Why Local Companies Are Winning in Emerging Markets
When entering emerging economies, multinationals
should get genuinely involved and actively participate in the development of
local markets rather than just adapt to them.
Many leading multinationals are finding that
their biggest competitors in emerging economies are local players and not other
big global names. Why is it, for example, that the Chinese and Indian ice cream
markets are dominated by local brands and not the likes of Unilever and Nestlé?
The same goes for a range of industries, such as home appliances or e-commerce,
and not just in China and India. In most cases, the fact that local companies
have been outperforming foreign multinationals cannot be blamed on protectionist
regulations or unfair competition.
A study I conducted with Peter J. Williamson
described in “The New Mission for Multinationals” provided plenty of evidence of locals winning
in various emerging markets and led us to discover why. We found three main
factors for why locals are winning and why multinationals aren’t: 1. Local
companies are leveraging the world’s technologies and knowledge at home; 2.
Local firms can turn quickly to consecutive shifts, which means attempts by
multinationals to adapt to the local market lag behind developments; 3. “Local
integration” provides a dual ‘home team’ advantage. Together, these three
factors make local firms a force to be reckoned with.
Leveraging the world at home
It was often assumed that globalisation would
only favour large multinationals from the developed world, which could transfer
physical as well as intangible assets within themselves cheaply and
efficiently. Their ability to outsource and offshore activities to emerging
economies ensured costs remained low, thus strengthening their domination.
But what goes around comes around. Globalisation
also affords local players in emerging economies the access to the same modular
designs, product components, contract manufacturing, and cross-border M&A
opportunities to bolster their competitiveness in their home markets in ways
that weren’t possible in the past. China’s Xiaomi Inc., for example, sells
mobile phones in China which are engineered and made with technologies,
components and manufacturing services by the same American, Japanese, and
Taiwanese suppliers that serve Apple and Samsung.
Local companies anywhere can also benefit from
global markets for knowledge-intensive activities such as design, engineering,
or consulting as well as from global markets for talent and talent development.
Four of Xiaomi’s eight local founders have a combined experience of fifty years
inside Motorola, Google, Microsoft, and Siebel, in addition to various academic
degrees from Purdue, Georgia Tech, and the College of Design in California. The
“global village” is, after all, a village for everybody.
Adaptation lags behind developments
The rapidly changing dynamics of emerging
markets is why “local adaptation” is always a second-best strategy in emerging
markets. Countries such as the BRICS have been engaged in the process of
globalisation with an unprecedented surge of modern development. Their
economies are, by and large, transforming into different shades of the market
economy. If we focus on the growth that several of these emerging markets have
exhibited, we may miss the point of the complex transformation that their
societies are going through, each unlike the other. It is this ‘emergence’ that
is both fascinating and hard to comprehend.
“Development” is not a linear path, let alone a
predictable one. It is associated with myriad changes (new institutions, new
policies, new rules and practices, new technologies and skills, new offerings
and preferences, new industries and product markets), some incremental and some
disruptive. Such economies are emerging precisely because such a transformation
is multifaceted and intricate, morphing and shifting, turbulent and partly
unforeseeable.
An emergent market economy is not just about the
economy; it is also about the polity and the society. Brazil’s economy has been
through an extraordinary phase of development and growth. At the moment GDP is
shrinking, but the question is not just about the short-term consequences of
inadequate fiscal policies or the dependence on commodities. The country is
struggling to unlearn old habits that led to corrupt relationships between
business and politicians, and changing the practices of politics and
government. At the same time, it is dealing with the increased participation of
citizens using social media who demand improvements to infrastructure,
environmental sustainability, and more. Brazil’s continued emergence is a long
and rough journey forward.
It wasn’t long ago that China had little or no
internet access. Now, it has 22% of the world’s internet users. Such rapid
developments are significant in that they transform work habits, social
interactions and feedback mechanisms. Different preferences and habits emerge in
different places and along the way, new rules enacted, common practices change
and some traditions vanish.
