GLOBALISATION
Sep 18th 2008From The Economist print edition
Illustration by James Fryer
GLOBALISATION used to mean, by and large, that business expanded from developed to emerging economies. Now it flows in both directions, and increasingly also from one developing economy to another. Business these days is all about “competing with everyone from everywhere for everything”, write the authors of “Globality”, a new book on this latest phase of globalisation by the Boston Consulting Group (BCG).
One sign of the times is the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the so-called BRIC economies of Brazil, Russia, India and China, up from 31 in 2003 (see chart 1), and is set to rise rapidly. On current trends, emerging-market companies will account for one-third of the Fortune list within ten years, predicts Mark Spelman, head of a global think-tank run by Accenture, a consultancy.
There has been a sharp increase in the number of emerging-market companies acquiring established rich-world businesses and brands (see chart 2), starkly demonstrating that “globalisation” is no longer just another word for “Americanisation”. Within the past year, Budweiser, America’s favourite beer, has been bought by a Belgian-Brazilian conglomerate. And several of America’s leading financial institutions avoided bankruptcy only by going cap in hand to the sovereign-wealth funds (state-owned investment funds) of various Arab kingdoms and the Chinese government.
One example of this seismic shift in global business is Lenovo, a Chinese computer-maker. It became a global brand in 2005, when it paid around $1.75 billion for the personal-computer business of one of America’s best-known companies, IBM—including the ThinkPad laptop range beloved of many businessmen. Lenovo had the right to use the IBM brand for five years, but dropped it two years ahead of schedule, such was its confidence in its own brand. It has only just squeezed into 499th place in the Fortune 500, with worldwide revenues of $16.8 billion last year. But “this is just the start. We have big plans to grow,” says Yang Yuanqing, Lenovo’s chairman.
One reason why his company could afford to buy a piece of Big Blue was its leading position in a domestic market buoyed by GDP growth rates that dwarf those in developed countries. These are lifting the incomes of millions of people to a level where they start to splash out on everything from new homes to cars to computers. “It took 25 years for the PC to get to the first billion consumers; the next billion should take seven years,” says Bill Amelio, Lenovo’s chief executive.
The sheer size of the consumer markets now opening up in emerging economies, especially in India and China, and their rapid growth rates, will shift the balance of business activity far more than the earlier rise of less populous economies such as Japan and South Korea and their handful of “new champions” that seemed to threaten the old order at the time.
This special report will argue that the age of “globality” is creating huge opportunities—as well as threats—for developed-world multinationals and new champions alike. The macroeconomic turbulence that the world is now going through after almost a decade of smooth growth will probably not alter the picture fundamentally, but it will complicate it. Despite all the talk of “decoupling”, emerging economies have recently been growing more slowly because of their exposure to increasingly cautious American consumers.
Moreover, high oil and food prices are creating inflationary pressures in many emerging countries that had enjoyed years of stable, low prices along with extraordinary economic growth. The side-effects of rapid development, such as pollution and water shortages, also need to be tackled. “After a long period in which globalisation has been all about labour productivity, the business challenge everywhere, and especially in emerging markets, will increasingly be to raise resource productivity—using fuel, raw materials and water more efficiently,” says Bob Hormats of Goldman Sachs, an investment bank.
Assuming that the upbeat growth forecasts for emerging markets remain broadly on track and the developed economies get back on their feet, what will be the main competitive battlegrounds of global business? One is those new consumers, who often demand products at far lower prices and often in more basic forms or smaller sizes than their developed-country counterparts. Emerging-market firms with experience of serving these consumers think they are better placed to devise such products than their developed-world competitors. Lenovo, for example, is going after the developing world’s rural markets with a cheap, customised PC that enables farmers to become networked.
Some of these innovations have global potential. Lenovo’s Chinese R&D labs developed a button that recovers a computer system within 60 seconds of a crash, essential in countries with an unreliable power supply. Known as “Express Repair”, this is now being incorporated into its computers everywhere.
