The Emerging Markets Century

How a New Breed of World-Class Companies Is Overtaking the World

Antoine van Agtmael

• Publisher: Simon & Schuster UK
• Year: 2008
• Print ISBN: 9781847370310
• eBook ISBN: 9781847375148
• Topic: Business
• Subtopic: Business General
• Index: Business

A new breed of powerhouse companies from the emerging markets is catching their Western competitors off-guard. Household names of today - IBM, Ford, Wal-Mart - are in danger of becoming has-beens as these more innovative superstars rise to dominance, representing both an urgent competitive challenge and an unprecedented investment and business opportunity. Understanding how they have become world-class market leaders - and where they are going next - is crucial to an understanding of the future of globalization. Training his brilliant investor's eye on the top twenty-five of these emerging market companies, visionary international investment analyst Antoine van Agtmael takes readers into the boardroom suites and labs where they are outmanoeuvring their Western competitors. He reveals how these companies have made it to the top of the global heap, profiling major players such as China's Haier appliance manufacturer; Korea's Samsung; Brazil's Embraer jet maker; and India's Infosys. Divulging their strategies for future growth, he analyses how their rise to prominence will change our lives. His unique insights reveal both how we in the West can capitalize on the opportunities these companies represent while also mobilizing a powerful response to the challenges they present.

Part I

Globalization
has No Borders

“World history, with its great transformation, does not come upon us with the even speed of a railway train. No, it moves in spurts but then with irresistible force.”¹

—OTTO VON BISMARCK

Chapter 1

Who’s Next?

How emerging multinationals you’ve never heard of could eat your lunch, take your job, or possibly be your next business partner or employer

For a few minutes, I held the future in my hand. Suddenly my Blackberry looked like a Model T Ford. I was trying out a prototype of a new third-generation cell phone. It certainly looked stylish, but more intriguing was the fact that this was a video phone that actually let me see the person on the other side of the line. And that was not all: on a bright screen that easily fit in my pocket, I could check local traffic, watch breaking TV news, and play interactive group computer games. Naturally, I could access the Internet, email, update my calendar, and listen to downloaded CDs. This was a smart phone indeed.

Was I visiting Verizon, Apple, or Nokia? No, it was January 2005 and I was standing in the research lab of High Tech Computer Corp. (HTC), a Taiwanese company that with its 1,100 research engineers had invented the iPAQ, sold it to Hewlett Packard, and gone on to make a successful series of state-of-
the-art handhelds and smart phones for the likes of Verizon, Vodafone, Palm, and HP. All around me were young, smart, ambitious engineers from Taiwan and China, hard at work testing everything from sound in a sophisticated acoustics studio to new antennas, drop impact, and the scratch resistance of new synthetic materials. Designed in Taiwan, these high-tech video phones would shortly be mass produced, and one day soon sold around the world.

I was not just looking at the prototype of a new smart phone, but making a pilgrimage to the prototype of a new kind of company—savvy, global, high-tech (as its name suggests) and, most importantly, well ahead of its nearest competitors even in the United States and Europe. My experience at High Tech was not as unusual as you might expect. For thirty years I had been visiting little known companies all over Asia, Latin America, Eastern Europe, and Africa, convinced of the long-term potential of these unknown markets and companies even if few firms or economies were as yet globally competitive. Managing an investment portfolio that has since grown to over $16 billion has only confirmed my belief that just as conventional wisdom wrongly depreciated emerging markets twenty-five years ago as “Third World,” today’s all too common error is to underrate the leading companies from these markets. Largely unnoticed in the mature economies, the firms profiled in this book have succeeded against the odds and become battle-hardened survivors of tough crises and Darwinian competition. With the rising power of China, India, and other emerging markets, and the resultant shift of consumer demand from the West to these markets’ exploding middle class, we have now formally entered the Emerging Markets Century.

The Emerging Markets Century

Instead of being peripheral, as they have been since the first Industrial Revolution,¹ key economies of the former Third World will soon reemerge as the dominant economies of the future. In about twenty-five to thirty years, the combined gross national product (GNP) of emerging markets will overtake that of the currently mature economies (see table). Although comprising about 85 percent of the world’s population, low per capita incomes in many emerging markets have kept their share of global GNP to about 20 percent. But this ratio is bound to change as the emerging economies continue to grow at a rate nearly twice as fast as their more mature cousins. This second industrial revolution will constitute nothing less than an economic landslide, causing a major shift in the center of gravity of the global economy—away from the developed to emerging economies.

Emerging markets will catch up

Sources: World Bank Atlas; JP Morgan; Goldman Sachs, BRICS Report, author’s estimates

The Rise of BRICS and other Emerging Markets
in the Global Economy (In Trillions)

Source: Author’s calculations based on Goldman Sachs projections for the four BRICs and eleven other major emerging markets and J.P. Morgan data for other countries. Goldman Sachs assumes that growth in emerging markets will slow and exchange rates in these markets will generally appreciate as their purchasing power increases, as has been the general experience in economic history.

