Fluent Essays

Using the “New Global Challengers” article as a reference point, identify a company or set of companies from a Rapidly Developing Economy (RDE) that may result in significant competition for specific US companies.  Describe the factors that will make the RDE company competitive and also how the US company or companies may try to counter the competitive threat. The New Global Challengers H o w 1 0 0 To p C o m p a n i e s f r o m R a p i d l y D e v e l o p i n g E c o n o m i e s A r e C h a n g i n g t h e Wo r l d BCG REPORT Since its founding in 1963, The Boston Consulting Group has focused on helping clients achieve competitive advantage. Our firm believes that best practices or benchmarks are rarely enough to create lasting value and that positive change requires new insight into economics, markets, and organizational dynamics. We consider every assignment a unique set of opportunities and constraints for which no standard solution will be adequate. BCG has 61 offices in 36 countries and serves companies in all industries and markets. For further information, please visit our Web site at www.bcg.com. The New Global Challengers H o w 1 0 0 To p C o m p a n i e s f r o m R a p i d l y D e v e l o p i n g E c o n o m i e s A r e C h a n g i n g t h e Wo r l d MARCOS AGUIAR ARINDAM BHATTACHARYA THOMAS BRADTKE PASCAL COTTE STEPHAN DERTNIG MICHAEL MEYER DAVID C. MICHAEL HAROLD L. SIRKIN M A Y 2 0 0 6 www.bcg.com © The Boston Consulting Group, Inc. 2006. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: [email protected] Fax: +1 617 973 1339, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. Exchange Place Boston, MA 02109 USA 2 BCG REPORT 3 Table of Contents A Word from the Authors 4 The New Global Challenge 5 Many Companies on the Move 5 RDEs as Platforms for New Types of Global Competitors 6 The RDE 100 Emerging Global Challengers 7 Where They Come From 8 The Industries They Represent 9 Why They Are Going Global 9 Their Huge Economic Muscle 10 The Shareholder Value They Create 11 How Global They Are Today 11 How the RDE 100 Are Going Global 13 Their Six Strategic Models for Globalization 13 How They Are Growing: Buying and Building 16 Where They Are Growing: Next Door and Around the World 18 The Competitive Strengths and Weaknesses of Emerging Global Challengers 20 Low-Cost Resources 20 Home-Market Environments 21 Operations 21 Innovation 22 Supply Chain Management 22 Going to Market 22 Management Talent 23 Rigorous Strategy and Road Maps 23 Looking Ahead 24 Implications for Challengers 24 Implications for Incumbents 25 Closing Thoughts 26 The New Global Challengers In our discussions with executives at the world’s largest companies, globalization and its challenges are often at the top of the agenda. Invariably, one key question comes up: Which are the new companies based in China, India, and other rapidly developing economies that I need to know about? Executives recognize that a new class of company is arising in the world today—a group of emerging challengers that are becoming important players in both developing and developed markets around the globe. Indeed, many companies based in RDEs are going global fast. As this report highlights, a sample of 100 lead- ing RDE-based companies already have combined annual revenue of $715 billion—and are growing at an average rate of 24 percent per year. Companies in this sample are gaining global market share, making major acquisitions, and emerging as important customers, business partners, and competitors for the world’s largest companies. The Boston Consulting Group recently assessed the activities and strategies of these newly globalizing com- panies. We identified and profiled 100 of them, focusing on those with large businesses, significant global activity, an evident commitment to further globalization, and solid prospects for continued success. A global team of senior BCG consultants, based principally in Beijing, Moscow, Mumbai, and São Paulo but also span- ning other RDEs, contributed to this effort. We would like to acknowledge particularly valuable contribu- tions to the research and analysis by our colleagues Evgeni Agronik, Jean Chen, Rahul Guha, Vladimir Kim, Xin Liu, and Fernando Machado. We would also like to acknowledge the editorial and production assistance of Barr y Adler, Gar y Callahan, Kim Friedman, Gina Goldstein, and Kathleen Lancaster. Our analysis of this sample of 100 companies has yielded important insights into the broader trend of RDE- based companies that are expanding globally. This trend is only beginning. Ultimately, its implications will affect ever y industr y and market. We hope that you will find this report interesting and useful. As always, we would be pleased to talk with you about our obser vations and conclusions. A Word from the Authors 4 BCG REPORT Marcos Aguiar Vice