plan has enhanced classroom education on nutrition and healthy lifestyles across 1000 schools and 400,000 students. First started in 2010, the program collaborates with local governments and non-profit organisations, and has created over 300 school gardens. These school-based gardens were reported to have improved children’s body mass index, decreased anemia rates and increased vegetable consumption. The initiative has also trained teachers on how they can incorporate physical activities and healthy habits into children’s daily life.
Through funding, training, sharing of information and best practices, this public-private partnership is testament to how a multinational enterprise like Mondalez can contribute to the betterment of a population’s health and nutrition standards.
5. Fifth, partnering industry and private sector players to tap into market knowledge.
Entering a new and unfamiliar market territory is a formidable task, especially so exacerbated in emerging countries with weaker public institutions, rule of law and inefficient bureaucracies, for which businesses have no influence over.
Working with local industry associations and active Chambers of Commerce, who represent the voices of industry players to champion pro-business initiatives, can help lower initial barriers. They can act as effective channels to provide feedback to the government, assist in bridging information gaps (such as regulatory understanding), and help foreign businesses be plugged into the local ecosystem.
Besides trade associations, many foreign businesses choose to form partnerships with reliable and capable local companies too, to leverage their in-depth market know-how, strong supply chain network and industry expertise. Identifying the right local partner for win-win outcomes is essential to pave the path to market entry. Different models such as joint ventures or distributorships may be pursued initially.
When working with local partners, it is critical that the entrant company invests significant time and human capital support to ensure that quality control and brand reputation are upheld. This will require closely guiding the local partner to help build their capacity and expertise.
Starbucks Entry Into India Market Helped by Tata
Starbucks first entered the Indian market in 2012, and a big part of its initial strategy was the joint venture with Tata Global Beverages (Tata) – an Indian firm. This collaboration was a first for Starbucks and allowed it to gain many strategic advantages.
While Starbucks was able to offer the conventional benefits of a multinational firm (technical expertise, huge financial resources, specialised knowledge), their partner, Tata provided valuable local market knowledge and access to local networks in exchange. Starbucks was able to better navigate in what was a previously unfamiliar institutional environment and gain important know-how to run a business in India.
This synergistic alliance has continued till today, with John Culver, group president of Starbucks International and Channel Development remarking that: ”At the core of this experience are our Indian partners…and through their dedication and passion have created a strong foundation for Starbucks as we expand to new cities across India in the years to come.”
It is impossible to generalise and address all the challenges that will arise when first setting foot in emerging markets, but these 5 principles can serve as a general guide to increase your prospect of success in your organisation’s market entry and operational strategic goals.
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