Globalization's New Logic: the Rise of Developing-World Multinationals

Ray · 05-08-2008, 12:19 PM

Quote:

Globalization's New Logic: the Rise of Developing-World Multinationals

Simon Roughneen | 07 May 2008
World Politics Review Exclusive

In July 2007, India's Tata Group made headlines with its $2.3 billion acquisition of Jaguar and Land Rover (JLR) from Ford, the latest in a series of high-profile mergers and acquisitions in which well-known Western brands such as IBM, Barclays Bank, Tetley Tea and Corus steel have been bought, in part or entirely, by multinational corporations from developing economies.

Those with a longer historical view might recall that it was private business -- the British East India Company -- that imposed imperial control over the "brightest jewel in the empire," before crown rule was implemented in 1858. With Tata scooping up two high-prestige British brands, a reversal of historic proportions appears to be taking place. Meanwhile, during the recent worldwide credit crunch, sovereign wealth funds, state-run investment vehicles often controlled by resource-rich developing countries, have helped bail out cash-strapped Western financial powerhouses like Merrill Lynch, Barclays, UBS and Morgan Stanley.

In the past, globalization's critics have alleged that the opening up of economic borders is little more than a license for giant Western companies to colonize emerging economies. But recent trends suggest otherwise. In his "The Emerging Markets Century," Antoine Van Agtmael says that the combined size of today's emerging economies will be bigger than their Western counterparts by 2030, which he predicts will help more and more emerging-market companies overtake their rivals in industrialized countries. According to the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment outflows from developing countries grew from 5.2 percent of the world total in 1990, to 14.3 percent in 2006. Simultaneously, "over 1 billion people are being lifted out of poverty," Harold L. Sirkin, co-author of "Globality: Competing with Everyone from Everywhere for Everything," told World Politics Review.

At the same time, new marquee brands based in the developing world are emerging. Chinese computer maker Lenovo made waves in 2005 by buying IBM's $11 billion PC business. "Big Blue" is now a part of the world's fourth-largest computer manufacturer, whose largest shareholder is the Chinese government. Elsewhere, Indian software outfits Infosys and Wipro have revolutionized the $650 billion technology services industry. In 2006, a takeover of Arcelor, Europe's biggest steelmaker, by India-based Mittal Steel established the world's largest steel company. The newly constituted Arcelor-Mittal is the worlds first steel company with an output exceeding 100 million tons annually. Adding to his celebrity-entrepreneur status, company founder Lakshmi Mittal topped the U.K. Sunday Times' "Rich List," published March 20, for the fourth year running, with assets now valued at over $45 billion. (The Times' list profiles "Britain's richest 2000." Although Mittal retains his Indian passport, he and his family spend much of their time in London.)

These are but the most high-profile examples. Sirkin, who is a senior partner at Boston Consulting Group, said, "high profile M&As aside, there are hundreds of companies from India, China, Brazil and elsewhere that are challenging household-name competitors from the OECD countries, and this challenge is global and growing."

Of course, all this does not mean that Dell or General Motors or Siemens are dead in the water. Far from it. Sirkin's book, due for release June 12, describes a world where "everything, everywhere will be up for grabs, and competition will be just as widespread." In 2006, UNCTAD noted that foreign direct investment in developing economies still exceeds outflow by more than $200 billion.

The global gold rush could be undermined by worldwide recession, however, with the U.S. and EU slowing or already stagnant. Rising food and energy prices are feeding inflation and eating into disposable incomes among the world's rising middle classes. Although it's too early to tell, these trends could undermine some of the base upon which emerging-economy enterprises are building their global strategies.

But for now, emerging economy multinationals are on a roll. Causes vary, but to generalize, for one, economies of scale matter: India and China have very large and growing domestic markets to fuel growth globally. And they have a head start on Western competitors in their home markets. Low local costs coupled with the communications revolution mean companies can go global sooner and faster than was the case in the 1960s-1980s, when German, Japanese and then Asian Tiger businesses came to worldwide prominence.

But it is not all about colonialism-in-reverse. Many companies in the developing world are also expanding into other developing-world markets. On April 25, 2008, for example, a Financial Times story was subheadlined "Could India be about to shake up the global telecoms industry?" The report concerned Indian company Bharti Airtel's bid for Africa's largest wireless company, MTN. The report asserted that "the industry's winners and losers are being increasingly defined by exposure to emerging markets."

A significant and growing proportion of global trade and investment activity runs between developing economies, where massive new middle classes are emerging. An extra 1.8 billion people will join these ranks globally during the next 12 years, according to Foreign Policy editor Moises Naim. With huge and increasingly affluent markets emerging in the so-called BRIC countries of Brazil, Russia, India and China, and across Southeast Asia, companies in these countries are looking to other developing economies as viable markets.

