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S. Tamer Cavusgil University Distinguished Faculty

Understanding Emerging Markets: The Potential of Rapidly Developing Economies. S. Tamer Cavusgil University Distinguished Faculty The John W. Byington Endowed Chair in Global Marketing Michigan State University May 2007. 10/3/2005. The Agenda. What is an Emerging Market?

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S. Tamer Cavusgil University Distinguished Faculty

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  1. Understanding Emerging Markets: The Potential of Rapidly Developing Economies S. Tamer Cavusgil University Distinguished Faculty The John W. Byington Endowed Chair in Global Marketing Michigan State University May 2007 10/3/2005

  2. The Agenda • What is an Emerging Market? • What are unique features of EMs? • Special risks/challenges and opportunities • China focus • Strategic implications for businesses

  3. What is an EM? • High-growth, high-potential markets • … in East Asia, Eastern Europe, Latin America; … China, India, South Africa, Turkey … • Engaged in rapid industrialization, market liberalization, privatization, modernization • An artifact of past three decades of global economic realignment

  4. The Promise of EMs • Dynamic, rapidly transforming… • Young demographics • Middle class coming into its own • Engaged in technological leapfrogging • Low competitive intensity • Less regulated • Serve as export markets, investment destinations, and sourcing locations

  5. Anholt-GMI Nation Brands Index(limited to 11 nations)

  6. The New Global ChallengersBoston Consulting Group • 100 companies from RDEs (Rapidly Developing Economies) that are poised to become important 21st-century multinationals • Embraer, Sadia & Perdiago, Natura (Brazil), • America Movil, Groupo Modelo (Mexico), • Ranbaxy, Infosys, Tata Tea, WIPRO (India), • Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano (China) • Koc Holding, Vestel & Sisecam (Turkey)

  7. RDEs as Platforms for New Types ofGlobal Competitors • RDEs have rapidly growing markets, some of which are very large • RDEs have low-cost resources • Difficult operating environments at home produce some highly capable companies • RDEs are training grounds for competing with global incumbents

  8. Six Strategic Models for Globalization • Taking RDE brands global (China’s Hisense, taking consumer electronics to Africa) • Turning RDE engineering into global innovation (India’s Wipro) • Assuming global category leadership (Hong Kong’s Johnson Electric) • Monetizing RDE natural resources (Brazilian food processors Sadia and Perdiago) • Rolling out new business models to multiple markets (Mexico’s cement conglomerate Cemex’s global acquisition strategy) • Acquiring natural resources (Shanghai Baosteel group expanding globally to secure stable iron-ore supplies)

  9. GDP Per Capita is a Poor Indicatorof Market Potential for EMs • Need to adjust for Purchasing Power Parity • Informal economy is often as large as the formal economy in developing countries • The “mean” is a poor indicator since income distribution is typically bi-modal in EMs • Household income several times larger than per capita income because of multiple wage earners • Developing country statistics may be unreliable • Typical exporter is more interested in a large enough “market niche” than huge potential

  10. Unadjusted GNP/capita Figures Fail to Reflect Potential Source: World Bank. Figures are for 2003.

  11. Unique Features • Surging middle-class -- the best indicator • Society, values, institutions, and rules are in flux • Family conglomerates or state- owned enterprises dominate • If trading with the state, Countertrade or reciprocal trade may be imposed • Cultural differences persist

  12. Family Conglomerates in Emerging Markets • Large, diversified, family-owned businesses that dominate their respective economies • A universal phenomenon: Groupos, Chaebols, Zaibatsu (Keiretsu), Business Houses, Holding Companies, Bamboo Networks, Bhumiputra • Informal structure, quick decision-making, entrepreneurial, high employee loyalty, strong shared values, political clout • Strong local identity; loyalty • Formidable competitors or potential allies

  13. State Owned Enterprises in China • China Mobile, Petro China, China Southern Airlines… • Almost all top corporations in automobiles, banking, power generation, aviation, telecom, gas… • Employ over half of China’s 750 million workers; control 57% of its industrial assets; and provide essential goods and services • State-run companies return only about 3% on ROA as opposed to about 7% in the private sector

  14. Sells Product or Technology Cash received as payment Marketer (typically Western manufacturer of products or technology) Customer (typically developing country government) Goods received as payment Goods Cash Countertrade Broker Sells products received from customer to third- party buyers Finds buyers for products received from customer in return for a commission

