S. Tamer Cavusgil

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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
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The Agenda

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

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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

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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

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Anholt-GMI Nation Brands Index (limited to 11
nations)
Leaders
Made-in image Governance People Culture heritage Tourism Investment U.S., Japan, Germany Sweden, Germany, U.K. U.K., Sweden, Germany Italy, U.K., China, India Italy, Sweden, U.K., U.S. U.S., Sweden, U.K., Italy
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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)

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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

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Six Strategic Models for Globalization

1. Taking RDE brands global (Chinas Hisense, taking
   consumer electronics to Africa)
2. Turning RDE engineering into global innovation
   (Indias Wipro)
3. Assuming global category leadership (Hong Kongs
   Johnson Electric)
4. Monetizing RDE natural resources (Brazilian food
   processors Sadia and Perdiago)
5. Rolling out new business models to multiple
   markets (Mexicos cement conglomerate Cemexs
   global acquisition strategy)
6. Acquiring natural resources (Shanghai Baosteel
   group expanding globally to secure stable
   iron-ore supplies)

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GDP Per Capita is a Poor Indicatorof Market
Potential for EMs

1. Need to adjust for Purchasing Power Parity
2. Informal economy is often as large as the formal
   economy in developing countries
3. The mean is a poor indicator since income
   distribution is typically bi-modal in EMs
4. Household income several times larger than per
   capita income because of multiple wage earners
5. Developing country statistics may be unreliable
6. Typical exporter is more interested in a large
   enough market niche than huge potential

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Unadjusted GNP/capita Figures Fail to Reflect
Potential
COUNTRY GDP Per Capita US Purchasing Power Parity GDP Per Capita
Argentina 6,950 12,400
Brazil 2,850 8,100
Bulgaria 1,790 8,200

China 1,553 7,600
Hungary 5,280 14,900
South Korea 9,930 19,200
Mexico 5,910 9,600
Russian Fed 2,140 9,800
Turkey 2,500 7,400



Source World Bank. Figures are for 2003.
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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

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Country Rank in MSU-CIBERs EMPI Middle-class population (millions) of Income held by middle class GDP per capita ( PPP, US )
China 1 587 45 6,800
India 8 534 49 3,300
Indonesia 20 105 48 3,600
Russia 12 67 47 11,100
Brazil 22 65 35 8,400
Mexico 13 42 41 10,000
Turkey 10 32 45 8,200
Thailand 14 28 45 8,300
South Korea 5 26 55 20,400
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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

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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 Chinas 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

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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
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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

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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

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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)

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Why dont Chinese feel the need of religion?
Budhism.. Daoismand Confucianism

• Buda (Buddhism)
• Laozi
• (Daoism)
• Confucius
• (Confucianism)

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Daoism

• DAOISM
• The other way passive way of thinking and
  doing
• Core value
• no action modeled on nature (??)
• Yin and Yang (??) 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.

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Confucius
551-479 BCE
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Core Value of Confucian thought Virtue ?

• Confucianism is primarily an ethical system, with
  little metaphysical speculation.
• Confucius himself had a simple moral and
  political teaching to love others to honour
  ones 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 (?) and good manners (?) would
  enable them to control themselves.

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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.
• ???? The three cardinal rules
• Ministers obey ruler (????)
• Children obey father (????)
• Wife obeys husband (????)

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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
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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

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Winning over Chinese Consumers
1. Match the Market While retaining the international image and power of your brand, localize your products to suit local tastes and preference. 3. Choose Your Destination Demographics are changing rapidly across parts of China. Many cities are gaining in wealth and consumerism. Watch the second- and third-tier cities as potential new markets.
2. Localize Marketing Given the vast differences in geography, climate, history, and even culturein China, marketing programs must be adapted. 4. RD in China, for China RD in China, for China, is the ultimate method for effectively understanding and serving domestic customers.
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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

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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?vlb_TdGvaQK4modere
latedsearch
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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

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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
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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

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Competitive restructuring can be swift
(Source Hong Kong Economics Times, January 28,
1999)
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Shares of Top 5 Brands of Home Electronics
(6/1999)
(The National Business Information Center of
China)
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Local brands marketing tacticsGuanxi
(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

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Summary of TipsFacing Competitors
1. Pick Winnable Battles For MNCs targeting the China market, there are some battles not worth fighting. Avoid competing against domestic cost-based products. 3. But Beware of Over-innovation Avoid over-engineered products. Offer quality and functionality that matches demand, but dont lose sight of cost.
2. Innovate The best survival strategy is to keep moving, continually upgrade to stay ahead of competitors. 4. Dont Fight, Merge If you cant beat them, join them (or buy them).
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Winning Over Chinese Consumers
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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

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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

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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
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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, social demographic,
  and psychographic approaches can be employed

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Four Generation Cohorts

• According to four influential events in China
  --the Foundation of the Peoples 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

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Definition and Characteristics of Generation
Cohorts in China
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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

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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
  movementShang 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

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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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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

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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.

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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.