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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Don’t Expect India to Lead (Yet) …

Right now, as the global economy looks increasingly fragile, people are eager to find reason to be optimistic because of what is hopefully happening in other BRIC nations.  This in part explains much of the recent PR around Indonesia as a potential replacement for India in the BRIC acronym.  One country that many are hopeful about is India, even though the last year has not been kind to the country.  Inflation, GDP slow-down, political turmoil, uncertainty over necessary FDI reforms, and now a brutal power outage.

CNBC’s article on the recent power outages did a good job capturing why this is such a problem for India and why for all the great good the county could do for the global economy, it just isn’t yet ready for this:

Thomas Byrne, senior vice president at Moody’s Investors Service, said the recent blackouts may hinder new investment into India.

“This (the recent power crisis) will have a chilling effect on whether new people want to take advantage of India’s long-term growth potential,” he said.

Foreign direct investment into India has been in the decline, falling 38 percent over April to May, compared to the same period last year, with regulatory uncertainty and policy flip-flops deterring investors.

China certainly has its own share of problems in the area of its electrical grid, but a problem of this magnitude at this stage in India’s development isn’t something that can be overlooked.  The country’s vibrant democracy has to do more than just add color to the global conversation about the role of democracy in economic reforms, now it has to prove that its model is capable of identifying problems and coordinating actions to deal with the country’s problems.

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Warning Signs – India’s GDP Slowdown

Earlier this week, news outlets announced India’s GDP growth had dramatically slowed down to 6.5%, the slowest growth in a decade for one of the key countries in the now-ubiquitous BRIC group.  Thus far in 2012, the Indian rupee has lost 1/5th of its value against the American dollar, reflecting ongoing concerns about the Indian economy as well as the country’s ability to push through the next set of economic reforms outside investors are waiting to see.  The VOA wrote this week, that Prime Minister Manmohan Singh announced that “India will formulate an economic revival plan to tackle a loss of investor confidence as the country’s economic growth dips to its slowest pace in nearly a decade … Singh has called on officials to take measures to revive the ‘animal spirit’ in the country’s economy and reverse a climate of pessimism.  His remarks came after taking charge of the finance portfolio from Pranab Mukherjee, who stepped down earlier this week as finance minister to run for president.”

These concerns aside, both IKEA ($1.9bn to open 25 stores) and Coca-Cola ($5bn by 2020) have made recent announcements about making significant investments into the country, a sign that each believes the country remains a good opportunity for them to expand their businesses.  Both of these investments are important, not only because they are symbolically significant as a sign than MNCs continue to desire a presence in India even given the uncertain political climate and the slowing economy, but also because they illustrate that certain types of foreign businesses (specifically single-brand retailers) can be wholly owned by foreign investors in India versus regulatory limits on how much foreigners can own of multi-brand retailers in the country.  For those not familiar with this challenge, I have written extensively on these issues here, here, and here.

The Economist notes,

“The promise of a push on reforms has been made—and broken—consistently by the government for years. With a busy electoral timetable up to general elections in 2014, it may be harder to fulfill than ever. Still, others, stepping back from the hurly-burly, can see a silver lining in India’s great wobble, particularly the fall in the currency. T.C.A. Ranganathan, the chairman of Exim Bank of India, which finances trade, says: “The exchange rate has moved in our favor. I’m fairly happy.” He reckons a weaker rupee will help spur a long-awaited boom in manufacturing. Kaushik Basu, the government’s chief economic adviser, no slouch on the need for reform, agrees. A cheaper currency means India is “getting an advantage for our export sector”. Perhaps, in time, that may prove more important than today’s firefighting.”

 

Over the last two weeks, the world has seen a spate of articles on China’s slowing economy, ongoing concerns about China’s banking and real estate sectors, as well as earnings announcements from bell-weather companies like P&G, Nike and Ford, each of whom has pointed to slowdowns in their emerging economy portfolios that have led to inventory build-up and decreased profits.  India adds another dimension to these concerns, not only because its economy remains one of the key elements to the BRIC formulation, but also because India must make similar economic reforms as China needs to, many of which some outsiders are doubtful India has the ability to make.  Because many pundits have similar concerns about China, and in some cases have given up their hopes that China will make these necessary reforms, India’s ability to step up and see these reforms through would send an important message to investors around the world that the BRIC conception is still viable.

