How to do business in the emerging markets
Hold onto your seats West – it’s about to get ugly. Over the next decade, almost 70% of the global economic growth is expected to come from the emerging markets.
New kids on the block
Yes, the burgeoning streets of Brazil, Russia, India and China (BRIC for short) have become the next business frontier. Leaving the recession relatively unscathed, these developing economies only cemented their role as 21st-century financial powerhouses. Now, every investor half worth his portfolio looks to the BRICs for guidance, ideas and a positive return.
It’s been a good couple of years for business visionaries as well. Those that infiltrated the emerging markets early are now being heavily rewarded for their financial foresight. In fact, plenty of US corporations owe surviving the recent crisis almost entirely to the growth experienced in their non-US markets.
Still, it’s not all sunshine and whatever the Chinese word is for rainbows. Where some thrived, countless other companies have crashed, and not due to a lack of popular demand. In today’s hyper-competitive global economic arena, it’s no longer enough to simply show up.
Overseas expansion has become a coveted business skill, one which requires much more than a general grasp of the developing world. For that reason, it’s important to get closely acquainted with both the pros as well as the various cons of taking your business abroad. So without further adieu:
Why do business in emerging markets?
China’s about to surpass the US in purchasing power, Brazil abounds with natural resources, and India’s GDP growth puts most rich-world economies to shame. Here are some of the main reasons to consider the BIRCs (and a few other countries) as your business’ second home.
According to the IMF, the emerging markets are projected to grow 2-3 times as fast as most developed countries. To large multinational corporations, this comes as little surprise. Over the last few years, the major european firms have typically sourced between 60% and 90% of their overall growth from the emerging world.
Overall, the long-term investments in emerging economies have consistently outperformed their western counterparts in the last 15 years. Naturally, this trend is slowly starting to trickle down to various countries outside the established BRIC circle as well. Bottom line – if you want your business to grow faster, start packing your bags.
Putting all eggs in one basket has never been a sound business strategy. It’s Economy 101: if you exclusively cater to a single financial system, you’re more likely to suffer from market volatility. Doing business in the emerging world means protecting your venture in times of high economic uncertainty. Starting to lose money in your native market? Having the company’s overseas branches remain profitable helps effectively offset some of the losses.
The overall performance of emerging markets has been – in great part – divorced from the latest global economic crisis. As noted, this was the exact reason why so many multinationals appeared recession-proof, despite amassing huge losses in the West.
For a Fortune 500 company, opening new markets is instinctive. In the case of startups and small businesses, however, it’s often considered an all-important status symbol. Running an international company that successfully navigates multiple markets does more than establish trust among customers. It’s an irrefutable proof of concept, demonstrating your entrepreneurial moxie to investors and prospective business partners alike.
Gaps in the market
Unmet needs aplenty in the emerging economies. For one, there’s a variety of basic necessities that still lack appropriate (or affordable) fixes. High demand is present for middle-tier products as well, as many consumers are dissatisfied with available solutions, yet find the high-end alternatives to be too expensive.
Finally, some emerging markets are already home to a booming upper class, with little to no access to a wide range of luxurious goods. This is a classic case of first-mover advantage: the basic scarcity of your product can help snowball your brand into an industry leader.
A variety of verticals is yet to be fully penetrated by the rich-world economies. Although industries like tech, consumer goods and resource exploitation all have significant barriers to entry, many sectors still yearn for foreign capital. If your company works in construction, property or healthcare, you might just want to jump in before it’s too late.
Accessibility of goods and services is another major issue in the developing world. Due to poor infrastructure and dispersed population, solutions to challenges of access are usually in high demand.
Many economists believe that innovative products and services should first be tested in markets with either faulty (often due to price) or nonexistent alternatives. Emerging economies fit that description in more ways than one.
If you believe your startup is truly disruptive, think of developing markets as a giant laboratory for effective product R&D. Furthermore, this is often an ideal place to try out original product features far away from your native competitors.
Easy access to top talent
A median age in India is 27. In the Philippines, it’s 23. Unlike most Western nations, the workforce of the developing world is getting younger by the minute. Due to diminished business activity, top talent in the emerging markets is not only cheap – it’s relatively easy to come by. As long as you can provide a quality working environment and enough room for your employees to grow, you’ll often get to handpick the best and the brightest.
Sourcing young local talent is often essential to your company’s success. Not only are they highly qualified, they tend to be invaluable in helping you understand the local culture, regulations, as well as a variety of business customs.
Challenges of doing business in emerging markets
While there are clearly more than a few reasons to consider expanding your business abroad, it’s much easier said than done.
