Mike Simpson

Private Life Cover A BRAVE NEW WORLD? 10 In late 2007 three friends – a German economist, an American industrialist and a British businessman – decided to realise their life’s ambition by going on a year-long around-the-world yacht cruise. Sometime in November they were shipwrecked on a remote South Pacific island and only rescued by a passing ship four years later. By MIKE SIMPSON A fter tearful family reunions and celebrations at their remarkable good fortune, the trio returned to their desks … to find a world changed beyond imagination during their time of isolation. For the economist, the industrialist and the businessman, the paradigms by which they had lived and worked for the previous three decades had shifted beyond recognition Yes, the story is fictional – except for the part about the dramatic economic changes which occurred during their time away. When our trio of mythical friends departed on their adventure, they would have left a world still dominated by the powerful economies and currencies of the developed nations. But their return would have revealed a different picture. They found that while the developed economies, which were once the engines of global economic development, now stumbled along with a growth rate of under 2% and had become increasingly indebted, the emerging markets had become the engines of the new world order. Indeed, says Adrian Saville, visiting professor at the University of Pretoria’s Gordon Institute of Business Science and a director at Johannesburg-based Cannon Asset Managers, it is estimated that the BRICS nations (Brazil, Russia, India, China and, more recently, South Africa) will, over the next decade, outpace the Greek economy 40 times over and Italy six times over. Or they’ll eclipse the US entirely. Buckle up and head South and East The implications this has for supplanting the once-established world order are enormous. Saville believes we can expect “more of the same, at least from the advanced economic world at the heart of the financial crisis, for perhaps the next four years”. By which time the likes of Brazil, India and China – if they can continue growing at upwards of 7% – will have a notable advantage. It’s an advantage they’re likely to keep. Saville talks of on-going greying of the population and ‘demographic decay’ in places such as Japan and Europe. They also carry an extraordinary level of public debt brought about by governments committing to more debt than they can service, including implicit public debt brought about by social contracts to provide state-funded medical care, unemployment and retirement benefits. Other nations and regions, once considered peripheral to the ‘old’ established global order, are also making up ground on the developed economies. Africa, in 2000 famously described by an Economist magazine article as the ‘hopeless continent’ is now the third fastest-growing region in the world. According to Saville, subSaharan Africa has shown superior growth to East Asia in eight out of the past 10 years. “So our hopeless continent is everything but hopeless. In fact it is putting down a remarkable footprint … Africa is open for business,” he told delegates at an Economic Outlook for 2012 seminar organised by GIBS. One of the world’s most influential investors, Dr Mark Mobius of US-based Franklin Templeton Investments, agrees that emerging markets are offering better prospects for global investors. “Emerging countries have progressed from being simply low-cost manufacturing economies to growth-driven economies with a very strong consumer base. We believe that, in the next decade, the combined value of emerging stock markets could exceed the combined value of the 11 Private Life Cover Opportunities for emerging businesses Does this mean greater opportunities for companies in emerging markets to expand their international footprints – both into fellow developing economies, as well as the established markets of the socalled first world? Some companies are already doing this, with notable examples including Indian automakers Tata and Mahindra; Chinese vehicle manufacturer Geely; and South Africa’s own Naspers. The latter has diversified from being a local publishing house to a global conglomerate which has internet interests in Russia, Switzerland, Poland, India, Thailand, the Philippines and China (among others); print media activities in Brazil and China; and pay-TV operations in many parts of Africa. If these businesses need inspiration and an affirmation of what’s achievable in new markets – even before the game-changing global recession of December 2007 – they need look no further than Korean electronic giant, Samsung Electronics, and auto brands Hyundai and Kia. Around 10 to 15 years ago they were regarded as upstart outsiders by cynical consumers more comfortable with developed market brands like Philips and Volkswagen. Today Hyundai is a big-spending sponsor of the Fifa Soccer World Cup and has a strong global footprint, while Kia increased its new vehicle sales in the US by a stellar 54% in 2011. Samsung Electronics, now one of the world’s largest information technology companies, leads eight out of 10 of the market segments in which it competes and its Galaxy smartphone has become a global headline-grabber. “Emerging markets are becoming hotbeds of innovation, producing breakthroughs in everything from telecoms to healthcare.” SD Shibulal, co-founder of Infosys US, Japanese and European equity markets,” he said in a recent presentation. “Emerging markets will continue their fast growth path, while the developed economies will grow at a slower pace as they continue to absorb the costs of the recent excesses in the financial sector, combined with declines in productivity. Emerging markets also have a low debt, with an average of 30% to GDP, versus 100% in developed markets,” said Mobius. 