The same logic may apply to innovations in business models that allow goods and services to be delivered in fundamentally different ways and at much lower cost. Lenovo, for example, has developed a highly effective formula for selling to Chinese consumers that it has since taken to India and America.
Yet the rise of the new champions has brought a vigorous response from some of the old ones. IBM may have felt that it was no longer worth its while to compete in PCs, but Lenovo is facing fierce competition from American companies such as Hewlett-Packard and Dell everywhere, including in China. Nor was IBM’s decision to sell its (low-margin) PC business due to a lack of commitment to emerging markets: it now employs 73,000 people in India, against 2,000 at the start of the decade, and hopes to increase the share of its global revenues coming from emerging markets from 18% now to 30% within five years.
Although multinational companies in developed countries must grapple with legacy costs of various kinds—financial (pensions, health-care liabilities), organisational (headquarters far away from new markets) and cultural (old ways of thinking)—they have advantages too. The greatest of these may be a deep well of managerial experience, which emerging-market firms often lack. Yet Lenovo has shown how to overcome this management deficit by hiring a group of seasoned international executives, including Mr Amelio, an American who cut his managerial teeth at IBM and Dell.
But Lenovo went further than hiring international managers. “We are proud of our Chinese roots,” says Mr Yang, but “we no longer want to be positioned as a Chinese company. We want to be a truly global company.” So the firm has no headquarters; the meetings of its senior managers rotate among its bases around the world. Its development teams are made up of people in several centres around the world, often working together virtually. The firm’s global marketing department is in Bangalore.
A huge effort has been made to integrate the different cultures within the firm. “In all situations: assume good intentions; be intentional about understanding others and being understood; respect cultural differences,” reads one of many tip sheets issued by the firm to promote “effective teamwork across cultures”. Mr Yang even moved his family to live in North Carolina to allow him to learn more about American culture and to improve his already respectable command of English, the language of global business.
In short, Lenovo is well on its way to becoming a role model for a successful multinational company in the age of globality: a good reason to be optimistic about the future of capitalism, even capitalism with a Chinese face. Perhaps Lenovo and other new champions will become the first of a new breed of truly global companies, rooted in neither rich nor developed countries but aiding wealth creation by making the most of opportunities the world over.
But is such optimism justified? Indeed, would Lenovo even have been allowed to buy IBM’s PC business today? Congress nearly blocked the deal at the time because it feared that valuable intellectual property might fall into the hands of the Chinese government. Since then, China-bashing has increased, there has been some Arab-bashing too, deals have been blocked and the rhetoric in Washington, DC, has become ever more protectionist.
One fear is that American jobs will disappear overseas. This is despite plenty of academic evidence that open economies generally do better than closed ones, that in America in particular many more and generally better jobs have been created in recent years than have been destroyed, and that the number of jobs lost to outsourcing is tiny compared with those wiped out by technological innovation. Mr Yang explains that “people thought we would manufacture all our products in China, but in fact we have opened new plants in Greensboro and also Poland, as we need to be close to our customers.”
Lately a new fear has been adding to the protectionist sentiment, turning even some usually enthusiastic global capitalists into protectionists. Could the rise of the new champions reflect the advance of bad forms of capitalism at the expense of good forms?
In their 2007 book, “Good Capitalism, Bad Capitalism and the Economics of Prosperity and Growth”, William Baumol, Robert Litan and Carl Schramm identify four main models of capitalism around the world: entrepreneurial, big-firm, oligarchic (dominated by a small group of individuals) and state-led. Most economies are a mixture of at least two of these. The best economies, say the authors, blend big-firm and entrepreneurial capitalism. The worst combination may be of oligarchic and state-led capitalism, both of which are prevalent in many emerging markets.
The worriers point out that, through corporate acquisitions and the investments of sovereign-wealth funds, the role of the state (often an undemocratic one) in the global economy is rapidly expanding. Given the lamentable history of state intervention in business, they say, this does not bode well.
