In 1893, American historian Frederick Jackson Turner declared that a frontier isn’t just a place; it’s also the process of adaptation and change that shifting borders force on people and institutions. The young Wisconsin professor was describing the role that the frontier had played for three centuries in creating the American nation, but the Turner thesis applies to modern business, too. Over the past three decades, the borders of the corporate world have constantly shifted as developing countries opened their economies to foreign businesses. As a consequence, multinational companies have had to cope with runaway growth, intense competition, greater complexity—and constant change.
Even so, little they have learned has prepared Western companies for the impact of today’s great recession on globalization. Not only is the worldwide slowdown hurting developed economies more than emerging economies, but it’s affecting the latter differently and substantively altering their role in the global economy. By the time the slowdown ends, the frontier will have shifted again in unexpected ways.
Today’s great crisis is forcing change at three levels. First, the developing countries are becoming relatively bigger markets. Defying the odds, they seem likely to expand by 1.6% overall in 2009, with the International Monetary Fund projecting in April 2009 that China’s economy would grow by 6.5%, India’s by 4.5%, and the Middle East’s by 2.5%. The pace is much slower than the spanking 6.1% at which the emerging markets grew collectively in 2008, but it’s remarkable considering the IMF’s forecast that the developed economies will shrink by 3.8% this year. “Emerging markets will account for a larger share of the world’s output when the recession ends than when it began,” concludes Antoine van Agtmael, who heads the investment firm Emerging Markets Management. “That will make them even more attractive.”
Second, governments are reshaping the contours of economic development even as they stoke growth through monetary and fiscal policy measures. No government is doing that more than China’s, which is using the $586 billion stimulus package it announced in November 2008 to influence demand and supply in 10 industries that together account for 50% of the country’s GDP. For instance, in January 2009 the China Auto Stimulus Package unveiled several measures—including a 50% cut in the sales tax on vehicles with an engine capacity of less than 1.6 liters—to boost demand for small and fuel-efficient vehicles. Companies that don’t launch such vehicles or focus on making bigger automobiles will find themselves at a disadvantage. “The government calls it a stimulus, but it’s really redesigning industries,” says David Michael, the Greater China head of the consulting firm BCG. “That’s why 9% GDP growth in China tomorrow won’t be yesterday’s 9% growth. The ‘new normal’ in many rapidly developing economies will be different after the recession.” Edward Tse, Booz & Company’s managing partner for Greater China, agrees: “The China of the next 10 years will be very different from the China of the last 10 years and so will require a very different approach for companies doing business there.”
Third, competition in developing countries has become more intense. With exports shrinking, companies in those countries are concentrating more on growing their sales at home. The rivalry is particularly heated in markets for commodities, such as steel, cement, and aluminum, and for upmarket and middle-market consumer segments. With multinational companies trying to squeeze more revenues out of developing countries, too, only the fittest businesses seem likely to survive the slowdown.
Smart companies in emerging markets have started responding to the challenges these changes pose. In fact, a few of them saw the downturn coming and modified their strategies quickly. (See the sidebar “Emerging Strategies to Beat the Slowdown.”) Companies in these countries already have an edge because they’re the world’s cheapest manufacturers and don’t need to develop low-cost business models. But before the downturn began, rising resource costs and appreciating currencies had eaten away at their profit margins. Many businesses are using the recession as a pretext to do some spring cleaning and reduce costs. “Between 1995 and 2008, Indian companies grew so quickly that many bad habits crept into their operations,” says Nirmalya Kumar, a London Business School professor. “They’re trying to eliminate them. After more than a decade of growth, they are taking a breather to restrategize.”
Many emerging giants are restructuring portfolios, halting iffy diversification plans, and consolidating operations. They’re introducing quality systems such as lean Six Sigma so that they can manufacture better products at a lower cost. In China, India, and Turkey, companies are taking a hard look at talent and firing (or not hiring) and halting bonuses and raises to freeze salary bills at last year’s levels.
Some businesses are using the cash they’ve freed up to develop value-for-money products and services, particularly for rural consumers and those in the lower middle class. Several Chinese manufacturers are using the slackening of demand as an opportunity to develop advanced products of their own, so that they won’t always have to serve as subcontractors. “Some costs, like talent costs, are lower today, so it’s a good time for companies to invest in developing innovation capabilities,” points out Peter Williamson, a professor at the University of Cambridge’s Judge Business School.
In India, Tata Motors’ March 2009 launch of the world’s most inexpensive car, the $2,000 Nano, has made low-cost innovation a priority for companies and entrepreneurs. There’s even a name for the trend: the Nano Effect. And in China, BYD Auto’s December 2008 launch of the world’s first mass-produced plug-in electric car, the F3DM, which sells for $22,000, has created a similar BYD Effect.
Clearly, the companies in these economies will be much more competitive at the end of the recession than they were when it began. This is the conclusion I came to after interviewing 30 or so academics and consultants in Argentina, Brazil, Bulgaria, China, Egypt, Hungary, India, Mexico, Russia, and Turkey during the first four months of 2009. I also spoke with senior executives working for local and multinational companies in emerging markets and reviewed recently published research.
Most Western companies are preoccupied with the crisis in their home markets, but they need to start focusing on the next phase of global growth. If they want to avoid being blindsided tomorrow, they must track five tectonic shifts that are emanating from the developing world.
Shift 1: A Growing Divide
Many executives are convinced that the manner in which the recession unfolded across the globe last year underscores the close connections between developed and developing economies. Since the 1990s, countries have become tightly interlinked, primarily by trade and financial flows. A contraction of the developed economies will set off shock waves in emerging markets and send stock markets all over the world tumbling—as has happened in the past year. In this view, it’s unlikely that the emerging markets can continue their rise when the advanced economies are falling.