12 Samsung’s chairman, Lee Kun-Hee, has the dubious distinction of being released from a prison sentence for tax evasion under a government pardon because he is of ‘strategic importance’ to South Korea. Certainly, he is a visionary and innovator and has gone on record as telling his employees: “Over the next 10 years the products we are leaders in will be obsolete. Do something about it.” New world order, new mind-set needed Innovation will be one of the key drivers for emerging market companies wanting to successfully challenge the developed market status quo. “Innovation is the key to improving the world. When innovators work on urgent problems and deliver solutions to people in need, the results can be magical,” wrote Microsoft founder Bill Gates in his annual letter from the Bill & Melinda Gates Foundation, the largest private charitable trust in the world which was established by the philanthropic billionaire and his wife in 1994. SD Shibulal, the billionaire co-founder of Infosys, an Indian-based consulting and IT services company with offices in over 30 countries, agrees. “Emerging markets are becoming hotbeds of innovation, producing breakthroughs in everything from telecoms to healthcare.” He added: “They are redesigning products to reduce costs; they are re-designing entire business processes to do things better and faster than their rivals.” In a 2011 interview with Insead – a global business school with campuses in Asia, the Middle East and Europe – Shibulal commented that innovation from emerging markets is leading to a ‘new world order’ in innovation and successful enterprises of the future must carefully leverage the resources and innovation capabilities in these markets in order to drive growth and profitability. Does the emerging world lack the killer instinct? Stephen Wunker, an American business consultant and author, believes wide-ranging innovation has yet to take hold in emerging markets. “Many of today’s breathless headlines about innovation in emerging markets are overblown,” he writes in a September 2011 article in Forbes business magazine. “But not for long.” As an example of innovation, he cites the launch in India of a $35 (approximately R280) tablet PC which uses the Android operating system and offers features like touch screen, USB and Wi-Fi connectivity. “This product is no iPad killer or even serious competition for similar devices. However, it has immense potential to improve access to basic education for over 350-million poor people in India and millions more in other developing nations.” While he acknowledges that home-grown innovation is happening in emerging markets, he argues that it’s still the exception. “It’s a very rare emerging markets executive who will contend that their country is remotely as innovative as the US, UK or Japan – even outside of high-technology, capital-intensive fields. Simply put, it has been too easy to succeed without undertaking the sort of disruptive innovation that builds new market space. Banks have grown through building out their branch networks and product offerings. Retailers have planted big box stores … In this environment, companies have prospered through executional excellence.” Shibulal’s other example is the Tata Nano small car which, with a price tag of just $2 500 (about R20 000), is claimed to be the world’s cheapest automobile. He explains that it was ‘reverse-engineered’ by first fixing the price and then working backwards to target the estimated 65 million Indians who normally ride scooters, mopeds, motorcycles and bicycles. He believes the Nano has the potential to create a ‘social revolution’ and points out that an upgraded version, known as the Nano Europa, is destined for launch in Europe. “Clearly, innovation that happened in an emerging market is receiving acceptance on the global platform,” he says. However, Wunker believes innovation taking place at an infrastructural level in emerging economies will open up these countries and their citizens to new products and services. Factors such as easier access to the internet, cellphone-enabled websites, banking services and credit will all help to create new markets eager to consume. But the ones taking advantage won’t necessarily only be companies URBAN IMPACT: The world in 2025 GDP,-%=$55.5 trillion GDP growth,-* 100%=$54.9 trillion 16 Small 29 16 4 Midsized 4 Large 3 26 29 34 11 3 73 8 37 70 14 10 Small 13 Large Midsized Developed economies Emerging market megacities Emerging market middleweight cities Emerging market small cities & rural areas McKinsey’s Urban World: Mapping the Economic Power of Cities report predicts that, by 2025, most of the world’s economic growth will come from the 577 middleweight (population of 10 million or more) cities in the so-called emerging markets. With populations in these cities expected to grow 1.6 times faster than the rest of the world, some 250 million new households will be created. China and sub-Saharan Africa in particular are both expected to see their household growth double by 2025. Many of the city hotspots are in China, but other areas of interest include Brazil’s Fortaleza and Manaus; Sharjah in the Middle East and Vadodara and Nagpur in India. * Note: Real Exchange Rate (RER) for 2007 is the market exchange rate. RER for 2025 was predicated from differences in the per capita GDP growth rates of countries relative to the US. 13 Private Life Cover and innovators from emerging economies. India’s Shibulal argues against the belief that emerging markets are threats to developed countries. Rather, they present opportunities which can be leveraged by anyone. “Emerging markets today provide three key opportunities: new growth markets, talent hubs and innovation hubs,” he says. South Africa’s Saville agrees that, while some First World national economies may be in trouble, the same doesn’t necessarily apply to their companies which are open to doing business globally. “It’s not so much European companies being in trouble, but European governments,” he explains. “In many