Such fears are not easily dismissed, if only because what is happening is so new that there is not much evidence either way. Sovereign-wealth funds insist that they are interested only in getting a good return on their money and will not meddle in politics. Perhaps they will turn out to be sources of good corporate governance and patient capital, in admirable contrast to the growing number of short-termist institutional investors in developed countries. But perhaps they will not.
Again, Lenovo offers an encouraging example. Even though its largest shareholder is in effect the government of China, its acquisition of IBM’s PC business does not seem to have had any troubling consequences. But maybe the Chinese government was restrained by its co-investors, two of America’s leading private-equity firms. Besides, the new champions may be typified not by Lenovo but by, say, Gazprom, through which the Russian state can make mischief abroad. As Mr Yang points out, of the 29 Chinese firms in the Fortune 500, Lenovo is the “only one that is truly market-driven”. Most of the rest enjoy monopoly power or operate in the natural-resources industries, where there is far more scope for politics and corruption than in consumer electronics.
At the very least, the growing role of states that often lack democratic credentials creates a sense that the competition from emerging-economy champions and investors is unfair, and that rich-country firms may lose out to less well-run competitors which enjoy subsidised capital, help from political cronies or privileged access to resource supplies.
So there is a real risk that bad capitalism will spread in the coming decades. Yet at the same time this latest, multidirectional phase of globalisation offers enormous potential for business to raise living standards around the world.
“YOU get very different thinking if you sit in Shanghai or São Paulo or Dubai than if you sit in New York,” says Michael Cannon-Brookes, just off the plane from Bangalore to Shanghai. “When you want to create a climate and culture of hyper-growth, you really need to live and breathe emerging markets.” Mr Cannon-Brookes is the head of strategy in IBM’s newly created “growth markets” organisation, which brings together all of Big Blue’s operations outside North America and western Europe. “This is the first line business in 97 years of our history to be run outside the US,” he says excitedly, noting that “Latin America now reports to Shanghai.”
IBM’s thinking about emerging markets, and indeed about what it means to be a truly global company, has changed radically in the past few years. In 2006 Sam Palmisano, the company’s chief executive, gave a speech at INSEAD, a business school in France, describing his vision for the “globally integrated enterprise”. The modern multinational company, he said, had passed through three phases. First came the 19th-century “international model”, with firms based in their home country and selling goods through overseas sales offices. This was followed by the classic multinational firm in which the parent company created smaller versions of itself in countries around the world. IBM worked liked that when he joined it in 1973.
The IBM he is now building aims to replace that model with a single integrated global entity in which the firm will move people and jobs anywhere in the world, “based on the right cost, the right skills and the right business environment. And it integrates those operations horizontally and globally.” This way, “work flows to the places where it will be done best.” The forces behind this had become irresistible, said Mr Palmisano.
This ambitious strategy was a response to fierce competition from the emerging markets. In the end, selling the personal-computer business to Lenovo was relatively painless: the business had become commoditised. But the assault on its services business led by a trio of Indian outsourcing upstarts, Tata Consulting Services, Infosys and Wipro, threatened to do serious damage to what Mr Palmisano expected to be one of his main sources of growth.
So in 2004 IBM bought Daksh, an Indian firm that was a smaller version of the big three, and has built it into a large business able to compete on cost and quality with its Indian rivals. Indeed, IBM believes that all in all it now has a significant edge over its Indian competitors.
Being willing to match India’s low-cost model was essential, but Mr Cannon-Brookes insists that IBM’s enthusiasm for emerging markets is no longer mainly about cheap labour. Jeff Joerres, the chief executive of Manpower, an employment-services firm, also thinks the opportunities for savings are dwindling. “When you see Chinese companies moving in a big way into Vietnam, you think there is not much labour arbitrage left.”