Conversely, if – as the Economist points out relative to India’s history – the country does not have this ability, it could well be that India’s relative open-ness and transparency (at least when compared to China’s opaque banking system) might be the first signal of something fundamentally wrong within the BRICs.  Keep in mind that as Carl Walter and Fraser Howie has written in their book Red Capitalism, a banking crisis in China can be masked over much more easily and for a longer-period than in any other country simply because of the role of the state in managing banks.  Consequently, by the time we are aware of a problem in China’s banking system or economy, it will be too late.  This is why many continue to watch India’s economy for signs of problems that other emerging economies and BRIC nations might be experiencing that India will be the first to manifest.  India’s debt-to-GDP percentage is 68.05%, a number that many analysts are beginning to grow uncomfortable with (keep in mind that beleaguered Spain has a debt-to-GDP of 63%).  The world is at a point in time where one of the last hopes we all have about how to sustain the global economy now rides on emerging economies:  if countries like China and India do not have the ability to make the necessary reforms they need to in order to continue attracting foreign investment and growing their middle classes, we could well be only mid-way into a global contraction and de-leveraging process that the 2008 financial crisis set in motion.

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In Case You Needed a Reminder …

Of why so many otherwise rational and grounded economists and businesspeople are so excited about the opportunities within emerging economies, viewing this graph should be helpful.  From Michael Cembalest, the Global Head of Investment Strategy at JP Morgan, the below graph illustrates the share of global GDP each country has represented since Year 1.  A couple of points to draw out of this.

First, as Derek Thompson of The Atlantic points out, the relationship between population and GDP needs to be understood:  the Industrial Revolution changed how these two were related to one another.  Prior to this, economic output was directly tied to population; after, economic output could outpace population growth.  One question this brings to mind is what happens when the most populous countries in the world catch up to the level of industrial modernization more developed countries possess.  The downside risks are those environmentalists and analysts focused on raw-material constraints are most concerned with; geopolitical issues related to similar levels of industrialization but widely divergent populations could easily set in motion the sort of “fear of inevitable superiority” that led Germany to attack France and Russia in World War I, except this time predicated on extreme economic insecurities felt by Western Europe and the United States towards a country like China.

The upside potential to this graph is the one every businessperson needs to understand:  developed economies are not going to be in the global economy’s driving seat much longer.  The share of world GDP that countries like China and India will likely ultimately come to account for are likely to, absent global war or encountering a new economic paradigm like a Chinese or Indian version of the Mexican middle income trap, return to historical norms.  This means that it is more important than ever to have a strategy in play for accessing these markets.  The historical narrative is clear and compelling, the question is how best to access these markets as they make their transition from emerging to semi-developed economies.

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Market Access for Pharmaceutical and Medical Device Companies in Asia-Pacific

As part of today’s Next Level Pharma event in Singapore, my recap of Wednesday’s discussion and my thoughts on what the key challenges are for pharmaceuticals, medical device, diagnostic and healthcare providers in the APAC region. More at Wednesday’s AsiaHealthcareBlog here.

On Thursday, the conversation turned to China’s healthcare reform process and how it has already illustrated the ease by which the nation’s Central Government and multiple ministries can work at cross-purposes both with one another, and with the more local needs of the provincial leaders. More on how this process has worked at today’s Asia Healthcare Blog post.

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“Delight, Don’t Dilute”

Today while at a NextLevel pharma event in Singapore, we heard a superb presentation by Sameer Desai of GSK’s healthcare business.  Sameer comes at emerging markets with a unique point of view that builds on a concept of what he describes as “delight, don’t dilute.”  For those familiar with what I’ve written about earlier, much of what he describes has to do with design for the bottom of the pyramid, or what has been described as “frugal engineering.”  His perspective offered some very specific insights into what this concept means, the best example of which is Nokia’s efforts in India.

Nokia’s India cell-phone business may be one of the best examples of frugal engineering and bottom of the pyramid commercialization strategies ever developed and successfully developed anywhere.  Led by Jan Chipchase, Nokia’s former Chief Usability Researcher (his TED video here shows how his background as an anthropologist has been relevant to his work at Nokia).  What Jan discovered when they went out into the field were the following boundary conditions that needed to inform what Nokia developed.  They were as followed:  an illiterate customer base, the phone would be the first of the family and in many cases the community as a whole, most villages would have irregular power supplies, the radio was their key source of entertainment, and the phones would have to survive in a dusty and noisy environment.

That is quite the combination of needs and obstacles.  What came of Nokia’s research was a phone that offered the following:  a dust resistant keyboard with a rubberized shell-shock proof shell (farmers were going to be rough on the product), 5 different address books (mom and dad might share one, and another family member or someone else from the community could have their own), a 22 hour standby battery life, a built in FM radio with an integrated loudspeaker (this allows the farmers to take one less appliance into the field and further encourages user adoption as they can take one device and accomplish two common objectives during their work day), a built in flashlight (ditto!), a speaking clock in local languages, and loud MP3 ringtones.  All of this was done with a product that was profitably sold for less than $30.