President and Director São Paulo [email protected] Arindam Bhattacharya Vice President and Director New Delhi bhattachar [email protected] Thomas Bradtke Manager Boston [email protected] Pascal Cotte Senior Vice President and Director Paris [email protected] Stephan Dertnig Senior Vice President and Director Moscow [email protected] Michael Meyer Consultant Beijing [email protected] David C. Michael Senior Vice President and Director Beijing [email protected] Harold L. Sirkin Senior Vice President and Director Chicago [email protected] The New Global Challenge 5 A revolution in global business is under way. Companies based in rapidly developing economies (RDEs) such as Brazil, China, India, and Russia, armed with ambitious leaders, low costs, appealing products or ser vices, and modern facilities and sys- tems, are expanding overseas and will radically transform industries and markets around the world. As this movement unfolds, established incumbent companies will meet the new RDE- based challengers in many arenas: in the com- petition for supplies, in the search for talent, in the quest for innovation, on the acquisition front, and in markets at home and abroad. Each of these encounters will pose threats but will also offer opportunities for part- nering and cooperation. So it will be vital for all companies, regardless of their home location, to understand these developments and take action ahead of them, lest their competitive positions deteriorate. Many Companies on the Move The handful of RDE-based companies that have recently captured media attention—prominent examples include the Chinese manufacturers Haier Company and Lenovo Group and the Indian soft- ware houses Infosys Technologies and Wipro—rep- resent only a small fraction of a much larger phe- nomenon. The number of RDE-based companies that are actively expanding beyond their home mar- kets, or planning to, approaches several thousand. Already, RDE-based companies have started assum- ing leadership positions in lucrative developed mar- kets and have established beachheads in other RDEs. Here are just 15 examples: • Bharat Forge (India) is now the world’s second- largest forging company • BYD Company (China) is the world’s largest man- ufacturer of nickel-cadmium batteries and has a 23 percent share of the market for mobile-hand- set batteries • Cemex (Mexico) has developed into one of the world’s largest cement producers • China International Marine Containers Group Company (China) has a 50 percent share of the marine container market, supplying the top ten shipping companies globally • Chunlan Group Corporation (China) has a 25 percent share of the Italian air-conditioner market • Embraco (Brazil) is the world leader in com- pressors, with a 25 per- cent share • Embraer (Brazil) has surpassed Bombardier as the market leader in regional jets • Galanz Group Company (China) commands a 45 percent share of the microwave market in Europe and a 25 percent share in the United States • Hisense (China) is the number-one seller of flat- panel TVs in France • Johnson Electric (China) is the world’s leading manufacturer of small electric motors • Nemak (Mexico) is one of the world’s premier suppliers of cylinder head and block castings for the automotive industr y • Pearl River Piano Group (China) is the global vol- ume leader in piano manufacturing • Ranbaxy Pharmaceuticals (India) is among the top ten generic-pharmaceutical players in the world • Techtronic Industries Company (China) is now the number-one supplier of power tools to Home Depot in the United States • Wipro (India) has become the world’s largest third-party engineering-ser vices company To be sure, not all challengers will be successful. Some may meet the same fate as D’Long Group, a Chinese investment company that acquired The New Global Challengers Established incumbent companies will meet the new RDE-based challengers in many arenas. Fairchild Dornier, a German aircraft manufacturer, with great fanfare in 2003, only to seek bankruptcy protection a year later. But many others will break through to become established global players. Just as many companies based in South Korea and Japan are now firmly global, so too will today’s RDEs pro- duce future global leaders. Indeed, the RDEs them- selves possess characteristics that constitute particu- larly powerful platforms for the creation and development of future global companies. RDEs as Platforms for New Types of Global Competitors Why are we now seeing the emergence of global challengers from RDEs? A variety of fast-moving globalization forces are spurring this trend. These include the Internet, the World Trade Organization, the dramatic surge in low-cost communications tech- nologies, and economic reforms in key RDEs. In addition, the development of RDE markets them- selves is a strong enabler for the creation and growth