places the companies face outward – like BMW in Germany.” Perhaps BMW is an ideal example. While its home European market is slow, it is happily selling huge numbers of cars and SUVs in emerging economies – from Beijing to Bloemfontein, Santiago to Singapore. A business case for corporate culture Supporting Wunker’s observation regarding a lack of innovation in emerging markets is the 2011 Global Innovation 1000 study by international management consultancy, Booz & Co, which indicates that nine out of 10 of the world’s most innovative companies still come from developed nations. The exception is Samsung of South Korea – a country which is classified as ‘emerging’ by some criteria, but as ‘developed’ by others. Perhaps, tellingly, the report says that corporate culture – which can take decades to build and evolve – is critical to the innovation process. By implication, then, younger companies from emerging nations could find it difficult to match the innovation of the ‘old guard’ for years, or perhaps decades, to come. Even a healthy balance sheet and a willingness to invest heavily in research and development is no guarantee of achieving innovation success. “Many companies, notably Apple, consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success – such as revenue growth, profit growth, margins and total shareholder return,” say the researchers. “Meanwhile, entire industries – such as pharmaceuticals – continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they and their shareholders might hope for.” Among the reasons given for poor innovation are a culture of low risk-taking and a lack of tolerance for failure during the innovation process. A deficiency in internal structures can also be problematic. The researchers cite Hewlett-Packard (HP) as an example of a business which integrates a long history of innovation with new and more customer-centric demands. “HP has made a conscious effort to integrate its innovation efforts more tightly with the business, (as well as) to ensure that both its strategic goals, and the innovation culture that supports those goals, are aligned with that overall strategy. And although the company’s overall strategy may change as 14 a result of the recent arrival of Meg Whitman as CEO, the tight link with the innovation culture is likely to continue,” the report reads. Geography can also be an advantage, particularly when it brings with it communities of skilled professionals who share a common culture of innovation and risk-taking. According to the Booz & Co report, companies located around Silicon Valley in California – home to what is sometimes called the ‘West Coast culture of innovation’ – are more than twice as likely to have suitable corporate cultures and strategies than businesses located elsewhere. A study by the Wharton Business School at the University of Pennsylvania certainly bears this out. Wharton researchers studied the bankruptcy of the famous Eastman Kodak company and concluded that part of the problem was an insulated and isolated “It’s not so much European companies being in trouble, but European governments. In many places the companies face outward – like BMW in Germany.” Adrian Saville, visiting professor at the Gordon Institute of Business Science (GIBS) culture stemming from its location in Rochester, a town in upper New York State. The study states: Kodak failed to build a strategy based on customer needs because it was afraid to cannibalise its existing business. It succumbed to inside-out thinking – that is, trying to push forward with the existing business model instead of focusing on changing consumer needs. Accustomed to very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted. Long-run strategies work better if you stand in the shoes of your customers and think how you are going to solve their problems. Kodak never really embraced that.” The report continues: “The company’s isolation probably didn’t help. They had a very insular culture, sitting up there in Rochester. The company might have been able to innovate more quickly on the digital front if it had set up a separate lab in Silicon Valley, then allowed it to grow independently and tap into the area’s tech culture and expertise. Instead, Kodak got sucked into the Rochester environment. They recognised the threat, but tried to deal with it on their own terms.” This view is also shared by Kodak insiders. Some people in the company saw a need for change but they couldn’t make it happen, says John Larish, a photography writer who worked at Kodak from 1969 to 1984 as a senior markets intelligence analyst. He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work”. Venture companies in Silicon Valley are “pretty wild”, Larish adds. “In Rochester, people come to work at 8 and go home at 5.” Therein lie the lessons for not only emerging markets but their corporate representatives too. It is a given that for the foreseeable future, emerging market economies will continue to grow at a rate far ahead of their developed market competitors, but the companies located within them may fail to reap the full benefits of this growth unless they can take dramatic steps to fast-track their own innovation cultures and processes. Otherwise, it may be the ‘old guard’ companies which are the real winners in the ‘brave new world’. “Many of today’s breathless headlines about innovation in emerging markets are overblown.” Stephen Wunker, American author and business consultant Ernst & Young’s Worldmap Emerging Markets highlights the top 25 ‘rapid-growth markets’ which are increasing in importance both in terms of their overall weight in the world economy and their global influence. We highlighted a few key players: Russia GDP 4% CPI 5.6% China GDP 8.4% CPI 3.5% Vietnam GDP 5.7% CPI 11% Ghana GDP 8.3% CPI 8.9% Nigeria GDP 7% CPI 12% Brazil GDP 3.1% CPI 5.5% Chile GDP 3.8% CPI 3.1% Argentina GDP 3.9% CPI 11.4% India GDP 6.1% CPI 6% South Africa GDP 2.5% CPI 6.4% 15