The result?  Nokia has now sold over 250m of these phones around the world, primarily in emerging economies.  User adoption has allowed Nokia to access complimentary revenue streams (Nokia’s Lifetools, Nokia Money, and OVI email).  Nokia discovered that once bottom of the pyramid customers bought a Nokia phone, they became very brand loyal.  Keep in mind that while one could make a very conceptual argument that what Nokia has leveraged in part is “aspirational marketing”, I would argue this is not what has driven Nokia’s success in India.

Rather, what Nokia has discovered is that by doing good on-the-ground research of how potential customers live, the challenges they face, the needs they have in common, their engineers and product development people can design a custom solution for this segment of the market, an insight which is key to what Sameer called “delight, don’t dilute.”  It’s a simple but profound insight that success in bottom of the pyramid markets isn’t simply about dumbing down or somehow economizing an existing product; many times it is about embracing your customers where they are and creating delight for them just as you would in more evolved markets.

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Bag of Links

From the past week, important and interesting happenings in the world of emerging markets:

Bloomberg paints an interesting picture of what early-entrants into Africa are hoping to accomplish as the commodity boon wanes and the nascent evolution of Africa’s consumer economy attempts to take the next step.

FT’s Beyond BRICs blog reports on the correlation (or would this be more appropriately termed “causation”) of Air India electing to train its domestic airline pilots on the new 787 and a spate of “sick days” called in by hundreds of the airlines international long-haul pilots!

P&G announced that it was moving its hub for the company’s personal beauty product line from Cincinnati, Ohio to Singapore.  If that doesn’t speak volumes on where they see their future growth coming from, then nothing does.

Huawei is being more public about their desire to move out of the back-office IT infrastructure space and the captive manufacturing of handsets into their own branded lines.  It’s a reminder that success in an emerging economy (for Huawei, their own domestic market) is going to seed competitors in developed economies.  It’s a process that gives as good as it gets, and one that American and European companies have to keep front of mind when they think about why they need to be proficient within emerging economies.

China Hearsay ponders whether Coke’s recent problems in China were the result of not having a proper crisis management plan in place, or simply not following the plan that was already in existence.  Both are worth considering as you explore China specifically.  Keep in mind that China’s market expects high quality from Western products; when they are disappointed the market’s reaction is severe and can be disproportionate to what happened.  But, that’s also why Western brands tend to have higher margins in China than anywhere else:  the consumer is paying for protection.

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How a Reverse Brain Drain Could Help You

Last week while in London I had the opportunity to have dinner with a friend from school.  Originally from Ghana, but having lived in the UK for most of his adult life, he shared with me how many of his fellow co-workers from West Africa were re-evaluating their life in the UK.  Confronted with an uncertain and increasingly tepid domestic economy, many are looking back towards their home countries and asking themselves if now was perhaps the time to head back and begin working to build a better future for themselves.

Most, if not all, originally found themselves in the UK as a result of their parents fleeing a domestic situation that had become either economically or politically untenable.  To see their children now re-consider going back speaks volumes both to the uncertainties they see in the developed West, as well as the potential they believe their home countries now possesses.

This same phenomenon has been at work with Chinese and Indian scientists, engineers and entrepreneurs for the last several years (and in particular post 9/11 as visas became increasingly difficult to obtain).  In the case of Chinese and Indian ex-pats, many came to believe that their home countries were better places to raise capital and test new ideas than what they could find in the United States.

If West Africa contains the next group of countries that will see a similar migration, how could this “reverse brain drain” help your business?  The most important way is that it profoundly increases the likelihood that you can access managerial and business development talent that understands how western companies work, and who also appreciates how the local economy is structured (or, in the case of many markets, how its lack of structure has to be incorporated into distribution and operational strategies).

This migration makes the stakes of political reforms in countries like Nigeria especially that much more important:  if this group of repatriates can not push their home countries forwards, then they may never be able to.  However, if they are successful, these men and women will play an increasingly powerful role shaping the development of Africa’s emerging middle class, a story that could prove to be as powerful in the first part of this century as China’s similar opening was towards the end of the last.

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Bag of Links

From the last week, a Bag of Links of interesting developments in emerging markets around the world:

BusinessWeek looks at the strategy foreign beer makers are pursing in China as these companies try to convince the growing Chinese middle class to move up into higher priced beers.  Will it work?  I am sure Jim Fallows hopes so!