It is not easy to understand today’s China from
an office in the US or in Sweden, let alone work out what the implications of
a changing China are. Even those in China cannot fully know
what China will be tomorrow. Emerging China can only be anticipated, and
partially so, by those who are actively engaged in building it. If you go there
today, by the time you appreciate what is happening, it will have moved on.
Multinationals are, at best, slow to adapt to such rapid social and
institutional shifts in an alien field and often miss the boat.
Local integration
The "home team" in an emerging market
has an additional advantage: it can anticipate changes because it is actively
engaged in developing the playing field and co-evolving with it, as the game
plays out. Unless the visitors have some remarkable superiority that works well
in any situation, they are bound to lose. Transforming the field and playing at
the same time is taxing for the home team but they have a particularly powerful
motivation: it is their home, after all.
Amazon and eBay were early entrants in China
when e-commerce was just beginning there. They found an embryonic market in a
vast country with no reliable and efficient infrastructure for delivery or
credit card payments. How could they adapt their plays to that field? Alibaba,
a local e-commerce company, decided to introduce new plays and change the
playing field. It created AliPay, a special payment system with Alibaba acting
as intermediary and guardian (by providing a trust account that did not release
funds to the seller until the buyer was satisfied); it partnered with forty
local banks and with China Post, so that AliPay accounts could be re-charged
nationwide; and it worked with the Post and several local delivery and
logistics companies around China to develop and facilitate the collection and
delivery of parcels. Alibaba continued to transform the local landscape for
e-commerce, as well as itself, actively influencing the development of the
market in China while simultaneously evolving with it.
Natura, the leading player in the local market
for toiletries, perfumes and cosmetics in Brazil, was a pioneer in using a
variety of rainforest plants and trees as key ingredients for its products.
Natura worked hand-in-hand with 32 local communities in the poorer North of
Brazil, often in remote regions, and helped build and develop the skills and
methods of over 5,000 small suppliers there. It worked with local and federal
regulators and legislators to help shape the regulatory framework of Brazil’s
unique biodiversity. At the same time its strategy encouraged greater
protection of the environment and was instrumental in building public awareness
about the need for greater sustainability in Brazil. Natura was among the first
companies in the world to practice “triple bottom line” principles, a lead that
was subsequently followed by many other Brazilian companies. Natura’s charismatic
founders were vocal about how companies need to participate in the development
of their countries. Natura was perceived to be sharing its destiny with that of
the country, something that multinationals rarely achieve outside their own
home country.
We identified five mechanisms that local
companies often use to build dynamic “home team” advantage in emerging markets
– a strategy we call “local integration” (these are detailed in “The New Mission for Multinationals”). Local integration requires the
active involvement and commitment of a company to a place and its community.
Being embedded locally is not enough, let alone just cloning a foreign
operation. Many local companies speak and act as if their “home” is just the
natural place to do business and make a profit. This is obvious. But other
companies go much further, embracing a vision for their “home” and contributing
to it. GE, for example, is public about its part in a “strong U.S.”. Not
surprisingly: GE is a global American company, profoundly engaged with, and a
long contributor to, the development of its home country. Likewise with Alibaba
and Xiaomi and Natura and many other local companies in emerging markets. The world
may be global, but “there is no place like home”.
The question is, can a multinational company be
“locally integrated” outside its home base, or will it remain consigned to
being foreign, a “visitor”, seen as trying to maximise its own performance by adapting
its business to the local market and leaving at the first sign of distress?
Such an alien visitor may still win there, but only when the local market
values it because it is foreign, or because it comes with unique offerings that
locals value, or both. Otherwise, in emerging markets, local companies will
continue to win.
Jose Santos is an Affiliated Professor of Practice in
Global Management at INSEAD.
Read more at http://knowledge.insead.edu/strategy/why-local-companies-are-winning-in-emerging-markets-4488?utm_source=INSEAD+Knowledge&utm_campaign=a17fe79cf2-Feb_11_Mailer2_11_2016&utm_medium=email&utm_term=0_e079141ebb-a17fe79cf2-249840429#CR7uibhX1ZFXQ1S6.99
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