Where are
the most prominent business markets around the world? They are in emerging markets, especially
in the BRICS countries (group composed by Brazil, Russia, India, China and
South Africa). According to
study by McKinsey Global
Institute (MGI) called “Winning the US$30
trillion decathlon: Going for gold in emerging markets”, by 2025, annual consumption in emerging
markets will reach US$30 trillion—the biggest growth opportunity in the history
of capitalism.
In
a series of surveys, MGI interviewed more than 300 executives at 17 of the
world’s leading multinationals. The professionals were chosen from a range of
sectors and geographies. The research was conducted by Yuval Atsmon, Peter
Child, Richard Dobbs, and Laxman Narasimhan.
According to the study, CEOs at most large multinational
firms say they are well aware that emerging markets hold the key to long-term
success, but they also recognize the complexity of seizing this opportunity as well.
The
importance of emerging markets inside multinational companies has been
increasing exponentially. In 2010, for example, 100 of the world’s largest
companies headquartered in developed economies derived just 17% of their total
revenue from emerging markets. “(…) those markets accounted for 36% of global
GDP and are likely to contribute more than 70% of global GDP growth between now
and 2025”, says the report.
However, the authors put on a spotlight on the challenges in order to reach success in emerging markets, and compared the efforts to a decathlon—sport that combine ten track and field events. “Our experience suggests the challenge
in emerging markets more closely resembles a decathlon, where success comes
from all-around excellence across multiple sports”, says. “As with a decathlon,
there’s no single path to victory.”
Over
the past two decades, the urbanization of emerging markets—supported by the
removal of trade barriers and the spread of market-oriented economic
policies—has powered growth in emerging economies and more than doubled the
ranks of the consuming class, to 2.4 billion people. By 2025, MGI research
suggests that number will nearly double again, to 4.2 billion consumers out of
a global population of 7.9 billion people.
According
to MGI’s estimates, by 2025, annual consumption in emerging markets will rise
to US$30 trillion, up from US$12 trillion in 2010, and account for nearly 50% of
the world’s total, up from 32% in 2010. “As a result, emerging-market
consumers will become the dominant force in the global economy.”
In
many product categories, such as white goods and electronics, emerging-market
consumers will represent the majority of the global demand. “Even under the most
pessimistic scenarios for global growth, emerging markets are likely to
outperform developed economies significantly for decades”, says the report.
So,
the business opportunities in emerging markets are vast. More than half of all
global Internet users are in emerging markets. Over the next 15 years, just 440
emerging-market cities will generate nearly half of global GDP growth and 40%
of global consumption growth.
In
Brazil, for instance, social-network penetration was the second highest in the
world in 2010. And a recent McKinsey survey of urban African consumers in 15
cities in ten different countries found that almost 60% owned Internet-capable
phones or smartphones.
Besides,
the scale of the modern exodus from farms to cities has no precedent. In
emerging-market economies today, the population of cities grows by 65 million
people a year—the equivalent of seven cities the size of Chicago, says the
study.
Nevertheless,
for developed-market companies, winning consumers in these new high-growth
markets requires a radical change in mind-set, capabilities, and allocation of
resources, says the study.
In
Brazil, the big metro market is São Paulo state, with a GDP larger than
Argentina’s. “But competition in São Paulo is brutal and retail margins razor
thin”, says the research. “For new entrants to the Brazilian market, there
might be better options in the northeast, Brazil’s populous but historically
poorest region.”
The
diversity of consumer preferences is another challenge for multinational
companies.
China,
for example, has 56 different ethnic groups, who speak 292 distinct languages.
In case of India, the country embraces about 20 official languages, hundreds of
dialects, and four major religious traditions. Brazil is one of the world’s
most ethnically and culturally diverse countries in the world. And the
residents of Africa’s 53 countries speak an estimated 2,000 different languages
and dialects.
To
win in emerging markets, developed-market companies must be willing to embrace
big changes fast. “Those unable to reallocate resources radically risk a
drubbing by local competitors”, says the study. According to research, emerging-market
companies redeploy investment across business units at much higher rates than
companies domiciled in developed markets, and they are growing faster than their
developed-market counterparts.
It’s
important to point that unskilled workers might be another challenge to
companies which are interested in penetrating emerging societies. Skilled
managers are scarce and hard to retain. “Yet there’s no escaping the importance
in emerging markets of making big bets and riding them for the long term”, says
the study. “The investment profile of global consumer products giants that have
established a successful presence in emerging markets indicates an interval of
approximately four or five years until investments pay off. M&A can
accelerate progress.”