According to Goldman Sachs projections, just four of the largest emerging markets (known as BRICs, for China, Brazil, India, and Russia) will overtake the seven largest industrialized countries, the G7 (United States, Japan, Germany, France, UK, Italy, and Canada) by 2040.², ³ Including the next group of eleven major emerging markets,⁴ the fifteen leading emerging markets will together be larger than the G7 soon after 2030. Their combined GNP is projected to reach $41 trillion, compared with the G7’s $43 trillion after taking account of a probable slowing in China to less than half its current growth rate. Adding in the remaining developed and emerging nations, my own projections show that emerging markets as a group will overtake the developed world by around 2030–35. By the middle of this century, the emerging markets, taken in aggregate, will be nearly twice as large as the current developed economies.

A new breed of companies will play a critical role in producing this shift, a select number of which truly deserve to be regarded as world class. In the face of these firms’ vigorous emergence onto the world stage, there will be a temptation to go into protective panic mode, as some American politicians began to do after Chinese companies made a few runs at long-established Western brands, and as European politicians did after Mittal Steel, the world’s largest steel group with its Indian-born CEO, made a strong takeover bid for #2 steelmaker Arcelor, a major European conglomerate. But if we fall prey to a defensive response, we do ourselves a profound disservice by ignoring potentially attractive opportunities for business partnerships and investments. Anyone who wants to play in this global game needs to know the strengths and weaknesses of the players on the opposing team.

During that same multiweek tour through Asia, I visited a number of other corporations that would surprise those who still regard “Third World” companies as raw material producers or imitative makers of cheap electronics. I toured Bumrungrad hospital in Thailand where patient information is entirely paperless (in sharp contrast to even the most advanced hospitals elsewhere in the world) and to which hundreds of thousands of patients from all over the globe flock each year for treatments ranging from heart operations to cosmetic surgery, all obtainable at a fraction of the price in the United States. I spoke with petrochemical engineers no longer interested in producing cheap polyester but focused on developing sophisticated new synthetic materials. I listened to researchers speak excitedly about applying nanotechnology to flexible computer screens that could be folded and rolled up. And most importantly, I tested out a whole host of new products that based on the quality of their design, sophistication of function, and durability, were equal if not superior to competing products made in the United States, Japan, or Europe.

The broader phenomenon I had witnessed during my sojourn to the future could, of course, be loosely labeled with the tired term “globalization.” But as Moises Naim, editor of Foreign Policy magazine, not long ago observed to me, “Globalization is not an abstract notion but driven by real actors who are pushing these changes.” He has a point. It was plain as day that a number of the companies I visited on my last trip were no longer bit players, but leading actors, even budding international superstars, on this new global stage.

By now we have all heard ad nauseam about globalization, the startling rise of the Asian Tigers, China and India as economic powers, outsourcing and offshoring, both pro and con. Yet in the “West” (as the developed nations of the United States, Europe, Japan, Australia, and New Zealand continue to be conveniently, if not correctly, called) we go on clinging to the comforting notion that at least “our” top companies continue to lead the world—in global presence, in technology and design, and above all, in brand recognition and marketing prowess. But is this still true? Are the leading corporations headquartered in Korea, Taiwan, China, India, Brazil, Mexico, and Russia really so far behind their counterparts in the industrialized West? Can we consider our complacency—occasionally shattered by periods of anxiety verging on panic—justified at a time when:

• Korean Samsung’s powerful global brand is now better recognized than Sony’s, its R&D budget is larger than Intel’s and its 2005 profits were higher than those of Dell, Nokia, Motorola, Philips, or Matsushita.
• The regional jets we fly are made by Embraer in Brazil.
• Mexico’s CEMEX has become the largest cement company in the United States, the second largest in the UK, the third largest globally, and the leader in many other markets.
• Computers are now not just made but largely designed in Taiwan and China.
• We get most of our advice about how to fix those computers from India.
• Russia’s Gazprom’s gas reserves are larger than those of all the oil majors combined and its market capitalization rivals that of Microsoft. Europe would freeze in the winter without its gas supplies, as was pointedly demonstrated when it briefly turned off the tap. Meanwhile, Russian Lukoil’s gas stations (bought from Getty Oil) can be found near the White House, the New York Stock Exchange, and all along the East Coast.
• Modelo, a Mexican company, sells more beer (Corona) to Americans than Heineken. And a Brazilian CEO became head of Inbev-Ambev, the world’s largest beer company, in a merger in which “old” European beer companies were amazed at the efficiency of their Brazilian partners.