  15. The Challenges in EMs • Bureaucracy/ Redtape / Lack of transparency • Inadequate legal, political, institutional framework • Political instability • Government meddling over business • Availability of IP protection • Partner availability and qualifications

  16. Ease of Doing Business... in China, Hong Kong and the U.S.A.(The World Bank) Doing Business (overall) 93 5 3 Starting a Business 128 5 3 Dealing with Licenses 153 64 22 Employing Workers 78 16 1 Registering Property 21 60 10 Getting Credit 101 2 7 Protecting Investors 83 3 5 Paying Taxes 168 5 62 Trading Across Borders 38 1 11 Enforcing Contracts 63 10 6 Closing a Business 75 14 16

  17. ‘Guanxi’ is Social Capital in Eastern Cultures • ‘Guanxi’ refers to social connections based on mutual interest and benefits • “reciprocal exchange of favors as well as mutual obligations” (Alston 1989; Hwang 1987; Luo 1997) • Guanxi engenders trust and thereby serves as a form of insurance in an otherwise risky business environment (Chua & Morris 2005)

  18. Why don’t Chinese feel the need of religion? Budhism.. Daoism…and Confucianism • Buda (Buddhism) • Laozi • (Daoism) • Confucius • (Confucianism)

  19. Daoism DAOISM • “The other way”: passive way of thinking and doing • Core value: • no action modeled on nature (无为) • Yin and Yang (阴阳): virtually everything is a paradox which has two opposite sides. The balance of two sides is important. Yin: the symbol of weak, soft, and female things; Yang: the symbol of strong, harsh, and masculine things.

  20. Confucius 551-479 BCE

  21. Core Value of Confucian thought: Virtue 德 • Confucianism is primarily an ethical system, with little metaphysical speculation. • Confucius himself had a simple moral and political teaching: to love others; to honour one’s parents; to do what is right instead of what is of advantage; to practice “reciprocity”; to rule by moral example instead of by force and violence….. • It was the ideal of benevolent rule. Confucius thought that government by laws and punishments could keep people in line, but government by example of virtue (德) and good manners (礼) would enable them to control themselves.

  22. External Expression: Rule obeying • Confucius believed the path to happiness and harmony lies at the degree to which everyone in the society obeys certain rules and the given roles in order of things. • “三纲五常” The three cardinal rules: Ministers obey ruler (君为臣纲) Children obey father (父为子纲) Wife obeys husband (夫为妻纲)

  23. Four Types of IB Risks  Poor Partner  Operational Problems  Cost of exit/termination  Competitive barriers  Poor execution of strategy Commercial Risk Types of Risks in International Business Cross-Cultural Risk Currency/Financial Risk • Liability of foreignness • Cross-cultural blunders  Negotiation failures •  Decision-making errors • Ethical dilemmas  Currency exposure  Asset valuation  Foreign taxation  Inflationary and transfer pricing  Global sourcing Country (Political and Legal) Risk  Social/political unrest and instability  Economic mismanagement; inflation  Distribution of income; size of middle class  Government intervention, bureaucracy, red tape  Market access; barriers; profit repatriation  Legal safeguards for intellectual property right

  24. Strategic Implications for Business • Monitor and build networks in key EMs • Learn and adopt local business practices • Access strong local expertise via FCs • Understand country, partner, and project risks • Build relational equity in partnerships in view of limited legal safeguarding • Capitalize on export / investment / outsourcing opportunities

  25. Winning over Chinese Consumers

  26. Management Skills to be Refined • Cultural empathy / Open-mindedness • Tolerance for ambiguity • Perceptiveness • Premium on personal relationships • Flexibility/Adaptability/Self- reliance • A good sense of humor • Warmth in human relationships • Curiosity

  27. One China, Many Markets Urban Area in China: 1st Level: Beijing; Shanghai; Guangzhou (Chongqing in the future) 2nd Level: Medium-size cities in the coastal area (special economic zones) 3rd Level: cities in hinterland Q: Which area will be your choice if your firm enters China? http://www.youtube.com/watch?v=lb_TdGvaQK4&mode=related&search=

  28. Facing Competitors • Global rivals (predictable) “All the big guys are [in China], right down the list. For the international players, this is a dog fight.” Dr. Gary Kirks President and CEO, British Petroleum China • Emerging domestic opponents (unpredictable) • Home-court advantage: low price, high quality • Fast learners • Commitment to Professionalism “Chinese companies are trying as fast as they can to be like MNCs. So, the distinctions are going to blur.” John Wong Managing director Great China, The Boston Consulting Group

