The Lands of Opportunity
Chapter 1: The Lands of Opportunity
The rapid development of the 86 percent of the world population in countries with a per capita gross national product (GNP) of less than $10,000 has made these areas the new lands of opportunity. But their complexity and distinctive characteristics will require different market strategies to realize these opportunities.
With growth slow at home, Procter & Gamble (P&G) stormed out of Cincinnati to increase its presence in India in 2004, slashing prices on detergents, shampoos, and other products. Unilever’s Hindustan Lever, which had been in a much smaller and quieter Indian market since it first entered in 1888, responded aggressively. Prices on some products dropped by as much as half. Unilever, like other companies with small domestic markets, had a long presence in the developing world, but P&G and other U.S. firms had focused on the large and attractive at home or high-end segments abroad. P&G and many other companies were now waking up to the broader opportunities in India, China, Russia, and other developing markets. But they could not capture these opportunities with the same strategies used in developed markets. They needed new solutions.
Why the sudden interest? The US$10 billion Indian market for "fast-moving" consumer goods is expected to double in the next decade. Even if this revenue comes in a rupee at a time (about 2 U.S. cents)—the price of a sachet of detergent—the market cannot be ignored. While selling shampoo and detergent for pennies may seem like a distraction from big-ticket items of developed markets, these sachets account for more than US$1 billion in annual sales in India for Hindustan Lever alone.
In China, retail sales have increased about 15 percent annually over the past 20 years, reaching $628 billion in 2004, making it the third-largest retail market in the world. While the US$47 billion Chinese market for packaged foods is growing at 8 percent per year, Nestlé was the only major global brand among the top five packaged foods companies in China in 2003. (The others were Ting Sin and Uni-President Enterprises from Taiwan, followed by Hai Pa Wang International Food and Long Fong, with Nestlé bringing up the rear. These may not be familiar brands today, but who had heard of Haier or Lenovo a decade ago?)
Markets for scooters, cars, refrigerators, beer, and many other products in developing countries are heating up. Shanghai hosted its first Formula One Grand Prix race in 2004—a sign of growing interest in the sport across the developing world (see sidebar). The "consumer class" (defined as people with incomes of greater than $7,000 in purchasing power parity) has an estimated 1.7 billion members throughout the world. Nearly half of them live in the developing world. By this measure, these consumers include more than 240 million in China, only slightly below the 270 million members of the consumer class in the U.S., and 120 million in India, equivalent to the consumer class in Japan. In fact, the size of this consumer class in China and India alone is greater than in all of Western Europe (although their spending power is certainly not as great).
These developing-world numbers are growing very rapidly. By 2003, China had more than 10 million private cars, including more than 1 million in Beijing alone. In China, a quarter of the population owns color televisions (more than 300 million), and more than 16 percent (more than 200 million) have mobile phones. Companies from countries such as Japan, China, Korea, India, Brazil, and Turkey are now dominating markets in the developing nations. In India, Samsung, LG, and Hyundai have each notched up sales of about $1 billion in the past decade. These companies from the developing world understand from their own experience what it takes to meet the needs of these markets.
While major developing nations such as China and India are now clearly on the radar screens of global companies, some firms have had a very difficult time capitalizing on the apparent opportunities. They have launched products and pulled back, changed their branding, or seen their positions undermined by local rivals. Multinational cell phone companies in China initially focused on the big cities, but Chinese firms such as Ningbo Bird and TCL ran circles around them by targeting the rural areas and designing for local tastes, taking half the market. (The global players, smarting from the hard knocks, have shifted their strategies dramatically and are winning back market share.) Beermakers in China and other developing markets saw their seasoned global brands go flat in the face of scrappy local rivals. What these companies learned the hard way is that the 86 percent markets behave differently from the 14 percent markets of developed nations. Developing markets may be the new lands of opportunity, but do you have the right market strategies to reach them?
