Emerging markets have driven growth for many multinational corporations (MNCs) for years, and they will continue to do so. But these are turbulent times as commodity prices plunge, currencies are devalued, and equity markets gyrate. The profitability of many MNCs’ operations is already under attack, and future performance will be challenged by slower macroeconomic growth, increasing costs, and heightened competition from local companies, which are rapidly gaining scale, experience, and capability. To reduce these pressures, companies will have to focus much more on improving their competitiveness through constant productivity gains.
Most MNCs have emphasized growth in emerging markets at the expense of other metrics, such as operating margins. Shifting the emphasis to include profitability requires implementing process discipline, leveraging scale, and instituting behaviors that focus on constant efficiency gains. Such changes are not easily achieved. For many MNCs, a fundamental transformation will be necessary, executed market by market.
The Changing Nature of Growth and Competition in Emerging Markets. For years, the BRICS (Brazil, Russia, India, China, and South Africa) were synonymous with broad-based, rapid growth. Not anymore. Data for 2015 from Oxford Economics shows China’s GDP growth slowing to 6.5%, South Africa eking out a percentage point or two, Brazil flat, and Russia actually contracting. Growth in other emerging markets, especially those with commodity-dependent economies, has slowed as well. The economics of emerging markets are also becoming more challenging. China is losing its cost competitiveness in exports thanks to rising labor costs, as well as higher energy costs than those in countries such as the U.S. and Mexico. China has plenty of company: the cost advantages of Brazil, Russia, Poland, and other countries are also diminishing.
Despite the slowdown, this is certainly not the time for MNCs to retreat; if anything, it may be a good opportunity for reengagement, as we have observed before. (See “Time to Reengage with, Not Retreat from, Emerging Markets,” BCG Perspectives, May 2014.) Some 300 million additional households will enter the consuming class in emerging markets during this decade. The populations of less developed countries are still growing four times faster than those of their developed counterparts: by 2020, 6.4 billion people (out of 7.5 billion worldwide) will be living in emerging markets. These economies will add more than 600 million urban dwellers between now and 2020. An increasing number of free-trade agreements will help contribute to sustainable economic growth. Still, these markets present big challenges for MNCs—the biggest having to do with competition, costs, and shifting relationships with key stakeholders such as employees and governments.
Competition. Most MNCs now face a fast-rising number of agile and aggressive local competitors that are winning share in many industries. The number of companies in Asia with more than $1 billion in annual revenues jumped sixfold to 1,015 between 2003 and 2013 and doubled in Latin America, Africa, and the Middle East to a total of almost 700. And these are not only companies making simple low-cost products or commodity components; many are in sophisticated segments of the engineering and manufacturing sectors. For example, emerging-market-based companies now control between 30% and 80% of the global markets for rolling stock, onshore wind-power equipment, coal power-generation equipment, wireless telecommunications equipment, and photovoltaic equipment. Their competitive prowess is typically rooted in three factors: a significant cost advantage owing to small overheads, lower wages, and lower R&D costs; a deep understanding of local markets and strong relationships with local stakeholders, including both customers and suppliers; and a nimble and aggressive corporate culture, which enables quick decision-making and significant risk-taking.
As the search for growth pushes many MNCs into middle markets in emerging economies—where they seek new middle-class consumers in B2C businesses and small-business customers in B2B—these companies run head-on into local competitors. Middle markets are tough, and in our experience most MNCs have struggled to make money in them. Prices are often only 50% to 70% of those in “high end” markets, where MNCs have traditionally focused. In mobile handsets in Asia, for example, local (mostly Chinese) competitors have erased profits in the lower price segments. In banking, new local operating models based on digital or mobile technologies are constantly pushing down price points. And in many infrastructure projects in emerging markets, competition from local companies has made it much harder for global players to bid successfully.
More: BCG Perspectives
Authors: Christoph Nettesheim, Lars Faste, Dinesh Khanna, Bernd Waltermann, and Peter Ullrich