how to succeed in emerging markets

7/31/2019 How to Succeed in Emerging Markets

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Issue 15 Cybersecurity Beyond the

BRICS

Interview with P&Gs

Deb Henretta

24 34 46

Designing yourfiercest competitorMastering change bymaking it realpage 12

view


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34 PwC ViewIssue 15

Beyond the BRICSHow to succeed in emerging markets(by really trying)

Strategy and growth


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PwC View Issue 1535

By John Maxwell

John Maxwell is the Global Leader in PwCs Retai

and Consumer practice.

1 Emerging Markets Take Centre Stage: A Dramatic Shift in Purchasing Power, Business Monitor International, February 4, 2010

2 PwC, Central banks: After the storm, 2010.

US businesses with keyoperations beyond the maturemarkets of North America and

Europe are most optimistic

about growth. Of those withoperations in emergingmarkets, about three-quarters expect businessesin those regions to expand,according to PwCs 15th

Annual Global CEO Survey.The world is turning to the

East, and consumer goodscompaniesjust like other

sectors that ultimately depend

on purchasing power andattractive demographicsare paying attention.

Its been 10 years now since Goldman Sachs Jim ONeill rst coined the acronym BRICs

in his November 2001 research paper, The World Needs Better Economic BRICs. ONeills

forecast of the importance of these markets was prescient. For example, even after their

advances over the past decade, China, India, and Russia are predicted to triple spending

power by 2018, and Brazil is not far behind, according to a recent report by Business

Monitor International.1

While South Africa, by most accounts, has become a fth member of the BRICS (signied

by the capital S), these countries no longer sufciently represent the rise of emerging

markets. Global gross domestic product (GDP), factoring in purchasing power parity,

now has reached about a 50/50 split between the developed economies and emerging

economies. In fact, for the rst time since the dawn of the Industrial Age, the global

economic engine is being powered by Southern Hemisphere nations.2

Moreover, in the aftermath of the nancial crisis and subsequent Great Recession,

the emerging markets as a wholenot the worlds debt-ridden developed markets

have been the most resilient in the face of global distress. As Chief Economist and Leader

of PwCs Emerging Markets practice Harry Broadman puts it, Going through the nancialcrisis, the most resilient economiesmeasured by GDP or trade volumeshave been

the emerging markets.

Broadman made this comment at PwCs annual Global Retail and Consumer Leadership

Conference held recently in New York. He moderated the session A BRIC and Beyond,

which examined the notion that, while the BRICS still serve as a proxy of sorts for any

emerging markets discussion, there is much going on beyond the BRICS that business

leaders should know about.

Besides Broadman, the panel included Michael Tangney, vice chairman of Colgate-

Palmolive; Ricardo Neves, PwCs retail and consumer leader in Brazil; John Wilkinson,

PwCs retail and consumer leader in South Africa; and Adnan Akan, PwCs retail and

consumer leader in Turkey. In the following, we present highlights of their discussion.

John Maxwell

Global Retail and Consumer Leader

PricewaterhouseCoopers LLP


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36 PwC ViewIssue 15

The EAGLEs are defned as 10 emerging and growth-leading economies

When we speak of emerging markets,

just what countries are we talking about?

It depends on whom you ask: The FTSE

Group identies 22 emerging markets,

split between advanced and secondary.

Standard & Poors, which rates the sov-

ereign debt of 126 different countries,

classies 19 of them as emerging markets.

Perhaps not surprisingly, the ubiquitoussuccess of the term BRICS has spawned

a whole new set of alphabet-soup-like

terms for different groupings of emerging

markets. One is the EAGLEs, dened as

the 10 emerging and growth-leading

economies. (See Figure.) Others are the

12 countries of the Big Emerging Markets

(BEM), and the rather unwieldy CIVETS,

which includes Colombia, Indonesia,

Vietnam, Egypt, Turkey, and South Africa.

No matter how they are sliced and diced,

most emerging markets will continue to

enjoy growth that dwarfs that of the devel-

oped markets. The International Monetary

Fund and the World Bank project that,

in 2025, the pace of growth in emerging

markets still will be double that of devel-

oped markets.