  29. How Chinese brands are positioned… : Drinks Appliances and Computers Automobile Cigarettes Most brands: indigenous, product base, mass appeal for the mass market and often lower-end market

  30. How Chinese brands are positioned… • Strengths of Successful brands • Standardized production technology, low price • Relationship with government and suppliers • Emphasize Attribute Differentiation • Implementation Competence • Weaknesses of Successful brands • Aesthetics and original design • Total brand integration • Brand equity development, no real global brands

  31. Competitive restructuring can be swift… (Source: Hong Kong Economics Times, January 28, 1999)

  32. Shares of Top 5 Brands of Home Electronics (6/1999) (The National Business Information Center of China)

  33. Local brands’ marketing tactics:Guanxi (Bribery?) • Guanxi-building A strong guanxi network is a fundamental element in your success in China. • Bright side: exchanges of favors • Dark side: a nice way of saying “corruption” • What will you do when you see some of your competitors (domestic or international) using methods, such as bribery, kickbacks, or illicit exchanges of business favors for personal favors, to get customers or support from government? Case: DuPont in China “Our core values do not change.” Kenneth Yu Managing direct of China, 3M

  34. Summary of TipsFacing Competitors

  35. Winning Over Chinese Consumers

  36. Winning Over Chinese Consumers • The lure of 1.3 billion customers • Tough customers • Sky-high demands • Pricing constraints • Mismatched products • One China, many markets • Low brand loyalty • Lack of reliable consumer market information • Regulatory challenges • Logistical difficulties

  37. Is Cheaper, always the Better? • Value for price used to be regarded as the most important factor in influencing consumer behavior • A traditional virtue • Unreliable pension system • Social value (status, peer approval): • Higher standards of living and globalization • Widening income gap and formation of different social classes • Vertical vs. horizontal dimension to maintain for Chinese people • Evolution of consumption value schemas: simple  complex

  38. The Most Expensive Cell Phone Nokia: Vertu Price: U.S. $ 32,000 Appeal: Sign of prestige, status, and success, esp. in Asia Major Source of Buyers: Hong Kong, Mainland China, Singapore and Indonesia

  39. Market Positioning Positioning • Psychographic differences: consumption values and life styles etc. • Regional differences: east vs. west, coastal vs. inland • Age differences: Generation Cohorts Segmentation: geographic, socialdemographic, and psychographic approaches can be employed

  40. Four Generation Cohorts • According to four influential events in China --the Foundation of the People’s Republic of China, the Cultural Revolution, the modernization reform, and the globalization of China-- it is possible to define four historical generation cohorts in China: • New China Idealists • Red Guard Revolutionists • Modernized Realists • Globalized Materialists

  41. Definition and Characteristics of Generation Cohorts in China

  42. New China Idealists • New China Idealists • Came of age during 1949-1965, 57-73 years old now • They account for 9 % of the population in China in 2000 • Approaching Grandparents, Grandchildren rearing • Retired, light healthy practices • Major Events They Experienced • Hundred Flowers Movement (1956-1957) • Anti-Rightist Movement (1957) • Great Leap Forward Movement (1958-1962) • Cohort values imprinted • Enthusiastic to the call of the party • Put state interest above individual interest • Conscious of the politics

  43. Red Guard Revolutionists • Red Guard Revolutionists • Came of age during 1966-1977, who are 42-56 years old • Account for 20 % of the population in China in 2000 • Parents with Children approaching adulthood • Working, approaching retirement, or be laid-off • Major Events they experienced • Catastrophic social turmoil (1966-1968) • Up to the Mountains and Down to the Villages movement—Shang Shan Xia Xiang (1968-1978) • National Isolation (1966-1978) • Cohort values • Scarred • Idealistic but realistic • Compensatory • Strong social bonds with their peer • Reminiscent of the past

  44. Modernized Realists • Modernized Realists • Came of age during 1978-1991,who are now 31-41 years old • Account for 21 % of the population in China in 2000 • Parents with young children • Working, responsible for the major income of the family • Major events They experienced • Centrallly-planned economy transforming to market-led economy • Price Inflation (1985-1992) • Rural Reform (1978-1984) and Urban Reform (1984-1989) • Qiang Gou Chao — scare buying (1988) • Cohort values imprinted • Acquisitive • Risk taking

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