Sino-Indian trade grew 38 percent during 2006, as the former overtook the United States to become the world's second-largest exporter, behind Germany. The World Bank Group estimates that south-south corporate investment more than tripled to $47 billion from 1995 to 2003. Currently it is probably closer to $60 billion. Speaking at the 2006 World Economic Forum, the chairman of India's Satyam Computer Services, B. Ramalinga Raju, told an audience that "culture can be as important to multinational success as capital." Companies used to operating in developing economies have an advantage where American or European companies can be daunted by political instability, corruption and a perception that consumers cannot afford to buy their products.

In addition, the developing world's emerging giants have had to beat not only local competition but Western multinationals as well. And that has meant making profits at prices that Europe and the U.S. would find unthinkable. Greater exposure to competition sets this wave apart from the success of Asian companies during the latter part of the 20th century, where protectionist models allowed Mitsubishi, Samsung and others to grow at home before becoming global players.

Even if developing-world companies do not mount major global challenges, many are having significant success against Western multinationals in serving middle-income consumers at home. Grupo Positivo in Brazil has 18 percent of the domestic computer market, larger than the combined share of Hewlett-Packard and Dell, its two closest competitors.

Tata's acquisition of JLR was preceded by the advent of its Nano, a $2,500 automobile aimed squarely at meeting growing Indian demand for cheap personal transportation. By going low, Tata has set the bar high for other auto manufacturers who are eyeing the 200 million-strong Indian middle class. Low-cost domestic strategies can also lead to success abroad: Mahindra & Mahindra (M&M) dominates the Indian market with its small tractors. But a 2006 Businessweek survey showed that two-thirds of the tractors sold in the United States are 70 horsepower or less. Now, M&M is undercutting Deere and other established tractor makers in the U.S. Similarly, Brazilian aircraft maker Embraer utilized its national base to fly past Canada's Bombardier, becoming the world's No. 3 aircraft maker and winning midsize-jet orders that otherwise would have gone to Airbus and Boeing.

Expect current trends to continuing as developing-world companies continue to see the strategic benefits of going global: not only to grow in new markets, but also to acquire the intangible assets like branding and intellectual capital that give Western rivals a competitive advantage, for now. Thus, more combinations of developing-world and Western companies are likely. Sirkin believes developing world companies will continue to "outbid Western competitors" to buy access to new technologies and markets.

Simon Roughneen is a freelance journalist who has reported from more than 20 countries.

Photo: Arcelor-Mittal's Lakshmi Mittal has a reason to smile (Agência Brasil, Creative Commons License Attribution 2.5 Brazil)

World Politics Review | Globalization's New Logic: the Rise of Developing-World Multinationals

A rather unique situation.

One wonders.

antimony · 05-08-2008, 12:54 PM

Sir,

The rise of the Western multinationals also prompted a rise in general living standards as well as infrastructure levels in those countries. It remains to be sen if that happens in India. Another thing that may be noted is that Indian multinationals still lag on a very key aspect of the Western MNCs, product innovation. We are more interested in takeover of already existing brands.

This is not the route that Japan or South Korea have chosen. They have aggressively invested in their own brands, which are now world class. Our Videocon/ BPL/ Godrej have simply not been able to match up. Of course, this does not mean that we will not catch them in the future.

By the way, I think the author is mistaken when he says that Mittal is India based. As per my understanding, Mittal Steel was based in Holland with Mittal controlling it from London.

bolo121 · 05-08-2008, 13:18 PM

Indian companies are pursuing inorganic growth strategies precisely because of this weakness. In order to effectively compete with Western MNCs indian companies need two things, scale and capability. Both these needs can be met by acquisition of western companies, access to western markets is obtained and technical knowledge enhanced. It remains to be seen if these firms can innovate and grow on their own in the long term.

Ray · 05-08-2008, 13:39 PM

Mittal being a Marwari know his onions.

Live in the UK and hold an Indian passport!

xunil · 05-08-2008, 13:49 PM

I think the author is too optimistic. An long as energy is not furfilled, we would not see a truely rise of China and India.

antimony · 05-08-2008, 17:49 PM

Quote:

Originally Posted by Ray

Mittal being a Marwari know his onions.

Live in the UK and hold an Indian passport!

I have had my share of dealing with marwaris both on a professional and personal basis. I noted that their business philosophy, at its heart, is as simple as the "buy low, sell high" concept. They, regardless of which level of the corporate world they might be, do not usually have a head-in-the-cloud
"growth oriented business models" kind of attitude that the B-schools seem to nurture. They leave that for their B-school employees; they are willing to view presentations of complex models but would take business decisions based on that "buy low sell high" concept. Also, they need not have any emotional attachment to the business model that they may have, if it is not making money they will dispose of it. This is also why we see them more in old-school brick and mortar type businesses instead of new, higher risk areas.

Paradoxically, that attitude also makes investment decisions in long term product research difficult, since that is a risk that may not pay off in the short term, or may not pay off at all. It is much better to forego that risk and buy a ready, tested product with some premium. That, in my view, is one of the explanations why Indian business models developed as they have.