What surprises many, though, is the precise

nature of this growth. Much of it will resultfrom whats called South-South commerce3

as opposed to the more familiar North-

South commerce, which is advanced

countries investing in developing countries

to make products cheaply and then export-

ing predominantly to developed countries.

There is a tremendous amount of com-

merce that is taking place among emerging

markets, said Broadman. In 1970, South-

South trade was about seven percent of

world trade. Today, it is 20 percent of world

trade. That means that the usual suspects

looking for market share in emerging

Something funny happened to developing

markets as they continued to emerge:

They became the engines of global eco-

nomic growth. India, China, Brazil, and

many other countries are undergoing the

kind of economic transformation that

South Korea, Japan, and the nations of

Europe experienced during the post-World

War II boom. Economic progress in emerg-ing markets is happening at an accelerated

pace due partly to advances in technol-

ogy, sound economic policymaking, and

reduction in poverty as a result of health,

education, and other social reforms.

In fact, from 1996 to 2010, emerging

markets countries grew at more than twice

the rate of developed countriesabout

ve percent versus two percent annual GDP

growth, respectively. Even more impressive

is that, recently, income disparity between

certain emerging markets and developedmarkets is declining rapidly.

3 Commerce among emerging markets.


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PwC View Issue 1537

Source: BBVA

B R A Z I L

C H I N A

E G Y P T

I N D I A

I N D O N E S I A

M E X I C O

R U S S I A

S O U T H K O R E A

T A I W A N

T U R K E Y

There is a tremendous amount of commerce that is taking placeamong emerging markets, said Broadman. In 1970, South-Southtrade was about seven percent of world trade. Today, it is 20 percentof world trade.

marketsmultinationals from developed

countrieshave an additional source

of competition in successful emerging

markets brands.

This sea change in the structure of the

global economy has ushered in a new era of

South-South capital investment as well. In

the past, the transparency and liquidity ofthe US capital market proved an enormously

strong lure for many global companies,

no matter where they were based. While

the US still is one of the globes largest

recipients of foreign direct investment,

the growth of South-South foreign direct

investment ows has taken off. If you look

at where foreign direct investment out

of emerging markets goesthe multina-

tional corporations from these emerging

marketsone-third of their foreign direct

investment is taking place in other emerging

markets, according to Broadman.


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38 PwC ViewIssue 15

how te emerging mrkets were

nd sti cn bewon

The companies that thrive in emerging

markets often tend to be the pioneers.

Colgate, for example, can lay claim to a

century-long legacy of overseas opera-

tionsnot to mention customers in

200 countries today.

When Colgate vice chairman Mike

Tangney was asked about the companys

long-time success in Latin America and

Asia, he explained that when he arrived

in Colombia in the late 1970s after time

spent at several other international Colgate

locations, he found a comparably strong

Colgate operation in the city of Cali.

Tangney quizzed several in-the-trenches

managers in Colombia, trying to under-

stand their secret. They all told him the

same thing: Virtually the entire manage-

ment team had been in place for nearlytwo decades, getting to know the lay of

the land. Thus, whenever asked to account

for Colgates success in perceived risky

environments, Tangney always responds:

Consistency of management, a willingness

to take the ups and downs, persistence, and

long-term vision.

John Wilkinson cited the Shoprite Group

of Companies, Africas largest food retailer,

as another company bold enough to look to

emerging markets ahead of other compa-

nies. Today, the company has more than

1,500 stores in 16 countries across Africa.

Shoprite is very interesting because

they are seen as pioneers in Africa,

Wilkinson said. Its exciting to talk totheir management about the challenges

and opportunities in Africa.

