Emerging nations, long seen as a source of low-cost services such as manufacturing and IT support, now are home to a new breed of multinational company. These new players, stepping forward from the background and building global brands, pose a new and serious threat to established multinational companies in North America, Europe, and Japan.
But how can companies with lower R&D budgets, less access to talent, little brand awareness, and a reputation for low quality keep the likes of General Electric Co. CEO Jeff Immelt up at night? And how do the established players counterattack? It’s all covered in a new book, The New Emerging Market Multinationals (McGraw-Hill, 2012), by marketing professor Rajeev Batra and INSEAD professor Amitava Chattopadhyay, with professor Aysegul Ozsomer of Koc University in Turkey.
“It’s not about selling stuff at lower prices or being the supplier of private-label or original equipment companies in the West anymore,” says Batra, the Sebastian S. Kresge Professor of Marketing and director of the Yaffe Center for Persuasive Communication. “These companies are learning to master design, R&D, and focused innovation. As such, they are getting better at building brands and marketing overseas. They have the ambition, vision, and confidence to be global players. The confluence of these new skills and capabilities is a double-barreled threat.”
Emerging market multinational corporations, or EMNCs, are growing fast. In 2005, 44 sat on Fortune’s list of the top 500 global firms. By 2010 the number had jumped to 113. Companies like Taiwan-based mobile phone maker HTC Corp., which makes Sprint’s 4G Evo and Google’s Nexus, and Chinese network equipment and service company Huawei Technologies Co. Ltd., have brand cachet and global market share, and still retain the low-cost advantage that’s part of their DNA.
Batra and his co-authors examine how this phenomenon developed by examining 39 EMNCs and conducting interviews with top executives about their practices and strategies. The book provides a critical snapshot of modern global business at a time when much of the world’s future growth is expected to come from emerging countries.
“For many years I’ve had a research, teaching, and consulting interest in global brands, and I noticed that more and more were coming from the emerging market companies,” Batra says. “HTC came from nowhere to become No. 3 in the global smart phone market. Haier Group, from China, has a 5-percent share of the global white goods appliance market. I asked myself how they were doing so well. It’s something worth digging into.”
The researchers found that these companies use four main strategies—some of them use more than one—to challenge Western and Japanese companies. Two strategies are well-worn, leveraging country-specific advantages, while two are newer.
• Cost leaders: Companies use, and further develop, a low-cost advantage to build large volumes and extend their reach to developed countries.
• Knowledge leveragers: Companies use their home market knowledge and resources to tap into other emerging markets.
• Niche customizers: A newer strategy in which a company combines its low-cost and flexible manufacturing with newly developed R&D to build customized niche brands in emerging markets.
• Global brand builders: Companies combine their frugal manufacturing and R&D expertise with focused innovation to build brands in developed markets. They also may acquire capabilities, including brands, through acquisitions.
Some niche customizers and global brand builders started as cost leaders. The low-price segment of any market usually is very large, but it’s hard to remain a leader in it, Batra says. As soon as your price is undercut, you have little left to offer customers.
These low-cost companies also saw diminishing returns. Building low-price or private-label original equipment products carries much lower profit margins than selling your own brand.
“That’s why emerging market companies have changed, and need to change, to these new-wave strategies of niche customization and global brand building,” says Batra.
Niche customizers take advantage of their low-cost manufacturing and R&D, and the flexibility that comes with it. They can identify a market, go after it, and adjust on the fly. Established global companies from North America, Europe, and Japan typically rely on scale and outsourced manufacturing, and usually don’t have that kind of flexibility.
The new niche customizers also hit the established giants in their weak spot—knowledge of emerging market customers. Companies like India’s Marico have used this model to grab market share in South Asia, the Middle East, and North Africa with hair care products.
“Emerging niche players know how to get the biggest bang for their R&D buck, and they don’t start with a broad, frontal attack,” Batra says. “They find a spot where even a small R&D budget can give them enough knowledge to compete and win.”
The next step in new-wave strategy, global brand building, takes the niche strategy of focused innovation and brings it to established markets. These companies largely mimic Apple’s model of spending a low percentage of revenue on R&D, but with a laser focus on market-moving, disruptive products or services.
Although EMNCs’ budgets aren’t as big as an IBM or GE, the sophistication is. And as they grow, they still retain the lean and agile advantages of their low-cost heritage. Brazil’s Natura, which sells natural, sustainable Amazon River-based cosmetics at home and in Europe, can crank out a new product every three business days, a level comparable to 3M. But Natura only spends 3 percent of its revenue on R&D—much less than its competitors.
These moves mean emerging market multinationals are beginning what Batra calls a “virtuous cycle” of building a stronger brand, charging a higher price, and earning a higher margin, then deploying that new capital into R&D.
Some of that capital also has been used for acquisitions that quickly bring top brands in house. For example, India’s Tata Motors now owns the legendary Jaguar and Land Rover brands.
“Once you get into that cycle, it builds and builds,” Batra says. “They understand that they need talent and a corporate culture that rewards innovation. HTC built a corporate culture based on Silicon Valley. As for talent, these companies are hiring Western executives and expatriates with experience at established multinationals who are interested in coming home.”
Social media also is helping EMNCs spread word of mouth wider and faster than was possible in the past. This helps them compete against larger companies with bigger advertising budgets.
But that can be a double-edged sword if the product is poor in quality. Many of these companies must overcome a reputation of lesser quality, and that can’t be accomplished by hype.
“The foundation for a strong brand has to be terrific real and perceived quality,” Batra says. “No amount of marketing magic will turn a poor product into a strong brand. If you get it right, you can leverage new media. If not, that can work against you.”
So how do established multinational companies compete with these new players? The book offers suggestions that play to the strengths of big companies. Traditional multinational companies have brands that still are considered leaders in technology and quality. They have an aspirational quality some of the newer brands haven’t yet caught up to.
Batra suggests a “shock and awe” marketing strategy around these brands.
“Traditional multinational companies can still do things that emerging competitors can’t,” he says. “They can sponsor global events like the Olympics and the World Cup. They can have major entertainment, fashion, and sports stars endorse their products.”
On the strategy side, established players should consider a flexible brand architecture that relies less on standard global offerings and more on sub-brands for emerging markets. Those could leverage the appeal of the global brand yet meet local needs and wants.
Batra warns one strategy employed in the past no longer will work—ignoring emerging market competitors.
“They can still counter the new emerging companies, but they need to figure it out quickly,” he says. “Given sufficient time, EMNCs have the potential to do damage. Their brands are growing in trust and confidence, especially in the markets poised for highest growth. Emerging market multinationals have an opportunity to take a huge chunk of global share.”