The 86 Percent Opportunity
For generations, the developed world has been seen as the land of opportunity. Immigrants crowded into ships or trucks to cross into the land of promise. Companies poured their resources into serving these populations. Developed markets have high incomes and well-developed infrastructures, so it is no wonder that the developed world is where most companies have devoted the lion’s share of their attention, and they are still attractive markets. But now these developed markets represent a shrinking part of the world market. Just 14 percent of the world’s more than 6 billion people live in countries with a per capita GNP of greater than US$10,000 (see Figure 1-1). Kenichi Ohmae has called this cutoff for developed nations "the $10,000 club," although there are diverse definitions of developing countries (see the sidebar).1 Yet the developed world is where most companies have concentrated their resources, based on essentially the same argument that Willie Sutton used to explain why he robbed banks—because that was where the money was. The rest of the world, 86 percent of the population, was deemed too poor or too far away to matter. But this is no longer true, and it becomes less so every day.
Figure 1-1 While many companies have focused on developed markets, 86 percent of the world population is in developing countries with a GNP per capita of less than $10,000. This percentage will continue to increase in the coming decades.
We Can’t Wait for Them to "Grow Up"
Doesn’t it make sense to wait for these developing nations to become developed before pursuing them? The risks will be reduced, and we will have business problems that we know how to solve. At that point, these populations will have enough disposable income and mature infrastructures to make it possible to easily create profitable businesses based on models from other developed nations. But we can’t wait. It will take too long. How many companies have become developed nations in the past 50 years? How many will become developed in the next 20 years? Excluding Japan, only a handful of countries with relatively small populations have become developed since the 1970s, including Israel, Singapore, Taiwan, Kuwait, Ireland, and possibly South Korea. Not a single developed nation exists in South America or Africa, and Asia has only a few. It took Japan more than 27 years to advance from a per capita GNP of less than $1,000 to reach the $10,000 club. Although other countries aspire to follow this example, one wonders how many of them will be able to achieve the phenomenal growth needed to join this club in the next two decades.
By 2020, in China and India only an estimated 5 percent of the population will have a per capita GNP of more than $10,000. As shown in Figure 1-2, many countries have a long way to travel before they reach the $10,000 mark. Assuming a constant growth rate of 5.5 percent, it would take India almost 60 years to enter the $10,000 club.
Figure 1-2 Although they are growing rapidly, many developing countries, particularly the most populous ones, have a long way to go to enter the "$10,000 club." (Source: World Bank, World Development Report, 2003, GNI per capita for 2001)
During this time, fortunes will be created or lost, and companies and brands will be built or destroyed. In the long run, these emerging economies will be developed nations, but as economist John Maynard Keynes observed, "In the long run, we are all dead."2 We cannot kid ourselves that we can wait for these markets to mature.
These Markets Contain Entire "Developed Nations" Today
Even though development will be slow, given the sheer size of populations of developing markets, there may soon be more rich people in the 86 percent markets than in the 14 percent markets. For example, if just a little less than 6 percent of the developing world achieved the $10,000 per capita GNP mark, this would represent a population of more than 350 million, greater than the size of the entire U.S.
These Markets Are Where the Growth Is
As consumer markets and economies expand, companies such General Electric are staking their future on the developing world (see the following sidebar). These companies recognize that this is where the growth is. While developed countries posted GNP growth rates of less than 3 percent from 1980 to 1995, developing countries averaged almost 6 percent growth in the same period. The U.S. still accounts for about a third of the global GDP, but its growth is slower than the developing world—about 3 percent. China’s aggregate GNP has grown about 10 percent per year since the late 1970s, and India has been posting about 6 percent annual growth since 1991.3 The sheer size of populations in the developing world should give companies pause. They represent more than 5 billion of the 6 billion people in the world and are expected to grow to more than 6 billion of 7 billion in the next two decades. Remove Japan, the U.S., and the European Union, and less than 2 percent of the world’s population is in other developed markets.