But for companies with no presence or just

nascent operations in emerging markets,

what good is talk of being a corporate

pioneer in 2012 when consumers all over

the world use mobile devices; more than

a billion people can access the Internet;

and millions enter the ranks of the middle

class every year? The irony is that despite

an ever-smaller and more interconnected

world, there still are many opportunities tobreak new ground. Three key C-suite attri-

butes can help ease the transition: a taste

for risk, in Tangneys words; a willingness

to disregard conventional wisdom about

emerging markets; and a commitment to

being there for the long haul.

attribute one:a tste for risk

According to Tangney, there is a value

proposition paradox at work in some African

countries that many companies without

experience there cant appreciate. While

some consumer packaged goods companies

are reluctant to build businesses in relatively

poor countries, assuming that they can sell

products only very inexpensively, Tangneysaid that, on the contrary, some of these

consumers are willing to pay a premium.

Even though consumers may have minimal

purchasing power, the value of what Colgate

sells to them is greater than the value in

developed markets, Tangney said. When

I go into homes in Soweto, South Africa, I

ask the question, Why do you buy what you

buy? And they say: The health of my fam-

ily is important. I am not going to buy the

cheapest product. We can, in fact, command

a premium price. But companies must beprepared for poor quarters, poor years, and

just about everything in between. Over the

years, weve dealt with chaos, civil insur-

rection, nancial disruption, Tangney said.

If youre looking for a sure thing, emerging

markets are not the way to go. You need a

taste for risk and a tolerance for ambiguity.


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PwC View Issue 1539

Unilever is another consumer products

company embracing the opportunities in

emerging markets while being aware of the

risks. Shifting much of its business to new

markets will mean a lot of changes,

as Unilever CEO Paul Polman explained in

an interview for PwCs 14th Annual Global

CEO Survey, published last year: Within

10 years, 70 percent of our business willcome from the Far East, Polman said. That

shift eastward has tremendous implications

for our companys structure and culture. The

values at the heart of our company certainly

wont change, but our culture and business

model will need to evolve to reect a chang-

ing customer demographic.

Other consumer goods CEOs clearly share

the same view: According to the survey,

57 percent anticipate that theyll need to

make strategic changes to capitalize on

the increasing prosperity of consumers inemerging markets. One of these CEOs is Bob

McDonald, Chairman of the Board, President

and CEO of US-based Procter & Gamble

(P&G). He explained to PwC just how com-

mitted P&G is to emerging markets, despite

the risks. He told us: We currently have 20

new factories under construction around the

world19 in developing markets and one in

a developed market, which is the US.4

Companies with the DNA to stake a claim

today in emerging markets may nd large

swaths of them still open for penetration.

Brazil, for example, is a huge economic

success story, but its relative insularity still

scares off some foreign companies. Brazil

has been an economy that, in some ways,

has been very closed, even when compared

with other emerging markets, said panelmember Ricardo Neves. Historically, we

have always been bureaucratic and put

a lot of fences around the internal mar-

kets. But those regulations will inevitably

loosen, because as Neves said, Theres a

lot of discussion about lower prices and

better-controlled ination if we were more

open to competition. The global consumer

goods companies and retailers that are

rst-movers in Brazil will have an enor-

mous advantage.

According to Adnan Akan, opportunities

abound in Turkey as well, particularly for

large retailers. About 60 percent of the

retail market is classied as traditional,

compared with just 20 percent for WesternEurope. That leaves plenty of consumers

hungry for the conveniences of modern

retail. And for consumer goods companies,

theres a lesson in what Napoleon Bonaparte

once said: If the world were just one coun-

try, Istanbul would be its capital. Turkeys

straddling of Europe and Asia gives it a

major advantage as a production center.

The panel included (fromleft) Harry Broadman,Michael Tangney, RicardoNeves, John Wilkinson, and

Adnan Akan.

4 PwC, 14th Annual Global CEO Survey, 2011.


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40 PwC ViewIssue 15

attribute two: leve convention

wisdom t te border

system, he said. But now you see develop-

ment all over the continent and investments

being made in countries geographically

removed from South Africa. There is a lot

of interest in Africa now so the various

countries are trying to promote themselves.

The ways they are doing that are as varied as

the 50 or so different countries of Africa. For

example, according to Wilkinson, Mauritiushas taken steps to make it much easier for

global companies to enter the country.

Another common assumption about many

African countries is that corruption and

instability will sink any efforts for success.

