Reprinted from Emerging Markets Blog. Original article here.
By David Gates, a senior strategy consultant with 10 years of experience in defining strategy for leading companies in the telecom, media, payments, and insurance industries.
Emerging-market multinationals have become more prominent in the last few years. Last week I reviewed a book that documented the rise of some of these new firms. Business publications, consulting firms, and others also have published reports on the topic.
A lot of this attention is based on anticipation for the future. Currently, only a small percentage of the world’s leading firms are based in emerging markets.
Consider the share of Fortune magazine’s Top-500 global corporations (by revenue) in the four BRICs (Brazil, Russia, India, China): China has 46 (of the Top 500) firms. India has eight. Brazil has seven. Russia has six. Many of these firms are commodity producers, operating on the traditional comparative advantages of their home countries.
The BRICs (as well as other emerging markets) have a long way to go. Developed countries are home to the vast majority of the world’s largest corporations. Spain (40 million people) has 10 of the Top 500 corporations. Switzerland (8 million people) has 15.
Even more glaring is the near-complete absence of emerging market countries from the world’s top brands. They are home to only three brands in Interbrand’s ranking of the Top 100 Global Brands: Samsung (Korea), Hyundai (Korea), and Corona (Mexico).
I believe emerging-market brands will become more common in future lists. They may follow the example of some foreign-based brands that expanded in the US market in recent years. As recently as the 1990s, US-based companies dominated US clothes and furniture sales. Today, H&M, Zara, and IKEA are well-known brands in the US.
Several factors will drive the rise of global emerging-market brands:
1. The rapid growth of emerging-market consumer classes will translate into more clout for local consumer brands. Twenty-plus years of strong economic growth in Chile is contributing to the emergence of an increasingly active consumer class. This transformation has fueled the rise of several Chilean retailers, which are now expanding in several other South American countries. Chile’s example will be repeated on a vastly larger scale in other countries, such as China, India, Brazil, and Turkey.
2. People are younger in emerging markets. Median ages in the West trend above 35 years, compared to under 30 years (and sometimes 25 years) in emerging markets. The West will be home to an ever smaller share of people in their economic prime (ages 25-49). New brands will rise to serve this demographic shift.
3. Access to capital for emerging-market firms is easier than ever before.Many developing countries have built functioning capital markets in the last 20 years. Governments are enabling lower interest rates by keeping inflation in check. Western investors are increasing their capital allocation to emerging markets.
4. Regional demand patterns exist. The developing world’s regions (East and Southeast Asia, South Asia, Latin America, the Middle East, Sub-Saharan Africa) tend to share some broad commonalities in taste that are not well-addressed by Western multinationals. Korean pop music, Mexican telenovelas, and Nigerian “Nollywood”films have regional appeal. It stands to reason that we will see home-region multinationals emerge in other “taste” industries, including fashion and food products.
5. Competitive pressures and scarcity of capital will cause some Western multinationals to retrench. If forced to choose between bolstering home operations or expanding in emerging markets, many Western multinationals will opt for the former. US and European telcos bought up most of Latin America’s wireless licenses in the 1990s and early 2000s. By 2007, however, Verizon, BellSouth (now part of AT&T), and Telecom Italia had sold most or all of their Latin American wireless operations, which included Top 3 players in most key markets.
These and perhaps other factors will fuel the rise of new emerging-market brands in the coming years. It’s probably sooner than later that you’ll find yourself standing next to your (Chinese) car, filling up the fuel tank at the local (Russian) gas station, while en route to the mall to buy that new jacket from your favorite (Brazilian) apparel store.