of globally ambitious companies. Once those mar- kets begin developing, many companies realize that they need to move beyond their home markets in order to grow further, create value, and sustain long- term competitiveness. We briefly explore the role of RDE countries as platforms for new global chal- lengers below; later in the report we address the companies’ own motives for globalization. RDEs have rapidly growing markets, some of which are very large. Markets such as China, India, and Russia are sufficiently large and fast growing to sup- port large domestic companies. For example, China’s Huawei Technologies Company, a telecom equipment maker, has achieved domestic sales of more than $3 billion. The rapid growth of RDE markets in general over the past decade means that domestic companies have an opportunity to become quite large on their home turf. RDEs have low-cost resources. All RDEs have an abundance of low-cost basic labor, and most offer other resources at low cost. Domestic companies in these markets are often better than foreign companies at exploiting these low-cost resources. We discuss this issue extensively later in the report. Difficult operating environments in RDEs produce some highly capable companies. The challenges of operating in RDEs include selling profitably to low-income customers, dealing with immature logistics and distribution environments, navigat- ing ambiguous legal environments, handling rapid external change, and managing despite shortages of management talent. A company that has addressed these issues in its home market will have an advantage when seeking to grow in similar mar- kets abroad. Such companies may also have devel- oped the ability to innovate quickly and to make ver y rapid decisions—skills that are essential to capturing fast-moving opportunities. RDEs are training grounds for competing with global incumbents. Increasingly, RDEs are key mar- kets for multinational companies (MNCs) that are the incumbent leaders in developed-countr y mar- kets. RDE-based companies have the opportunity to learn from these competitors in their midst. Consumer electronics companies such as Hisense and TCL Corporation in China, for example, com- pete aggressively in their home markets against global incumbents Matsushita, Philips, Samsung, and Sony. Despite providing all these advantages, RDE mar- kets in themselves do not allow companies to attain global scale, no matter how big or fast growing they are. Ultimately, many RDE-based companies find that they must seek opportunities abroad. We will discuss this point further. 6 BCG REPORT 7 The RDE 100 Emerging Global Challengers To better assess the globalization strategies of RDE- based companies, we have identified 100 large RDE- based companies that, in our opinion, are at the leading edge of globalizing their businesses. Having identified this group of companies, we then looked at their similarities, differences, and globalization patterns and derived some interesting implications from this analysis. Our list of 100 emerging global challengers comprises a diverse group of companies based in ten RDE countries. (See Exhibit 1.) We The New Global Challengers Industry yrtnuoCynapmoC Nonferrous metals Telecommunications services Automotive equipment Automotive equipment Computers and IT components Petrochemicals Consumer electronics Building materials Food and beverages Aerospace Automotive equipment Fossil fuels Shipping Nonferrous metals Telecommunications services Automotive equipment Telecommunications services Fossil fuels Shipping Home appliances Pharmaceuticals Fossil fuels Mining Shipping Textiles Engineered products Automotive equipment Pharmaceuticals Engineered products Aerospace Textiles Food and beverages Computers and IT components Home appliances Fossil fuels Steel Home appliances Food and beverages Food and beverages Home appliances Nonferrous metals Consumer electronics Telecommunications equipment Food and beverages IT services/business process outsourcing Engineered products Home appliances Consumer electronics Engineering services Computers and IT components Textiles Aluminum Corporation of China (Chalco) América Móvil Bajaj Auto Bharat Forge BOE Technology Group Company Braskem BYD Company Cemex Charoen Pokphand Foods China Aviation Corporation China FAW Group Corporation China HuaNeng Group China International Marine Containers Group Company (CIMC) China Minmetals Corporation China Mobile Communications Corporation China National Heavy Duty Truck Group Corporation (CNHTC) China Netcom Group Corporation (CNC) China Petroleum & Chemical Corporation (Sinopec) China Shipping Group Chunlan Group Corporation Cipla CNOOC Companhia Vale do Rio Doce (CVRD) COSCO Group Coteminas Crompton Greaves Dongfeng Motor Company Dr. Reddy’s Laboratories Embraco Embraer Erdos Group Femsa Founder Group Galanz