But the reality, according to Wilkinson,

is that while foreign investors need to

perform detailed analysis of any country

they consider, the operating environment

Its not just a tendency to shy away

from risk that leaves plenty of opportuni-

ties on the table in emerging markets.

Assumptions about how to do business in

various emerging markets unnecessarily

shackle companies.

For example, for global companies enter-

ing Africa, its been conventional wisdomthat the path to success starts in South

Africa, moves north through Namibia,

Botswana, and Zambia, and then swerves

east to Tanzania or perhaps west to Nigeria

and Ghana. According to panel member

Wilkinson, however, the days of any one

template for investment in Africa are

long gone. South Africa has been in that

fortunate position with the most developed

economy, infrastructure, and banking


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PwC View Issue 1541

is much improved. Africa is not a country;

its a continent, Wilkinson said. So there

are different market sizes, income levels,

languages, and cultures. But as a whole,

Africa is booming, political risk has less-

ened, and the operating environment has

improved in many countries.

For Brazil, a number of companies stillremember the instability and runaway ina-

tion of the 1990s, dynamics that, back then,

were synonymous with the rest of Latin

America. But the levels of instability and

ination of the past are nowhere to be found

today, and what developed is a burgeoning

middle class with tens of millions of young,

educated workers moving up the economic

food chain. In addition to the high-income

Brazilian customers that always have existed

for multinational companies, there now are

millions of up-and-coming consumers. For

companies that are agile and adaptable, this

is a huge opportunity to create new market

share, as well as to protect the market share

they already have.

The instability and ination issues

we had have been gone now for 12 to15 years, explained Neves. We have

built very strong markets from both the

perspective of production and consump-

tion. Thats one reason Brazil has been

able to ride out the nancial crisis and

recession and not be as affected by it.

In Turkey, the events of the Arab Spring

introduced a potentially new story line

for consumer companies. While Turkey

The amount of global commerceamong emerging markets20%

has long been a regional manufacturing

powerhouseit makes more televisions

and buses than any other country in Europe

and is the fourth-largest manufacturer of

automobilesthe potential liberalization

of the Middle East could position Turkey as

the ideal launching pad for export to these

countries. Turkey as a base for production

and exporting to the Middle East, as wellas the Balkans, makes a lot of sense, said

Akan. We have connections with all of

these regions and a strong manufacturing

and logistics capability. Akan also pointed

out that Turkish entertainment program-

ming is very popular with certain Middle

East countries, so companies that target

Turkey as a market essentially hit all of the

Middle East with their product advertising

at no extra cost.


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attribute tree: Commit for

te ong u

Colgate has been active in emerging

markets for decades and maintained its

commitment while managing political,

operational, and cultural risk. But numer-

ous other companies havent met with that

success and have retreated. So for the

retailer or consumer products company

looking to make a long-term play in emerg-

ing markets today, what are some of the

most critical issues that need to be man-

aged? (For Broadmans personal point of

view, see Navigating the risks and oppor-

tunities in emerging markets, on page 44.)

First, the good news: Our panel agreed that

the demographics in virtually all emerging

markets work in any companys favor. Take

Africa, Turkey, and Brazil. Africa contains

more than one billion people and some of

the fastest-growing countries in the world

in terms of GDP, including Ghana, which

grew the fastest in 2010 (China was the

fourth fastest growing). It is estimated that

in 30 years time, one in every ve children

will live in Africa, and the continent will

have the largest working-age population.Foreign direct investment overall still is

quite low, accounting for less than ve

percent into emerging markets, so there

still are plenty of opportunities. Africa

strikes me as a perfect case of rst-mover

advantage, posited Broadman.

Turkey boasts a growing and youthful popu-

lation. While it has few natural resources

to speak of, its manufacturing acumen and

geographic position at the crossroads of

Asia and Europe make it an ideal platform

for production. Its growing Internet usage

and relative lack of a modern retail industry

make it a ripe growth area for global onlineretailers. And Brazil? It might have the best

demographic prole of any emerging mar-

ket: a large, young, educated population;

abundant natural resources; a multicultural

society; and a high percentage of Internet

penetration. But challenges remain.

