Winning the World Economic Decathlon
Shortly after the London Olympics, the McKinsey Quarterly came out with an enlightening report on strategies for multinational corporations (MNCs) to tackle expanding opportunities in emerging markets. “Winning the $30 Billion Decathlon: Going for Gold in Emerging Markets” (Winning) uses the Olympics analogy to describe epochal changes in the developing world, particularly in China and India.
Winning posits that China and India doubled their per capita GDP in just 12 and 16 years respectively compared to the 150 years for Britain during Industrial Revolution 1.0 and more than 50 years for America in Industrial Revolution 2.0. With a combined population of roughly 1 billion at the outset of their economic takeoffs compared to about 10 million for Britain and the US at the beginning of their rise, China and India’s Industrial Revolution 3.0 is “roughly 10 times the economic acceleration of the Industrial Revolution, on 100 times the scale – resulting in an economic force that is over 1000 times as big”.
Owing to two decades of rapid urbanization in emerging economies, the number of people in the ‘consuming class’ around the world, defined as earning more than US$10 a day on purchasing power parity (PPP) basis, the level at which households start to make purchases of major appliances and electronic devices, has surged from 1 billion in 1990 to 2.4 billion today.
With large scale urbanization continuing into the next decade and beyond, the McKinsey Global Institute (MGI) suggests that within 14 years (2025) the consuming class will nearly double to 4.2 billion out of a global population of 7.9 billion. By that time, roughly 1 billion households with annual incomes of $20,000+ will reside in developing countries and their annual consumption will jump to $30 trillion to account for nearly 50% of global spending. In 2010, only 17% of MNC revenues came from emerging economies even though those countries generated 36% of global GDP that could double by 2025.
A new generation of young consumers is rising in the developing world who are more confident about their career and income prospects in a digital era than their counterparts in developed countries. China is home to over 510 million netizens, more than twice that of the US. They are increasingly savvy in using e-commerce and mobile-payment systems while homegrown major service providers like Baidu and Tencent are leapfrogging the developed-market competition. Just a couple days ago, Baidu announced an investment of over $1.6 billion in new cloud computing facilities to focus on its next phase of growth centered on the mobile Internet.
Winning argues that emerging market consumers are increasingly driving global innovation in product design, manufacturing, distribution channels, supply chain management, and other areas so advanced country MNCs must radically re-think their strategies and operations there. Like decathletes, MNCs must run faster, jump higher and longer, and throw farther and more accurately.
MNCs must develop 10 key capabilities to meet the myriad of challenges in emerging markets including surgically targeting urban growth clusters; aggressively redeploying resources to take advantage of niche and nascent markets; crafting brands, innovating at all price segments, and building a go-to-market approach; while fundamentally rethinking their management structures and processes.
McKinsey’s analysis of urban growth clusters (conceptualized by Chinese scholars years ago) particularly stands out for approaches to the China market (which I will look at in a subsequent post). In terms of annual GDP values, the Shanghai cluster, for instance, is the size of Switzerland. The Jingjinji cluster (the Chinese acronym for the Beijing-Tianjin-Hebei province corridor which I have examined closely in a report commissioned for Global Bridge Consulting) is larger than Belgium; the Shandong cluster is greater than Norway and Austria; and Guangzhou exceeds Denmark.
Although it focuses on MNC strategies and mentions new domestic champions in China such as Internet giants Baidu and Tencent, Winning substantially underestimates the growing competition from Chinese companies across the industrial and high-tech spectrum. A post on July 4 discussed a recent KPMG survey of international high tech and venture capital firm CEOs forecasting the shift in high-tech innovation from Silicon Valley to China within a short 4-5 years. This is not to mention cutting edge R&D and state-of-the-art facilities being put to use in traditional industrial sectors.