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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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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



The Agenda

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

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

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
the new global challengers boston consulting group
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)
rdes as platforms for new types of global competitors
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
six strategic models for globalization
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)
gdp per capita is a poor indicator of market potential for ems
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

Unadjusted GNP/capita Figures Fail to Reflect Potential

Source: World Bank. Figures are for 2003.


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

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

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

Sells Product or Technology

Cash received as payment


(typically Western manufacturer of products or technology)


(typically developing country government)

Goods received as payment





Sells products received from customer to third- party buyers

Finds buyers for products received from customer in return for a commission


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
ease of doing business in china hong kong and the u s a the world bank

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

guanxi is social capital in eastern cultures
‘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)
why don t chinese feel the need of religion budhism daoism and confucianism
Why don’t Chinese feel the need of religion? Budhism.. Daoism…and Confucianism
  • Buda (Buddhism)
  • Laozi
  • (Daoism)
  • Confucius
  • (Confucianism)


  • “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.



551-479 BCE

core value of confucian thought virtue
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.
external expression rule obeying
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)


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


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


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

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
one china many markets
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?

facing competitors
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

how chinese brands are positioned
How Chinese brands are positioned…



Appliances and Computers



Most brands: indigenous, product base, mass appeal

for the mass market and often lower-end market

how chinese brands are positioned1
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
competitive restructuring can be swift
Competitive restructuring can be swift…

(Source: Hong Kong Economics Times, January 28, 1999)

shares of top 5 brands of home electronics 6 1999
Shares of Top 5 Brands of Home Electronics (6/1999)

(The National Business Information Center of China)

local brands marketing tactics guanxi bribery
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

winning over chinese consumers2
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
is cheaper always the better
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
the most expensive cell phone
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

market positioning
Market 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

four generation cohorts
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
new china idealists
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
red guard revolutionists
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
modernized realists
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
globalized materialists
Globalized Materialists
  • Globalized Materialists
    • Came of age after 1992, who are 18-29 years old
    • Account for 14 % of the population in China in 2000
    • Receiving post-secondary education or in career searching
    • Single or just married
  • Major events they experienced
    • Increased exposure to global products, lifestyles, and mass media
    • Popular usage of the computer and the Internet
  • Cohort values imprinted
    • Globally minded
    • Receptive to fashionable things and new technology
    • Self-awareness
learning resources
Learning Resources
  • One Billion Customers: Lessons from the Frontlines of Doing Business in China by James McGregor, A Wall Street Journal Book published by Free Press, 2005.
  • The Asian Mystique: Dragon Ladies, Geisha Girls, and our Fantasies of the Exotic Orient by Sheridan Prasso, Public Affairs, 2005.
  • China Shakes the World: The Rise of a Hungry Nation by James Hynge, forthcoming.
  • Doing Business in Emerging Markets, S.T. Cavusgil, P. Ghauri & M. Agarwal, Thousand Oaks, CA: Sage Publications, Inc., 2002.
learning resources1
Learning Resources
  • The World is Flat: A Brief History of the Twenty-First Century by Thomas L. Friedman, New York: Farrar, Straus and Giroux, 2005.
  • The Next Global Stage: Challenges and Opportunities in Our Borderless World by Kenichi Ohmae, Pearson Education, Inc./ Wharton School Publishing, 2005.
  • Tectonic Shift: The Geoeconomic Realignment of Globalizing Markets by Jagdish N Sheth and Rajendra Sisodia, New Delhi:Response Books
  • The Culture Code: An Ingenious Way to Understand Why People around the World Live and Buy As They Do by Clotaire Rapaille, Broadway Books, 2006.