OVER the last 15 years, observers, analysts and managers alike have been fascinated by the rapid growth of emerging markets, especially China and India. Many believe that the growth potential of these markets offers a one-of-a-kind opportunity for all firms, multinational or local. Large populations are a clear advantage enjoyed by these countries. Together, China and India account for more than a third of the world's population, and with growing incomes, their market potential can be huge.
Their growth record is also impressive. Between 1979 and 2004, China grew at an annualised rate of 9 per cent, and India at 6 per cent. In 2006, the combined nominal GDP (without adjusting for purchasing power parity or PPP) of these countries was US$3.574 trillion - roughly 27 per cent of the US economy. More importantly, 'Chindia' accounted for 38 per cent of world population, 49 per cent of world iron ore consumption, 55 per cent of world cement consumption and 59 per cent of world vegetable production. According to one estimate, by 2020, China's GDP will be US$12 trillion and India's GDP will be about US$3.4 trillion - together, they would constitute 60 per cent of the US GDP. If current growth trends continue, by 2050, China's GDP would exceed the US GDP significantly while India's would match it.
Low current penetration levels (in terms of ownership of durable goods) is another factor working in favour of these markets. For instance, in 2003, only 0.9 and 1.6 per cent of the population in China and India, respectively, had cars - versus 55 per cent for Japan, 25.7 per cent for Taiwan, 22.7 per cent for Malaysia and 9.1 per cent for Thailand. There is strong evidence of the increase in percentage of car ownership with increasing incomes, suggesting that both China and India's markets have plenty of room to grow.
Operating in Chindia: some misconceptions
Despite the attention received by these markets in the popular press, many misconceptions remain about them. For instance, many analysts and managers tend to view China as a cheap source of low value-added manufacturing and India as a cheap location for low value-added high-tech services (such as software and business process outsourcing) while believing that the size of these markets is rather limited for high-tech goods and services.
Another set of analysts and managers believe that these countries offer large markets for counterfeit goods and limited opportunities for genuine goods, which often come at high prices. Finally, some question whether these markets are characterised by higher levels of risk than what expected returns would suggest. On the other hand, there are also optimists who believe that capturing even a one per cent share of these markets would make a big difference to their overall performance and that achieving this should not be a tall order.
China and India's low average income levels belie the fact that they have plenty of consumers who can buy a wide variety of goods and services - whether low or high- tech. By end-2006, for instance, China had more than 350 million mobile phone subscribers and India is expected to reach this number in late 2008.
As producers, these countries will play an even bigger role in high-tech industries. India's exports of software and technology-enabled services are expected to go up from US$22 billion in 2006 to US$140 billion in 2012. In 2005, high-technology exports constituted 28 per cent of China's total exports and amounted to US$220 billion.
As for the difficulty of operation in these countries and the risk/reward equation, according to one estimate, 68 per cent of US companies in China are profitable and for 70 per cent of the companies, the margins in China are greater than their global margins. The proportion of profitable companies in India is as high as 90 per cent and Indian operations exhibit better profitability than average for 60 per cent of the MNCs.
Finally, while it is true that counterfeits pose a challenge, Chindia offers plenty of opportunities for selling genuine, high-quality (and premium-priced) goods. China, for instance, is the second largest market for Louis Vuitton, the purveyor of high-quality fashion accessories.
The challenging nature of these markets implies that once strong competitive footholds are established, they are likely to be sustainable simply because later entrants would often face similar high entry barriers. In fact, there are several examples of firms that struggle in their home markets but have managed to capture pole positions in Chindia. These include Buick and KFC in China, and Suzuki in India.
While the Chindia market represents a tremendous opportunity, it is clearly not without challenges. In fact, firms rushing in and expecting to easily capture even one per cent market share may get a rude shock. Upon its initial entry into India, even Kellogg's - a company with a wealth of experience of operating in global markets - struggled badly. Its main product, corn flakes, was considered too expensive and inappropriate (too bland) for local tastes.
Integrating Chindia into your strategy
So how can multinational firms integrate Chindia into their global strategy? Here are a few rules of thumb:
1. Be early: In emerging markets, early movers may be able to build brands cheaply, create impregnable positions in the distribution channel and shape consumer expectations - all of which would be difficult for later entrants to match.
Singapore-based Asia Pacific Breweries, which makes Tiger beer, is a classic example in this regard. In China's Hainan province, where it was the first multinational brewer, it commands 80 per cent of the market and its international brands, such as Anchor, enjoy leadership position. The same company has found success to be elusive in the Shanghai market, where it was not the early mover and jockeying for market share is intense. KFC in China and Suzuki in India provide other salient examples of successful early movers.
2. Take the long and broad view: Given the evolving nature of these markets including factors such as the strong role of politics (especially market participation through state-owned-enterprises), multinationals looking for quick returns are likely to be disappointed. On the other hand, those who patiently build their operations are likely to be handsomely rewarded. It is also important that multinationals go beyond a pure local market orientation (as an opportunity to generate more sales) and look at these markets for diverse purposes such as sourcing products/ services/talent; and learn new ideas.
3. Be adaptable: Being a fox is likely to be more rewarding than being a hedgehog. Lack of adaptability has led to many failures. Nestle's bottled water business in China failed because it adopted a centralised facilities-based model resulting in high costs and long delivery times. The business also suffered at the hands of nimble competitors.
Ericsson lost market share on its handset business partly because it refused to deal with cases involving defective products.
4. Don't underestimate local companies: Multinational firms often enjoy strong competitive advantages over local companies in the form of scale economies, technology and brand advantages. Some multinationals, however, run the risk of underestimating local competition. Recently, many Chindian firms such as Haier, Huawei, Ranbaxy and Tata Steel have emerged as important competitors on the global stage.
5. Be an insider: Multinational firms can significantly enhance their chances of success by becoming an 'insider' - a term coined by noted management consultant and writer Kenichi Ohmae. Becoming an insider might include a broad range of strategies including developing a local supply chain, getting involved in the local communities, making extra effort to hire local managers and presenting a local face in promotional and other strategies.
Korean car company Hyundai has become an 'insider' in India. It was early in developing the local supply chain, which has reduced its costs and helped it charge lower prices. It also employs Bollywood celebrities as its spokesmen, which has further enhanced its popularity. In China, Motorola has benefited by being a model corporate citizen by supporting education, environmental protection and also China's bid for the 2008 Olympics.
6. Partnerships: Partnerships offer multinational firms several advantages over going it alone. They can ease the task of obtaining regulatory permissions, fill competence gaps (especially in terms of local knowledge) and give a local face to the multinational entity.
Is Chindia homogeneous?
While the prior arguments have treated Chindia as a homogeneous market, one should not downplay the differences across the markets. China is far ahead in terms of infrastructure, which helps it be 'the factory to the world'. India's weak infrastructure, on the other hand, has meant that it is more competitive in high-tech services (which depend less on physical infrastructure). Both have very different political systems. But despite these differences, the markets are sufficiently similar for the above arguments to be applicable to multinationals seeking to build positions in both countries. Also, with time, the differences will become less salient.
Chindia offers the prospects of significant opportunities and rewards. As Pete Engardio of BusinessWeek has noted: 'Few companies any longer can afford not to engage in China or India. As consumers, suppliers, competitors, innovators, investors and sources of skilled labour, they are reshaping the world.'
The author is associate professor in the Business Policy Department at NUS Business School.
This article was first published in The Business Times on Aug 12, 2008.