Figure 1-3 As global consumption rises from $14 trillion to $21 trillion between 2003 and 2010, the center will shift from North America to Asia and other parts of the developing world. (Source: Donald Hepburn, Unilever, 2004)
These developing markets have consumers spending real money today, and with more on the way. Large populations and high growth rates translate into rapidly growing markets, as shown in Figure 1-3. An estimated 35 to 40 percent of profits among the U.S. companies on Standard & Poor’s 500-stock index come from outside the U.S. Despite anti-American sentiment after the launch of the Iraq war, U.S. companies earned profits of $102 billion from overseas affiliates in the first half of 2004, up 38 percent from the year before. Goldman Sachs estimates that in less than four decades, the combined GDP of Brazil, Russia, India, and China (the "BRIC economies") could be larger than the G6 in U.S. dollar terms. Of the top six countries based on GDP, only the U.S. and Japan would remain on the G6 list by 2050.4
These Markets Are the Future
As developing markets experience rapid growth in populations and income, they are becoming more central to defining the future in many industries. They are now helping shape technology standards and are playing a growing role in culture and entertainment. For example, Bollywood in India releases nearly 1,200 movies per year, compared to 450 for Hollywood. Indian box offices sell 12 million tickets per day. The arrival of the musical Bombay Dreams on Broadway in April 2004 (despite its questionable financial performance) is a further sign of what the show’s coproducer, Bollywood director-producer Shekhar Kapur, calls a process of "reverse cultural colonization." Kapur foresees the day, not too far off, when Spiderman will remove his mask to reveal an Indian or Chinese face. (Already a comic-book version of the arachnid superhero story has been released, set in Mumbai with an Indian hero.) This view may be shocking to folks in the insular world of Hollywood, but it’s not at all surprising from the perspective of Bollywood. The success of films from China, such as Hero and Crouching Tiger, Hidden Dragon, which grossed $128 million in U.S. markets, also indicates the emergence of new centers of filmmaking. Some 600 international film festivals take place each year in the world, many of them in the developing world.
It is not just the faces that are changing, but also the themes. While Hollywood may make movies like Waterworld and The Day After Tomorrow, envisioning a time when the Earth is covered with water, Bollywood is focusing more on developing-world themes. In the movie Water, for example, factions in a futuristic city battle over scarce water supplies in India. In the 2004 Indian movie Swades ("We, the People"), Shah Rukh Khan stars as a NASA engineer who returns to a rural Indian village, working to improve the electricity and water supplies, living in an RV stocked with bottled water and a satellite connection to the Internet—a home on wheels with all the modern facilities that the village lacked. These films are very much grounded in the realities of the developing world. To understand where the world is headed, companies need to have a presence in this world.
If You Can Make It Here, You Can Make It Anywhere
According to the popular Frank Sinatra song, New York used to be the proving ground for individuals and companies. But the companies that have cut their teeth on the challenging markets of the developing world have often found ways to export their solutions to the rest of the 86 percent market and even to the 14 percent populations of the developed world.
TCL came out of China to become the largest television manufacturer in the world, purchasing the venerable RCA brand in 2003 to create a $3.5 billion company with factories in China, Vietnam, the Philippines, and Germany. In December 2004, Chinese computer maker Lenovo (formerly Legend) bought a majority stake in IBM’s PC business for $1.75 billion in cash and stock, making it the third-largest PC maker in the world and giving it control of the IBM ThinkPad brand. IBM retains a minority stake in the merged company. The US$600 million in cash that IBM took from the deal is insignificant, representing less than 1 percent of the company’s US$89 billion 2003 revenue. But the move positions IBM’s brand for growth in China and the rest of the world, with an on-the-ground partner in the world’s fastest-growing market for PCs.
Appliance manufacturer Haier, in just two decades, went from having a single plant in China to become the second-largest refrigerator maker in the world and a fixture in college dorm rooms in the developed world. Mexican cement company Cemex, after meeting the tough logistical challenges of its home market, has risen to become the world’s third-largest cement maker with operations in more than 30 countries. Turkish conglomerate Koc Group, which offers products and services from appliances to financial services, posted 2003 revenues of more than $11 billion. More than 45 percent of these revenues were drawn from international sales, fueled by purchases of local brands in Germany, Austria, Romania, and other parts of the world. Brazilian aircraft manufacturer Embraer became the world’s fourth-largest commercial aircraft manufacturer and Brazil’s second-largest exporter in 2004.
The solutions to the challenges of these demanding environments lead to products that are cheaper and better. Brands that have built a broad base of support in the developing world can use this momentum to enter developed markets.