Perhaps a bigger attraction now, according to IBM, are the highly skilled people it can find in emerging markets. “Ten years, even five years ago, we saw emerging markets as pools of low-priced, low-value labour. Now we see them as high-skills, high-value,” says Mr Cannon-Brookes. As for every big multinational, winning the “war for talent” is one of the most pressing issues, especially as hot labour markets in emerging markets are causing extremely high turnover rates. In Bangalore, for example, even the biggest firms may lose 25% of their staff each year. IBM reckons that its global reach gives it an edge in recruitment and retention over local rivals.
IBM also says it can manage the risk of intellectual-property theft—a perennial worry for multinationals in emerging markets, especially China—well enough to have cutting-edge research labs in India and China. And it is starting to “localise” its senior management, including moving its chief procurement officer and the head of its emerging-markets business to China. But as yet it has no plan to move its headquarters from Armonk, New York, whereas Halliburton, an energy-services firm, shifted its headquarters to Dubai last year. One notable success has been the company’s partnership with AirTel in the Indian mobile-phone market, which it has already extended to other Indian phone companies and is likely to take to other countries. In this partnership IBM manages much of AirTel’s back-office operations and shares the financial risk with the phone company. “We grow as they grow,” says Mr Cannon-Brookes, noting that IBM is now the largest service provider to local customers in India.
Risk-sharing has worked well for other multinationals too. Vodafone, for example, is a big shareholder in Safaricom. In June Daiichi Sankyo, a Japanese pharmaceutical giant, bought a 51% stake in India’s Ranbaxy Laboratories. Such deals increasingly involve strategic partnerships rather than the joint ventures of old. Daiichi hopes the deal will add value to its research and development expertise and provide access to Japan’s fast-growing market to Ranbaxy, which in turn brings low-cost manufacturing and an understanding of the generics market.
In many emerging markets the most attractive potential customer is the government, thanks to an infrastructure boom that promises to span everything from mobile telephone networks to roads, airports and ports, energy and water supply. IBM is not alone in pitching directly to governments for this business, relying on its established brand and on the growing pressure on emerging-country governments—even those that are not strictly democratic—to deliver high-quality, value-for-money infrastructure. Instead of trying to sell specific products, they say, these firms aim to help governments draw up plans for improving their country—plans which invariably require substantial spending with the company concerned. Both Cisco and GE have recently started establishing long-term problem-solving relationships with governments in which the firms help to design an infrastructure programme as well as build some or all of it.
Three years ago Cisco combined all its emerging-markets activities into a single unit. Since then the share of its revenues coming from emerging markets has risen from 8% to 15%, accounting for 30% of its total revenue growth. “We identify the country’s most important industries and go to them with a blueprint for a strategy to improve them using our technology to beat global benchmarks; this is about revolutionary not incremental change,” says Paul Mountford, head of Cisco’s emerging-markets business.
In 2006 GE—which since launching its Ecomagination strategy in 2003 has bet big on a boom in green technologies—signed a “memorandum of understanding” with China’s National Development and Reform Commission to work jointly to safeguard the country’s environment. It also wants to forge relations with local government in 200 second-tier Chinese cities, each of which will soon have a population of at least 1m and will need everything from a power supply to an airport.
More recently, top GE executives have got together with Vietnam’s government to discuss the huge problems facing the country in water, oil, energy, aviation, rail and finance—all areas in which GE has products to sell. At one meeting GE’s president found himself in the same room with no fewer than three Vietnamese leaders who had taken part in a leadership programme at GE’s famous training facility in Crotonville, New York, recalls John Rice, the company’s head of technology and infrastructure. This programme of inviting groups of 30-40 senior government and business leaders from a particular emerging country to Crotonville for a week was launched more than a decade ago, starting with a group from China. “We transfer a lot of learnings between us, and we end up friends for life,” says Mr Rice.