Too many companies arrive vastly underprepared for obstacles that await in the developing world. Here are some of the most common challenges both small and large-scale businesses face in the emerging markets:
Lack of flexibility
Entering a new market with an open mind is one of the key components of international success. Most companies assume they can pretty much replicate what they did in their home country. This rings especially true in countries that have already adopted major Western brands and services. After all, if McDonald’s made it in India, how different can it really be?
As a result, corporations tend to simply import their native business formulas. Sure, they may lower the price by using local workforce or adapt their product culturally, but the basic profit formulas remain very much the same.
Reluctant to address a variety of demographic and infrastructural challenges, western companies are typically able to sell only to centralised, high-income individuals. In most emerging economies, however, the upper class is still far too slim to ensure a positive return on its own.
Creating a brand new business model often requires drastic changes to overhead costs, profit margins and resource velocity. Needless to say, this becomes a major issue for most traditional, well-established companies. It’s also why we’re seeing more and more startups claiming significant market shares in the emerging economies. Being able to creatively address the local challenges (mainly accessibility and affordability) is essential to gaining a competitive edge in the developing world.
Although less frequently than before, emerging markets are still very much vulnerable to times of high political instability. We have seen the recent crises in Crimea and Ukraine further strain the relationship between Russia and the West. President Obama vowed sanctions against Moscow, while Putin retaliated with a slew of protectionist measures. Caught in the crossfire were thousands of US companies doing business all over Russia. They either suffered severe losses or had to retreat from the market altogether.
That being said, if the EU crisis has taught us anything, it’s that no market is safe from a volatile political environment. These days, political due diligence is often considered a must wherever you think of expanding.
Systematic palm greasing is still prevalent in some emerging economies. India, for example, currently ranks 85th on the Corruption Perceptions Index, with China another 15 places behind. Business corruption takes many forms. While it’s often unlikely that people will ask to be paid off, you’ll quickly start to see even the most basic of tasks taking much longer than they should.
Of course, the best (and the only legal) thing to do is not to engage. However, this may end up significantly delaying your growth and affecting your bottom line. The culture of bribery can quickly frustrate even the most seasoned of businessmen. That’s why it’s crucial to take it into serious consideration before making any expansion plans.
It takes 119 days to open a business in Brazil. To put that in perspective, the current OECD median is 12 days. The emerging economies still suffer from overly complicated rules and regulations, which have yet to adapt to the countries’ astronomical growth. In India, for example, obtaining a construction permit includes 34 separate procedures, and takes almost 200 days on average.
This also makes it increasingly difficult to effectively protect your interests in the court of law. India still ranks as one of the worst countries in the world in terms of enforcing a contract (taking almost four years, on average). China, on the other hand, is notorious for its lax approach to intellectual property rights.
This is why most large companies choose to partner with a local firm or source top talent from the area. Someone with an in-depth understanding of local regulations can often prove irreplaceable to your expansion efforts.
“Tax disputes are as Brazilian as string bikinis or samba”, reads The Economist. Strongly related to mounting regulations and a lack of political transparency, many rich-world companies find it impossible to effectively navigate the local tax codes.
Vodafone, for example, was engulfed in a years-long tax battle with the Indian government. The country decided to retroactively tax one of Vodafone’s overseas mergers, a move the company claimed “violates international legal protections”.
Many have labelled India’s approach to corporate taxation as ‘tax terrorism’. Either way, an entrepreneur used to a reliable set of homogenous laws can soon find himself overwhelmed with the emerging world’s tedious and dispersed tax regulations.
Companies large and small are often reluctant to modify their corporate identity to cater to the local tastes. And while very few value-neutral products can probably get away with it, most businesses will have to make significant cultural concessions to make it abroad.
In North America, Red Bull is often recognisable by its trademark red, blue and silver packaging. In China, however, the Red Bull can looks nothing like its western counterpart. It’s smaller, and rather than silver and blue, red and gold dominate the aluminium wrap. Why? Because in China, red brings good luck, while gold is associated with wealth and happiness.
On the other hand, Holland & Barrett – a healthy food retailer from the UK – crashed and burned in China. They lacked the necessary variety in their products to bridge the cultural gap and even blundered on portioning. Oblivious to its price-sensitive consumer base, they opted for the same containers as in their home country, rather than introduce smaller, less expensive bottles.
Repackaging, rebranding or fully reinventing your product to fit the local niche takes time, expertise and resources. If you’re just planning on parroting your native service, you risk either insulting your target audience, or making them completely indifferent to what you have to offer.
Hitting the BRICs
In conclusion, doing business in emerging economies can be widely beneficial to small business and multinational corporations alike. There’s also more than a few hurdles both will have to overcome in the process.
Knowing exactly what awaits and showing up prepared is key to making it abroad. Unless you’re willing to let go of your established profit models, traditional corporate identity and the innate need for simple regulatory mechanisms, you’ll be back home before you can say Holland & Barrett.