Bookshelf: Local competition

Large Western multinationals ignore the threat from emerging markets at their peril.

by Nenad Pacek, World Business
Last Updated: 23 Jul 2013

Books on anything relating to emerging markets are rare, and useful books on the topic even more so. The good news is that Antoine van Agtmael's The Emerging Markets Century is an illuminating addition to this growing pool of knowledge. Van Agtmael is a long-standing emerging markets enthusiast and investor.

He recognised more than 35 years ago that the rise of the then Third World markets would be forceful and unstoppable, resulting in a tide of lucrative commercial opportunities. In the opening pages, he reminds us that he coined the term 'emerging markets' in the autumn of 1981, while he was working on ways to persuade leading investment managers to invest in a Third World equity fund.

About two thirds of the book is dedicated to describing 25 'world-class' companies from the emerging markets. Some of these names will be familiar - Samsung, Lenovo, Infosys, Embraer, Cemex; others less so - Chilean winery Concha y Toro, Argentinian oil pipe manufacturer Tenaris, Taiwanese shoe manufacturer Yue Yuen.

What distinguishes them is that they all compete well globally. Not so long ago, you could look long and hard around emerging markets and not find any truly world-class companies. Over the next decades, and most certainly this century, predicts van Agtmael, there will be many more emerging markets companies rising from obscurity to world-class status.

Van Agtmael and his team have researched these companies on-location (as any serious investor should do but rarely does), so they have a deep understanding of where they have come from, what they do now and what one can expect from them in the future. This is clear throughout the book.

Two groups of readers will benefit from The Emerging Markets Century. First, portfolio investors can learn not only why they should invest in some of those 25 companies, but also how to recognise the newcomers and the best practice for successful investment in emerging markets companies. Van Agtmael identifies a number of 'emerging market twists' that new corporate players adopt to improve their global competitiveness; for instance, chameleon firms adapt and change in order to move up the value chain.

The same toolkit will also be valuable for the second group of readers - executives from Western multinationals who face local competition in emerging markets but also increasingly on their home turfs in the US, Western Europe and Japan.

This is at the core of the book: time and time again, large Western multinationals ignore local competitive threats and assume they will be market leaders in China or Russia simply because they are market leaders in their home markets. They end up disappointed and frustrated when they realise how tough it is to beat a formidable local competitor.

Many emerging market multinationals are challenging Western multinationals just about everywhere on the planet. Lenovo's acquisition of IBM's ThinkPad was one of the most powerful manifestations of this role reversal. Emerging markets companies often leapfrog, thanks to new R&D and innovation. Chinese white goods manufacturer Haier is a great example of a company that pretty much invented the market segment in which it operates. Brazilian aircraft manufacturer Embraer successfully developed a 'reverse outsourcer' strategy in which it retained manufacturing in Sao Paulo, while sourcing the best and cheapest components from the global market.

This book is a forceful wake-up call to existing corporate and government prejudice and arrogance. But it does have a couple of shortcomings. First, some critical readers might be forgiven for thinking that it is nothing but a smartly packaged sales pitch for companies that van Agtmael's investment fund might already own.

Second, the title of the book does not really correspond to what one finds inside. Readers could expect to see analysis of why and how certain economies will catch up with today's developed world and how the latter will respond. Instead, the book is more a series of case studies, albeit all relevant and interesting.

Finally, there are also a couple of factual mistakes. Emerging markets are growing nearly three times as fast as developed economies, not twice as fast, as the book says. And they account for almost 30% of global GDP rather than 20% (and at purchasing power parity more than 50%). But all in all, this is a useful book and its strengths outnumber its weaknesses.

The Emerging Markets Century, Antoine van Agtmael, Simon & Schuster, £20, ISBN: 1-84737-030-6.

Nenad Pacek is vice-president of the Economist Intelligence Unit and author of Emerging Markets (2004).

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