Today’s leading multinationals “are no longer the slow-moving creatures they used to be. They are not going to be beaten up like the big American companies were by the Japanese,” says Tom Hout, a former consultant at BCG who now teaches at Hong Kong Business School. With Pankaj Ghemawat, who last year published a well-received book, “Redefining Global Strategy”, Mr Hout has analysed the emerging market in which multinationals have competed longest against local champions: China. Whether the established multinationals or their local rivals are winning “depends on the segment you’re looking at”, says Mr Hout. Established Japanese and Western multinationals dominate in the high-tech sectors of the economy; the Chinese are strong at the low end. The main battleground is in the middle. This is quite different from the conventional wisdom, which is that established multinationals are getting pushed out by local companies, he concludes.
A 2007 study by Accenture of China’s top 200 publicly traded companies found that the best businesses in China are not yet on a par with the world’s foremost ones. Although their revenue growth increased on the back of China’s continued economic growth, their ability to create value was still only half that of their global peers. “It remains to be seen whether China’s best players have built the management practices and supporting business operating models that will allow them to generate profitable growth in more mature markets over the long term,” the study went on to say.
Their legacy thinking and cost structures notwithstanding, some established multinationals are increasingly trying to take on the frugal engineers of the emerging markets head-to-head, says Mr Ghemawat. “Smarter multinationals have all given up on the idea that they can simply deliver the same old products in the developing world,” he explains. “If they just focus on pricing high in mostly urban areas, they will miss out on the mass consumer markets that are emerging. And they have to be able to compete as cost-effectively as the local firms, which can mean fundamentally re-engineering their products and business model.”
A recent report by BCG, “The Next Billion Consumers”, highlighted many innovative business models and products offered by multinationals such as Nokia— still the biggest mobile-phone producer in China, despite frequent predictions that it will fall behind a local rival—and Procter & Gamble, as well as similar efforts by emerging-market firms.
The decisive factor may turn out to be management. Although some emerging-market firms are very well managed, by and large established multinationals still seem to have the edge. Mr Hout reckons that the expatriate managers now deployed by multinationals in emerging markets are generally of a much higher quality than the “young bucks or retirement-posting types” they used to send. “They are aggressive, smart, at the heart of their careers. And they tend to be married to more worldly women than management wives used to be.”
That said, the multinationals’ management advantage is based more on training and experience of running a large business than on exposure to other countries. Indeed, leading multinationals are reducing their use of expats, and those they do send are often expected to train a local manager as their successor. There is still a striking lack of executives from emerging markets at the top of developed-country multinationals. Even at GE, which is wholeheartedly committed to emerging markets, around 180 of the top 200 managers are still Americans. “The single biggest challenge facing Western multinationals is the lack of emerging-market experience in their senior ranks,” says Mr Ghemawat.
Such companies’ boardrooms are even less globalised. According to Clarke Murphy of Russell Reynolds, a recruitment firm, American multinationals now have a “ferocious interest in attracting non-Americans to the board”, but as yet even Europeans are a rarity, let alone directors from emerging markets. The share of non-Americans on the boards of American multinationals is less than 5%.
The main problem “is attendance, especially if there is a crisis and the board needs to meet a lot at short notice”. Once again, Goldman Sachs seems to have found a clever compromise by appointing Lakshmi Mittal to its board. The Indian steel tycoon is based in London and often visits New York, where the investment bank has its headquarters.
Some European firms are doing slightly better than their American counterparts at internationalising their boards. Nokia recently appointed Lalita Gupte, an Indian banker who had just retired from ICICI bank, one of the world’s most innovative practitioners of bottom-of-the-pyramid finance. And leading British companies have lots of foreigners in their executive suites and boardrooms.
Moreover, multinationals have great trouble retaining the managers they do have in emerging markets, says Mr Hout. “Well-trained, good, honest people are scarce in emerging markets. Multinationals are better at training these people than emerging-market companies, which prefer to poach them once they are trained.”
The founders of emerging-market firms are often impressive, but such firms typically lack the depth of management talent of old multinationals, says Mr Hout. The best students he has taught on MBA courses in Hong Kong and Shanghai have typically worked for developed-country multinationals.