Group Company Gazprom Gerdau Steel Gree Electric Appliances Gruma Grupo Modelo Haier Company Hindalco Industries Hisense Huawei Technologies Company Indofood Sukses Makmur Infosys Technologies Johnson Electric Koç Holding Konka Group Company Larsen & Toubro Lenovo Group Li & Fung Group China Mexico India India China Brazil China Mexico Thailand China China China China China China China China China China China India China Brazil China Brazil India China India Brazil Brazil China Mexico China China Russia Brazil China Mexico Mexico China India China China Indonesia India China (Hong Kong) Turkey China India China China (Hong Kong) Industry yrtnuoCynapmoC Fossil fuels Automotive equipment Shipping Home appliances Nonferrous metals Telecommunications services Automotive equipment Cosmetics Automotive equipment Fossil fuels Telecommunications services Musical instruments Food and beverages Fossil fuels Fossil fuels Fossil fuels Pharmaceuticals Chemicals Nonferrous metals Chemicals Food and beverages IT services/business process outsourcing Steel Automotive equipment Steel Steel Chemicals Building materials Consumer electronics Aerospace Consumer electronics IT services/business process outsourcing Automotive equipment Steel Food and beverages Consumer electronics Engineered products Food and beverages Food and beverages Automotive equipment Telecommunications equipment Consumer electronics Consumer electronics Telecommunications services Process industries Automotive equipment Engineered products IT services/business process outsourcing Telecommunications equipment Lukoil Mahindra & Mahindra Malaysia International Shipping Company (MISC) Midea Holding Company MMC Norilsk Nickel Group Mobile TeleSystems (MTS) Nanjing Automobile Group Corporation (NAC) Natura Nemak Oil and Natural Gas Corporation (ONGC) Orascom Telecom Holding Pearl River Piano Group Perdigão PetroChina Company Petrobrás Petronas Ranbaxy Pharmaceuticals Reliance Group Rusal Sabanci Holding Sadia Satyam Computer Services Severstal Shanghai Automotive Industry Corporation Group (SAIC) Shanghai Baosteel Group Corporation Shougang Group Sinochem Corporation Sisecam Skyworth Multimedia International Company Sukhoi Company SVA Group Company Tata Consultancy Services (TCS) Tata Motors Tata Steel Tata Tea TCL Corporation Techtronic Industries Company Thai Union Frozen Products Tsingtao Brewery TVS Motor Company UTStarcom Vestel Group Videocon Industries Videsh Sanchar Nigam (VSNL) Votorantim Group Wanxiang Group Corporation WEG Wipro ZTE Corporation Russia India Malaysia China Russia Russia China Brazil Mexico India Egypt China Brazil China Brazil Malaysia India India Russia Turkey Brazil India Russia China China China China Turkey China Russia China India India India India China China (Hong Kong) Thailand China India China Turkey India India Brazil China Brazil India China E X H I B I T 1 T H E R D E 1 0 0 S P A N M U L T I P L E I N D U S T R I E S A N D C O U N T R I E S SOURCES: BCG RDE Challengers Database; BCG analysis. The RDE 100 list was generated through a detailed screening process. We began with more than 3,000 companies based in 12 major RDEs, which we had selected on the basis of the size of their economies (GDP), the value of their exports, and the amount of their foreign direct investments. Our list of RDEs com- prised Brazil, China, the Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, and Turkey. The initial master list of candi- date companies was compiled on the basis of rank- ings of the largest companies in each of the selected countries, such as the top 500 companies in India selected by Businessworld, the leading Indian busi- ness magazine, and the top 500 companies in Brazil selected by Exame, the leading Brazilian business magazine. An international BCG research team consisting of business analysts and economists from Brazil, China, India, Mexico, and Russia, and a panel of senior BCG experts in Asia, Europe, and the United States then conducted a rigorous four-step triage. In step one, we ensured that only truly RDE-based companies were selected, omitting foreign joint ventures and RDE sub- sidiaries of multinational corporations. In step two, we homed in on those players with annual revenue of at least $1 billion (as of 2004), a threshold we believe is necessary to drive a serious globalization campaign. In step three, we eliminated players whose current international business presence amounted to less than 10 percent of revenue (we made an exception for M E T H O D O L O G Y F O R S E L E C T I N G T H E R D E 1 0 0 companies that were close to 10 percent and whose international business activity had grown swiftly in the recent past). In step four, we scored the major globalization cre- dentials of those companies that had passed all three previous thresholds. The scoring was based on five criteria: the international presence of the company as indicated by its owned and operated subsidiaries, sales networks, manufacturing facilities, and R&D centers; the major international investments it had pursued in the past five years, including mergers and acquisitions (M&A); its access to capital for financing international expansion, whether through free cash flows, stock markets, or other sources; the breadth and depth of its technologies and its intellectual-prop- erty portfolio; and the international appeal of its exist- ing offerings and value propositions. This analytically rigorous approach generated a list of 80 companies that fully met our criteria. Twenty com- panies that did not pass the $1 billion minimum-rev- enue hurdle are nonetheless included among our RDE 100 because they have created unique globalization capabilities or business models. From the original list of 12 countries, no companies from the Czech Repub- lic, Hungary, or Poland made it through the screening, primarily because the larger globalizing companies in these countries are actually subsidiaries of foreign multinationals. We also included a company from Egypt in the final list, although Egypt was not among the markets in our initial screening. 8 BCG REPORT identified these companies from a pool of more than 3,000 candidates by screening primarily for size, extent of overseas revenue, and prospects for further expansion. (For details, see the sidebar below.) Although these companies employ different strate- gies and are at different stages of globalization, they share a strong ambition to grow globally. They also share a set of compelling competitive advantages that they are leveraging in various ways to pursue global growth. Where They Come From Asia is home to the large majority—70—of our RDE 100 companies, followed by Latin America with 18. Another 12 are based in Egypt, Russia, and Turkey. China is by far the dominant home-base countr y, with 44 of the RDE 100, followed by India with 21 and Brazil with 12. (See Exhibit 2.) Relative to the current size of their national economies, China and India are disproportionately represented on the list. China’s share of the total GDP of the 100 RDE countries is 29 percent, but Chinese companies account for 44 percent of the companies on our list; for India, the numbers are 13 percent and 21 percent, respectively. At the other extreme, Russia and Indonesia are greatly underrepresented. Among the RDEs studied, China and India in par- ticular have already produced an impressive set of companies with strong global ambitions. Where the globalizing Chinese companies differ dramatically from the globalizing Indian companies is in their ownership structures. More than two-thirds of the Chinese companies among the RDE 100 are state owned or state controlled, often with publicly traded subsidiaries or with minority stakes in the hands of strategic investors (both domestic and for- eign). Of the remaining companies, some have a mixed-ownership structure but only four Chinese companies on the list are privately owned (and these include one company actually domiciled in Hong Kong). The shares of Indian companies are usually divided among private owners, strategic investors, and the 9The New Global Challengers general public, with no single investor possessing a majority stake. All the Indian companies on our list are publicly traded and all have foreign strategic investors as stockholders. Only one Indian com- pany on the list is state controlled. Companies from other countries display a wide range of ownership patterns. In some countries, such as Mexico, strate- gic investors play an important role while in others, such as Turkey, the families of the founders still exert control. The Industries They Represent The RDE 100 are active in a wide range of indus- tries. The largest is industrial goods, which includes 32 companies active in the automotive equipment sector, basic materials, and various engineered products. The second-largest group is consumer durables, comprising 18 companies involved mainly in household appliances and consumer electronics. Resource extraction is the third-largest cluster, with 15 players. Food-and-beverage and cosmetics com- panies come in fourth, with 11 players, and tech- nology equipment companies fall into fifth place, with 6. The remaining 18 companies represent a broad spectrum of industries ranging from phar- maceuticals and mobile-communications ser vices to shipping and infrastructure. When we view the industr y distribution of the RDE 100 together with their geographic distribution, certain clusters of regional capabilities emerge. (See Exhibit 3, page 10.) China possesses the most diverse set of emerging global challengers. Chinese companies are well represented in consumer elec- tronics, household appliances, telecommunications and IT