That is not all—not by a long shot. Today, Korean engineers are helping U.S. steel companies modernize their outdated plants. New proprietary drugs are being developed in Indian and Slovenian labs no longer content to compliantly turn out high volumes of low-cost generics for resale in the mature economies. New inventions in consumer electronics and wireless technology are moving from Asia to the United States and Europe, as opposed to the other way around.

Often overlooked when people speak glibly of “globalization” is that a new kind of firm is fast arising and flexing its muscles in the nations of the former Third World.

The era of emerging markets companies being nothing more than unsophisticated makers of low-cost, low-tech products is rapidly coming to a close. Something different and dynamic is happening in these new economies, blessed with robust rates of growth our mature economies can only envy. What is often overlooked when people speak glibly of globalization is that a new kind of firm is fast arising and flexing its muscles in the nations of the former Third World. These companies frequently serve dual roles of competitor and business partner with established First World multinationals. It would be naïve for us to dismiss them for deriving their competitive advantage “unfairly” from “cheap labor.” More often than not, factors other than price or cost have been the prime determinants in their arduous climb to world-class status. Chief among these “man-made” factors are: (1) an obsessive focus on quality and design, (2) brand building, (3) logistics, (4) being ahead of competitors in adapting to changing market trends, (5) acquisition savvy, (6) sustaining an edge on competitors in information technology, (7) clever niche strategies, and (8) unconventional thinking. These companies and their leaders represent the next big economic superstars of the Emerging Markets Century.

The era of companies from emerging markets which were nothing more than unsophisticated makers of low-cost, low-tech products is rapidly coming to a close.

The Invisible Champions

It is time to start getting used to the idea that the household names of today—whether we are speaking of IBM, Ford, and Wal-Mart in the United States; Philips, Shell, and Nestle in Europe; or Panasonic, Honda, and Sony in Japan—are in danger of becoming the has-beens of tomorrow. After all, most of us were blissfully unaware that companies from emerging markets were already playing a major part in our lives. They make much of what we eat, drink, and wear, in addition to providing us with energy and raw materials. Fifty-eight of Fortune magazine’s top 500 global corporations are headquartered in emerging markets. Many of these are not less but more profitable than their peers in the United States, Europe, or Japan. Emerging world-class multinationals have a number of things in common. They

• Are widely recognized as leaders in their industry on a global, not just national or...

Table of contents

• Cover
• Copyright
• Contents
• Introduction: The Emergence of Emerging Markets
• Part I: Globalization has No Borders
• Chapter 1: Who’s Next?How emerging multinationals you’ve never heard of could eat your lunch, take your job, or possibly be your next business partner or employer
• Chapter 2: Against the OddsThe strategies that propelled twenty-five emerging multinationals into world-class corporations
• Part II: The New Breed: Twenty-Five World-Class Emerging Multinationals
• Chapter 3: From Under the Radar Screen: Building Emerging Global BrandsSamsung and Concha y Toro are setting new trends
• Chapter 4: Other Roads to Brand Leadership: Buy It or It May Drop in Your LapLenovo buys IBM ThinkPad, Haier tries to buy Maytag, and Corona Beer has its accidental iconic brand
• Chapter 5: China’s Largest Exporters…Are Taiwanese: Building a Global Presence Behind a Veil of AnonymityHon Hai and Yue Yuen make your computers, cell phones, and shoes
• Chapter 6: From Imitators to InnovatorsTaiwan’s TSMC and High Tech Computer win by reinventing industries and products
• Chapter 7: Your Next Global Employer?Hyundai and CEMEX want to be close to their customers everywhere
• Chapter 8: Turning the Outsourcing Model Upside DownBrazilian plane maker Embraer stays in the driver’s seat with suppliers in the developed world
• Chapter 9: Commodity Producers that Redefined their IndustriesAracruz, CVRD, and POSCO defied conventional wisdom…and the odds
• Chapter 10: Alternative Energy ProducersSouth Africa’s Sasol makes oil out of coal and gas, Brazil’s cars use biofuels, and Argentina’s Tenaris makes pipes seamless enough to be used deep under the ocean or in Arctic climates
• Chapter 11: The Revolution in Cheap BrainpowerIndia’s Infosys and Ranbaxy transform the worlds of software design and generics
• Chapter 12: New Global Media StarsMexico’s Televisa, India’s Bollywood, and Korea’s game makers appeal to worldwide audiences
• Part III: Turning Threats into Opportunities
• Chapter 13: A Creative ResponseDon’t be defensive or stick your head in the sand—develop new policies and strategies
• Part IV: An Investor’s Resource
• Chapter 14: Investing in the Emerging Markets Century: Ten RulesA long-time investor looks at pride and prejudice in emerging market investing
• Appendix: Financial Profiles of 25 World-Class Emerging Multinationals
• Notes
• Bibliography
• Acknowledgments
• Index