Part of the problem in China is that running a big company—even a giant such as China Telecom, with its 220m customers—still has a lower status than a political job such as governor of a province. And Chinese managers, being used to protected markets, often lack the skill to operate in more sophisticated markets overseas.
Anil Gupta, co-author with Haiyan Wang of a forthcoming book, “Getting China and India Right”, says that recognition of their lack of management capability may have been one reason why no Chinese steel firms joined their Indian and Brazilian peers in the bidding war for Corus, and why no Chinese carmakers entered the battle to buy Jaguar and Land Rover. “If one could create a Jack Welch index of leadership and assess companies on such a measure, the top 50 companies from India would come out way ahead of the top 50 companies from China,” says Mr Gupta, a professor of strategy at the University of Maryland.
Certainly some Indian firms are extremely well run. The senior ranks of Tata, for example, are full of professional managers. On the other hand, many Indian firms are in family ownership, and “it can be hard to find room for professional managers when you have several sons demanding jobs of similar high status,” says Mr Ghemawat.
Perhaps the best-known example of the problems of family ownership is the feud between the Ambani brothers, who after their father’s death divided the family’s huge conglomerate, Reliance, between them. The dispute still simmers on. In July a bid by Reliance Communications, run by Anil Ambani, to buy a South African mobile-phone company was thwarted by Mukesh Ambani, the boss of Reliance Industries. No wonder that the brothers, who live in the same opulent apartment building, have separate lifts to avoid chance meetings.
TO MOST Western businessmen, this summer’s hounding of Robert Dudley was clearly the work of the Kremlin. Never mind that the four billionaires whose court actions drove the British chief executive of BP-TNK out of Russia presented it as an ordinary business dispute over the terms of the oil joint venture, rejecting the idea that their origins in the Soviet Union made them Kremlin stooges. (One of them told a group of journalists in New York recently: “If you believe that the Kremlin likes me, you are very wrong. First, I am Jewish. Second, I am rich. Third, I am independent.”) To the outside world, this was yet another reminder of the huge political risk involved in doing business in Russia.
Political risk is arguably more pervasive and fundamental to who makes or loses money than at any time since the second world war. And not just in Russia. Indeed, although political risk is most prevalent in emerging markets, it is not confined to them, as Dubai Ports World discovered in 2006 when it tried to buy some American ports from their British owner, P&O, only to be delayed in Congress. A year earlier the Chinese National Offshore Oil Company (CNOOC) had tried and failed to buy Unocal, an American oil company.
In 2006, when Lakshmi Mittal bid for Arcelor, a European steel firm, he met fierce and seemingly racist opposition from the governments of France, Luxembourg and Spain, which preferred to see their champion merge with a Russian rival rather than with “a company of Indians”, as Arcelor’s chairman put it. The deal went ahead only when India’s government threatened a trade war.
“Developed-country governments do unexpected things that are every bit as troublesome as emerging-market governments. If you are an oil or gas company today, do you worry more about emerging markets or a windfall-profit tax in the US?” says GE’s John Rice. Look, too, at the recent heavy-handed interventions in the financial system by the American government. Yet most business leaders around the world reckon that political risk is a far greater problem in emerging markets. Ask the boss of Carrefour, a French retailer, whose shops in China saw violent protests this year after pro-Tibet campaigners disrupted the progress of the Olympic torch through Paris.
Western oil and mining companies, having started to improve their behaviour in Africa under pressure from NGOs, now face competition from Chinese, Indian and Russian rivals that seem willing to cut deals with even the most unsavoury African politicians. And how do Western firms compete in countries where bribes are seen as an ordinary cost of doing business?
Then there are the more humdrum uncertainties about emerging-market governments’ attitude to the rule of law. Will theft of intellectual property be punished? Will lax regulatory enforcement allow your company’s supply chain to be contaminated? (For example, Whole Foods Market discovered in July 2008 that Chinese powdered ginger it had been selling as organic contained a banned pesticide.) Might the government issue a decree that alters the fundamentals of your busi...
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