Infrastructure

Over the past two decades, China has shown

how advancing a countrys infrastructure

can help spur economic growth. In the case

of Brazil, the country completed many in-

frastructure projects due to its hosting of thesoccer World Cup in 2014 and the Summer

Olympic Games in 2016 in Rio de Janeiro.


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PwC View Issue 1543

But as Neves pointed out, strong Internet

access can go a long way toward hiding

weak spots in infrastructure: In Brazil, the

way that companies are looking to use social

media to test products and introduce new

products into the marketplace has really

overcome part of the infrastructure need.

In fact, any company looking at Brazil as

a long-term investment needs to under-

stand this equation: The combination of a

youthful, educated populace; an Internet

penetration rate of more than 50 percent

and growing; and a burgeoning middle classequals a huge potential for online retail-

ing. We have a very young population and

high level of Internet usageand not just

homes with high speed Internet, Neves

said. Hundreds of thousands of shops offer

access where anyone can go in. And they are

buying things online as well.

Infrastructure needs in Turkey and Africa,

apart from South Africa, are more daunting.

Akan recounted how Turkey still predomi-

nantly uses railways built before World War

I. Wilkinson pointed out that companiesopening multiple factories in Africa often

dont realize the continents enormous

sizethe land masses of China, the US, and

India all would t within Africas borders

and distance between the major cities. And

the continents ports, like Turkeys railroads,

are from another era. Despite the prob-

lems these infrastructure gaps present for

companies doing business, one silver lining,

according to Wilkinson, is that many compa-

nies that work on infrastructure projects no

doubt will prosper in the coming years.

Corruption

Each member of the panel addressed cor-

ruption and graftissues likely to comeup in any discussion of emerging markets.

Interestingly, each saw the problem in terms

of the larger questions of advancing an open

political system and maintaining the rapid

clip of economic growth. The belief is that

corruption is less when there is a robust

economy and the political system is open.

We are very proud of our democracy in

Brazil and the liberty of the press, Neves

said. The reality is that consumer products

companies will face the issue, especially

those that sometimes sell through direct

channels to government agencies or to someof the local municipalities. But with our

democracy, and as we keep improving eco-

nomically, we will continue to clean that up.

In Turkey, Akan pointed out that the

country has bettered its position on various

indices that track corruption. He believes

that things have improved a lot in the last

10 years, and it is mainly attributable to

the improvement in economic growth.

Wilkinson noted that companies that dont

stick to strict rules and impeccable business

ethics end up regretting it. Some compa-

nies investing in South Africa and the rest

of Africa have bent a little to the left or

right, and they end up getting burned,

he said. So theyve learned their lessons.

Seizing opportunities

It was tting that an executive as well-

traveled and experienced as Tangney

offered the nal perspective on the cyclical

nature of world business and the need to

spot opportunities where they exist: I can

remember when Latin America was weak

and dangerous, he said. They spoke of

the debt crisis. Now its the Europeans who

have the debt crisis. Today, in our world,

Africa has the high potential to do very

well. Companies have to act according totheir beliefs about what the future holds.

1:5It is estimated that in 30 years time, one in every ve children willlive in Africa, and the continent will have the largest working-agepopulation. Foreign direct investment overall still is quite low,accounting for less than ve percent into emerging markets, sothere still are plenty of opportunities.


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PwC ViewIssue 15

eitrial

Editorial Director

Tom Craren

Managing Editor

Gene Zasadinski

Assistant Managing Editor

Christine Wendin

View points Editor

Angela Pham

Contributing Editors

Mike Brewster

Emily Church

Cecily Dixon

Susan Eggleton

Benjamin Isgur

Sandy Lutz

Susan Poole

Anand RaoBill Sand

Jamie Yoder

onlin

Jeffrey Dreiblatt

Adiba Khan

Scott Schmidt

Jack Teuber

dsign

Odgis + Company

Creative Director

Janet Odgis

Senior Designer

Banu Berker

Designers

Rhian Swierat

T. Chlo Bartholomew

Cntributrs

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