Emerging Market Big Boys

The latest issue of the Economist contains an interesting (and apparently free online) article on the powerful multinational companies that have grown up in emerging economies. Thanks to these companies, foreign direct investment (FDI) from the developing world has increased from 5% of total FDI in 1990 to 14% of the world's total FDI in 2006.

The companies from China to keep an eye on:

• BYD, battery maker
  
• Chery Automobile, China's largest automobile exporter
• Embraer and China Aviation Industry Corporation II (AVIC II) (no English site, yet), joint venture in regional jet manufacture
  
• Hisense, consumer-electronics group
• Johnson Electric, miniature electric motor manufacturer
• Lenovo, computer manufacturer
• TCL (no English site, yet), consumer-electronics company
  

The Economist lays out several advantages of the home markets of the new multinationals:

• "Rapid growth gives companies scale and spare cash to invest abroad."
• "Costs are low."
• "The difficulties of operating in an emerging market may make managers adaptable and resilient."
• "Gradual liberation in their home markets ... has exposed them to [healthy] competition from multinationals."

The Economist points out two other distinct advantages these multinationals have:

• Family ownership/control, even when public, is more common and allows decisions to be made more quickly.
• State banks offer them cheap financing.

The Economist also points out several disadvantages:

• The world economy is already into advanced stages of globalisation.
• The multinationals from the rich nations matured at a time when companies were able to grow at a slower pace.
• Tariffs and other regulations can prevent companies from emerging markets to enter the developed markets.
• "Firms may be ignorant of the markets they are entering."
• Well established brands in the emerging world are often unknown abroad.
• Management talent may be lacking.
• Pay structures are difficult given wage expectations in the developed world.
  

The Economist points out five successful strategies that these multinationals have used:

• Taking successful local brands global, as accomplished by Hisense in Africa, Eastern Europe, and the Middle East.
• "Turn local engineering excellence into innovation on a global scale," as is being done in the joint venture between Brazilian firm Embraer and AVIC II.
• "Global leadership in a narrow product category," as done by BYD and Johnson Electric, and I'd add Nine Dragons Paper to this category.
• "Taking advantage of natural resources at home, and boosting them with first-class marketing and distribution." Labor seems to be China's greatest natural resource, but I can't think of a homegrown multinational that fits the bill. The magazine offers the examples of Brazil's Sadia (frozen foods), Perdigão (frozen foods, and making a name for itself in the '70s by adhering to Islamic law in the slaughter of chickens), and Vale (iron).
• "Have a new or better business model to roll out to many different markets." The magazine offers Mexico's Cemex and their "rigorous development of its own style of managing acquisitions."

The author tells us to expect "new creatures, bursting out of nowhere to take the world by storm."