Also, their attitude in life is markedly different from how some other ethnic groups are brought up. In the marwari philosophy, failure to set up a business or get involved in the family business is a negative. You work for someone else only if you are not able to do your own thing. The emphasis is not so much in money, but in freedom to take charge of your own life. This is different from, say Bengalis, where doing your own business frequently means that you are not "educated" enough or "qualified" enough to get a job.

It is also interesting that the companies which focus on technology expertise and new product development are frequently set up by non-marwari (non-baniya class) promoters. Bose and many of the software companies are good examples

bolo121 · 05-09-2008, 00:20 AM

Antimony, i agree on that point. Its not just Marwaris all the Indian bosses I have met seem to have a variation of that philosophy. I think its ok when you are just doing business on a medium scale in one country but when it comes to transforming their business structure, having some sort of long term strategy and especially motivating subordinates they fall short. Even worse than that is our dynastic business structure, no room for professional managers appointed by a board, its just father followed by sons followed by grandsons ad nauseum.

antimony · 05-09-2008, 03:29 AM

Quote:

Originally Posted by bolo121

Antimony, i agree on that point. Its not just Marwaris all the Indian bosses I have met seem to have a variation of that philosophy. I think its ok when you are just doing business on a medium scale in one country but when it comes to transforming their business structure, having some sort of long term strategy and especially motivating subordinates they fall short. Even worse than that is our dynastic business structure, no room for professional managers appointed by a board, its just father followed by sons followed by grandsons ad nauseum.

I used to be a commercial banker and had the pleasure of interacting with a number of them, both at the promoter level and also with exectuives in the finance departments of my client companies. The first thing I observed was surprise, at the fact that a Bong like me was working in Corporate Finance, instead of the marwaris whom they used ot work with. However, like pragmatic business people they are, they do not hold that against you once you prove your mettle. The other thing that I observed was what I call the "trader mentality", venture into short term profit ideas that do note necessarily build long term growth for their companies. I also observed, with disappointment, their propensity to take money out of their promoted (but publicly traded) companies...

Even after all of this, the lasting impression that I retain of the Marwari community is their interest in taking control over their own lives...

bolo121 · 05-09-2008, 05:25 AM

Quote:

I also observed, with disappointment, their propensity to take money out of their promoted (but publicly traded) companies

Yes this is one of the most destructive habits of Indian business. I also agree that in good companies the business environment is usually what you do speaks for you.
I dont know about taking control of your own life. From what Ive seen, a business takes over your life with its unceasing demands. Day in and day out you are worrying about the future, working ungodly hours and neglecting family. Even at home there is no peace because business is always in the back of your head. At least for me at the end of the day i can step out of the office and go home.

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05-08-2008, 12:54 PM	#2 (permalink)
antimony Patron Join Date: 02-21-08 Posts: 199	Sir, The rise of the Western multinationals also prompted a rise in general living standards as well as infrastructure levels in those countries. It remains to be sen if that happens in India. Another thing that may be noted is that Indian multinationals still lag on a very key aspect of the Western MNCs, product innovation. We are more interested in takeover of already existing brands. This is not the route that Japan or South Korea have chosen. They have aggressively invested in their own brands, which are now world class. Our Videocon/ BPL/ Godrej have simply not been able to match up. Of course, this does not mean that we will not catch them in the future. By the way, I think the author is mistaken when he says that Mittal is India based. As per my understanding, Mittal Steel was based in Holland with Mittal controlling it from London.

05-08-2008, 13:18 PM	#3 (permalink)
bolo121 Contributor Join Date: 12-19-07 Location: india Posts: 540 Country:	Indian companies are pursuing inorganic growth strategies precisely because of this weakness. In order to effectively compete with Western MNCs indian companies need two things, scale and capability. Both these needs can be met by acquisition of western companies, access to western markets is obtained and technical knowledge enhanced. It remains to be seen if these firms can innovate and grow on their own in the long term.

05-08-2008, 13:39 PM	#4 (permalink)
Ray Postmaster General *Military Professional* Join Date: 08-20-03 Posts: 24,968 Country:	Mittal being a Marwari know his onions. Live in the UK and hold an Indian passport!

05-08-2008, 13:49 PM	#5 (permalink)
xunil Regular Join Date: 03-27-08 Posts: 116	I think the author is too optimistic. An long as energy is not furfilled, we would not see a truely rise of China and India.

05-09-2008, 00:20 AM	#7 (permalink)
bolo121 Contributor Join Date: 12-19-07 Location: india Posts: 540 Country:	Antimony, i agree on that point. Its not just Marwaris all the Indian bosses I have met seem to have a variation of that philosophy. I think its ok when you are just doing business on a medium scale in one country but when it comes to transforming their business structure, having some sort of long term strategy and especially motivating subordinates they fall short. Even worse than that is our dynastic business structure, no room for professional managers appointed by a board, its just father followed by sons followed by grandsons ad nauseum.

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