MNCs face threat from emerging market players

Discussion in 'Economics' started by Yuvrajjj, Jun 19, 2008.

  1. The traditional model of western business is under challenge from the process of globalisation in emerging economies, according to a report by Cambridge University’s Institute of Manufacturing, released by Capgemini.

    Globalisation is driving the growth of domestic companies into emerging multinationals, says the report, which examines the growth profiles of a cross-section of manufacturing organisations in key emerging markets of Brazil, Russia, India and China (BRIC nations).

    Predictions indicate that BRIC economies will together be more than half the size of G6 economies (US, Japan, Canada, UK, Germany and France) by 2025 and will overtake them by 2040. In all probability, the MNC giants of tomorrow will emerge from these economies.

    At present, 12 Brazilian firms are on the list of the top 100 emerging MNCs from the BRIC nations. Currently, the outward investment from these countries is relatively small compared to developed countries like the US and UK, but this investment is growing, fuelled largely by inward investment and the strong growth in their economies.

    “In recent years, we have seen strong, sustained growth of the global economy and a large part of this has been due to the performance of emerging markets,” said Nick Gill, global automotive and manufacturing leader, Capgemini.

    He added, the report indicates, “This actually poses a challenge to western MNCs as they face significant competition from organisations which were initially able to grow within a sheltered environment. Established corporations will seek to understand the internationalisation strategies of organisations in these emerging markets, since many of them will become the MNCs of tomorrow.”

    The report points out that western companies are often priced at considerably lower multiples of earnings than Indian companies, making such purchases potential bargains as well as being strategically sound. Most deals are cash, rather than stock-based, which is consistent with the strong cash positions of many successful Indian companies and the strong family/promoter ownership in the Indian industry.

    A substantial portion of outbound FDI has funded M&As, with most targets being in Europe or the US. The main driver for these recent international M&As seems to be the access to foreign markets in industries that are being rapidly globalised. Ranbaxy and AV Birla made substantial overseas investments since 2005, when the government relaxed the $100-million cap on annual foreign investment by Indian companies.

    In China, Haier, TCL and Wanxiang moved globally through exports. While emerging MNcs initially grew in a protected environment with a large local market, they were led by visionary leaders who had long-term plans for their firms.

    Thus, Ranbaxy collaborated with Lapetit (Italy), and GSK (UK), Petrobras with Shell (Dutch), Texaco (US) and Pemex (Mexico) and AV Birla with Kaiser Aluminium and Chemicals (US) and Outokumpu (Finland). Further, having missed the late 90’s economic boom, the BRIC countries witnessed an economic ‘break-out’ around the turn of the century.

    The companies also gained experience before the national ‘break-out’ - they were ready when the opportunity came, having gone “slightly international”. They also exploited the low-cost advantage in unattractive markets or segments before moving on to more sophisticated markets.

    Thus, South Africa, South East Asia or the old Soviet Union, where most western countries did not venture into, were tried out by these companies. They also used the greenfield, joint venture, and mergers and acquisitions routes to expand.

    Since the economies of these countries are growing more rapidly than developed countries, the research says, outward FDI can be expected to grow more rapidly. To compete with these new players, established MNCs will have to learn to be more cost competitive or find ways to out-innovate the new competition. MNCs will also have to rethink their approach to market segmentation - a low-margin segment offers a point of entry to a new competitor.

    For the companies in EMs, too, there are challenges ahead. As they expand, they can expect fiercer competition from established players and other companies. While some have sought capital from the capital markets for expansion, this may restrict their freedom to forego short-term profitability, especially if their rate of growth declines.

    In India, the government has begun to prioritise manufacturing to provide employment, resulting in an increased growth in GDP, which has averaged 8.5% since 2006. Other key factors are the influence of citizens returning after completing a western business education, the increased exposure of India’s economy to global markets and pressures, and the relaxation of controls on outward investment.

    In Brazil, there’s been a surge in outward FDI in the form of M&A deals, alongside fluctuating GDP and inward FDI, which is currently growing slowly. China has become the main provider of manufactured goods for the world. Some domestic manufacturing companies have achieved very impressive scale and are beginning to invest overseas. The increase in outward FDI has followed China’s admission to the WTO and the introduction of the government’s ‘Going Out’ policy to raise its economic profile.
  2. pod11432


    Did you write this article, if not then provide the source(link) of the article. Otherwise this is plagiarism.