The New York Time’s explosive article on Wal-Mart’s Mexico bribery scandal is going to draw new attention to the areas where money changes hands in emerging economies in order for multinationals to complete projects, obtain licenses, and grow their businesses.  Short-term the damage is going to be localized to Wal-Mart, but long-term this will have an impact on other companies and their focus on emerging economies.

The China Observer has a good infographic, based on newly public research from the Hurun Report, on where in China the wealthy live.

ChinaLawBlog argues that a settlement between Apple and Proview is imminent.  The implications to this entire situation for companies, both multinationals and SMEs, is something CLB has written about extensively before.

The Tata Nano car is beginning to see impressive sales growth in India.  That is interesting enough, but even more so is that this appears to be the result of a rejiggered marketing campaign to India’s second tier cities which stresses more than the economics of the Nano.

Speaking of cars, increasingly high fuel costs in China are adding further fuel to the fire about the need for additional EV development in the country.  While Beijing’s domestic suppliers are best positioned to take advantage of this opportunity, automotive multi-nationals are also taking notice.

While no one has been watching, rural India has become an increasingly important player in the region’s manufacturing, as the WSJ recently pointed out.

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Kung Fu Pepsi

Before reading this post, take a minute to watch the video:

To a Westerner, this is a pretty “safe” ad campaign.  But, would it be successful in Asia?  In the west, monks are interesting, but even though some Eastern religions are growing in popularity and acceptance in the West is continuing to expand, you can safely use monks as a punch line.  But what about in the East?  Given the traditions of Buddhist, Hindu and Jains, would this ad campaign still work?  Could you modify it somehow either by swapping out the monk for another analog, or would this not work in Asia in general?  It’s an interesting question and one I’m curious to hear your thoughts on.

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Two Competing Views on India

If you read the title to this blog post and thought “only two competing views on India?”, then you are probably well ahead of the pack in terms of understanding the country!  However, Andrew Sullivan recently posted two differing views on what is going on within the country, and the two voices he quoted are worth reading at length.  When viewed at arm’s length, the country appears to be one of the most vibrant and compelling members of the BRIC nations.  However, when viewed more closely, problems related to chronic poverty, an economy that appears to be creating more – not less – income inequality, and inadequate access to social services make it more difficult to claim the country as the next great growth story.

Amrit Dhillon sounds the more cautionary note, quoting a recent London School of Economics’ study on India:  “The LSE study by nine India experts concludes that, despite ”impressive” achievements, India is unlikely to become a superpower for many reasons including “the increasing gap between the rich and the poor; the trivialization of the media; the unsustainability, in an environmental sense, of present patterns of resource consumption; the instability and policy incoherence caused by multi-party coalition governments.”  Great points all and, with the exception of the last one (policy incoherence) all fully transferable to China.  One could go so far as to say the last point might also be fair game relative to China simply because the differences between what Beijing promulgates from its central government and what is enacted at the provincial level remains open to wide interpretations.

Conversely, Shashi Tharoor writes more positively about India in general, and its messy democracy:  “By contrast, India strikes many as maddening, chaotic, divided, and seemingly directionless as it muddles its way through the second decade of the twenty-first century. Another view, though, is that India is a country that has found in democracy the most effective way to manage its immense contradictions. This should be exciting, not alarming.”  This is not the place to comment on whether India or China’s economic and political models are better than one another; rather, it is simply worth pointing out the two divergent ways in which even those closest to India remain divided on the direction of the country’s economic and political reforms (gosh, that sounds an awful lot like criticisms about China doesn’t it?).

The question remains, what do these two divergent opinions have to say about India’s development and the role India should play in your company’s growth strategy?  First, I would not be scared off by the more draconian interpretations of India’s situation.  In many ways, you could read Amrit Dhillon’s piece and instead of referring to India, substitute China (and, to that point, not just the China of yesterday, but the China of many of the country’s 300m plus who still live in agrarian poverty).  Because of this, none of Amrit’s concerns should be viewed as incompatible with a market for your products developing across India.  Second, what Shashi points out is that culturally, India is an extraordinarily diverse and fragmented area to navigate.  It lacks the cultural and social homogeneity that China offers, which reinforces a strategy that successful operators in China understand:  when building your China business model, think very local.  What worked in Shanghai probably won’t work in Chongqing; transfer these Chinese cities to Indian ones and you get the idea, except even more so!  Consequently, create a lot of space to try different things and be careful how many operating paradigms you bring from one city in India into another.  In many ways India is an emerging economy like China, and successful operators will create even more space than they did in China for their Indian strategies to find room, innovate, and grow.

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