On Business: Off with the old

Emerging economies are stealing the show, but instead of whinging the West should grab the opportunities.

by Antoine van Agtmael, World Business
Last Updated: 23 Jul 2013

A few years ago, we believed that the big competitive threat to older companies would come from the 'new economy', but instead new economies quietly stole the show. We may talk glibly of globalisation and the rise of China and India, but we still fail to grasp the profound impact of the dramatic changes that are happening right before our eyes.

We are in the midst of the biggest shift in the global economy (and global power) since the Industrial Revolution. Then the shift was toward Europe and the US (we have conveniently forgotten that China and India were the world's largest economies before then).

Now the tide is turning. Countries that were basket cases just a decade ago now sit on the bulk of the world's foreign exchange reserves, and exhibit growing confidence and independent taste. Within about 25 years, emerging markets in Asia, the Middle East, Eastern Europe, Latin America and Africa will be larger than the current developed world. I call it 'the emerging markets century'.

Samsung handsets are now more visible around the world than those of Ericsson and its South Korean brand is better known than Sony's; Hyundai cars beat Toyota in the JD Power quality survey; India's Tata Steel took over British and Dutch steel giant Corus; retail stores are packed with Chinese products, while upcoming Chinese brands such as Haier follow Samsung's example. Over the past few years, this new breed of company has crept up on us in a new competitive struggle that is no longer limited to companies from Europe, the US and Japan.

Still viewed with prejudice as second-rate producers of cheap goods, the best of these emerging multinationals are becoming world-class. Samsung, Hyundai, LG, Corona beer and Concha y Toro wine have become recognised brands, but many are still unknown while they quietly make much of what we eat, drink, wear and use, deliberately hiding behind a veil of anonymity. Indeed, more and more of these emerging multinationals will soon become the powerhouses of the future.

Even if we would like to dismiss their success as based on cheap labour and resources, man-made factors have contributed most to their success, including unconventional thinking, daring strategic moves, discovery of a market niche, imaginative adaptation, an obsessive focus on quality and execution, and a dogged pursuit of innovation and better technology.

Companies such as Hyundai, Cemex and Tenaris have become truly global producers with plants in many countries: Hyundai has major car plants in South Korea, the US, India, China and Turkey, while its affiliate Kia is building a large new plant in Slovakia.

Even though many emerging multinationals do not excel in innovation yet, their manufacturing expertise gives them a particular strength in process technology. Samsung Electronics, for example, had more patent applications in 2005 than any European company and spent more on research and development than Intel; South Korean Posco's Finex technology saves energy and cuts emissions in steel making; South Africa's Sasol makes fuel out of coal and gas; and Brazil achieved energy independence by an early focus on making ethanol from sugar.

Fortunately, the new borderless world is not a zero-sum game. Even if emerging multinationals often have the 'home' advantage in these new growth markets, an estimated 1 billion new consumers will be added in emerging markets over the next decade, more than there are in the whole world today. There is a marked contrast between the slow growth in home markets and the rapid growth in emerging markets for companies from IBM to Coca Cola to Tesco and Wal-Mart. A Belgian company provides the technology for Indian windmills, and hi-tech environmental products from Europe are in vogue in emerging markets.

Protectionism only delays and inhibits what is really needed - a creative response focused on innovation and adaptation to the needs of these new customers. Students should not consider themselves graduates until they have lived for a year or more in an emerging market and are comfortable with the culture and language. Companies will need to reinvent their competitive edge by focusing on new designs and technologies, and the fusion between the two. They should do more joint research, form new alliances with these emerging multinationals and find out more about tastes and preferences in these new economies.

Viewing these competitors as a threat is to miss the point. Smart companies will discover exciting opportunities.

- Antoine van Agtmael is chairman and chief investment officer of Emerging Markets Management in Arlington, Virginia, and is the author of The Emerging Markets Century: how a new breed of world-class companies is overtaking the world (2007).

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