equipment, and automotive equipment manufacturing. India is well represented in auto- motive equipment manufacturing, IT ser vices, and pharmaceuticals, especially generic drugs. Most other countries have large domestic players in only one or two clusters, as well as perhaps a few indi- vidual challengers in other sectors. Examples include raw-material extraction in Russia, house- hold appliances in Turkey, and food processing in Thailand. Why They Are Going Global For RDE-based companies, the decision to globalize is ultimately driven by the need to create sustain- RDE 100 by industryRDE 100 by geography India (21) China (44) Other (10)1 Mexico (6) Russia (7) Brazil (12) Consumer durables (18) Industrial goods (32) Other (18) Technology equipment (6) Food and cosmetics (11) Resource extraction (15) Including • Telecommunications services (6) • IT services/business process outsourcing (4) Including • Fossil fuels (9) • Nonferrous metals (5) Including • Home appliances (6) • Consumer electronics (8) Including • Automotive equipment (12) • Steel (5) • Engineered products (5) E X H I B I T 2 T H E R D E 1 0 0 R E P R E S E N T A V A R I E T Y O F C O U N T R I E S A N D I N D U S T R I E S SOURCES: BCG RDE Challengers Database; BCG analysis. 1These companies are located in Egypt, Indonesia, Malaysia, Thailand, and Turkey. able advantage and shareholder value. Inter- national opportunities can provide a strong plat- form for shareholder value creation. Our research indicates that for 88 of the RDE 100 companies, the key motive for globalization is gaining access to new profit pools. Overseas markets may bring RDE- based companies higher margins and revenue, as well as higher volumes (which contribute to scale economies) and opportunities for growth-enhanc- ing acquisitions. For the remaining 12 of our RDE 100 companies, such as China’s CNOOC (fossil fuels), globalization is driven by the need to secure long-term access to raw materials. The underlying motives may be both nationalistic and related to shareholder value. These companies are less likely to compete for overseas customers and instead will challenge developed-market companies for access to supply and for M&A opportunities. Their Huge Economic Muscle In aggregate, the RDE 100 accounted for $715 bil- lion in revenue in 2004—similar to the 2004 GDP of the entire national economies of Mexico and Russia. Already, 28 percent of the group’s collective rev- enue, or $200 billion, comes from international sales. Among other impressive statistics: • The RDE 100 grew at a rate of 24 percent per year from 2000 through 2004, ten times as fast as the GDP of the United States, 24 times that of Japan, and 34 times that of Germany. They earned $145 billion in operating profits, equivalent to a margin of 20 percent over sales, compared with 16 percent for the United States’ S&P 500 compa- nies, 10 percent for Japan’s Nikkei companies, and 9 percent for Germany’s DAX companies. • In 2004 their collective portfolio contained $520 billion in net fixed assets, which is more than those of the world’s top 20 automobile man- ufacturers combined. That year the RDE 100 invested around $110 billion. They employed 4.6 million people and had a collective payroll of approximately $20 billion. And they purchased an estimated $190 billion to $200 billion in raw materials and energy, $50 billion to $60 billion in parts and components, and $40 billion to $50 bil- lion in ser vices such as third-party IT and engi- neering, shipping, and logistics. • The RDE 100 spent $9 billion on R&D in 2004, equivalent to 1.3 percent of sales, to support the work of their 250,000 to 300,000 engineers and scientists. • On the acquisition front, the RDE 100 completed 200 publicly announced international transac- 10 BCG REPORT Russia • Fossil fuels (2) • Steel and nonferrous metals (3) Mexico • Food and beverages (3) Brazil • Food and beverages (2) • Engineered products (2) Turkey • Home appliances (2) Southeast Asia • Food and beverages (3) India • Automotive equipment (5) • IT services /business process outsourcing (4) • Pharmaceuticals (3) China • Consumer electronics (6) • Home appliances (5) • Automotive equipment (6) • Telecommunications equipment (3) • Computers and IT components (3) E X H I B I T 3 M A N Y O F T H E R D E 1 0 0 F A L L I N T O R E G I O N A L C O M P E T E N C E C L U S T E R S SOURCES: BCG RDE Challengers Database; BCG analysis. tions between 2001 and 2005. That number does not take into consideration the sizable number of acquisitions in individual companies’ domestic markets, which further strengthened these com- panies’ platforms for launching global growth. The Shareholder Value They Create Sixty of BCG’s RDE 100 are public companies or have subsidiaries that are publicly traded in major international capital markets. The total market cap- italization of …