Creation of a Consumption Trend in Emerging Markets

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West's Decline & Mr. Gordon Brown's Insights on Recovery

It is always helpful to know what the leaders of nations are thinking during crisis, which may be driven by economics, climate, etc. What is even more interesting is to see the realization of the "what" into the "how", which usually is a bit farther away from the desired.

In his article "How the west can reverse a decade of decline" in the Financial Times here, Mr. Gordon Brown highlights an obvious fact - "Within a decade a richer Asia will be home to a middle-class revolution equivalent to the consumer power of two Americas, becoming the main driver of world growth... This shift can be the most effective exit strategy from the crisis, and help to rebalance the world economy – but only if Europe and America re-equip, and are able to export their superior innovations and global brand name goods to Asia’s new billion-strong middle class. Yet delivering these value-added, technology-driven, custom-built products and services will only be possible with high levels of investment."

Here is a fallacy - Western innovation is not superior, and if it is, for example, internal combustion engine, it is being leapfrogged as China is focusing on electrical vehicles and in a decades time frame will be delivering commoditized electric vehicles and/or their components to the world.

Mr. Brown though highlights a key consideration and this is where his "what" is right on, though the "how" to manage it is already looking like as he predicts - "The descent into trade and currency wars, bans on cross border takeovers, and excessive restrictions on skilled workers are also counterproductive, risking access to the world’s biggest new markets just at the time they could benefit us most. History will judge these newly fashionable orthodoxies as wrong as the false certainties of the 1930s."

Here is an example of how reacting to fear due to lack of knowledge, just like GM not adopting the electric vehicle option, gets popularized, and Mr. Brown's statement above may come to be:

As a senior South Asian diplomat friend of mine says, "But what to do??!!" :)

Innovation in Emerging Market: Consumer Spending

"To flourish in this atmosphere, it helps to have the spirit of a frontier settler, not a corporate bureaucrat." states the article "Grow, grow, grow" in Economist's recent report on innovation in emerging markets here.

Innovation in Emerging Market: Universal and Apsirational Brands

From the Economist's recent report on innovation in emerging markets here, the article "Easier said than done" showcases pyramid-straddling - the concept where a brand is able to win across all socio-economic market segments.

"... the masters of pyramid-straddling are mobile-handset makers. Nokia produces phones for every market, from rural models designed to cope with monsoons to fashion accessories that will look cool in a Shanghai nightclub. The cheap phones are sold through a vast network of local outlets, such as mom-and-pop stores and rural markets, and the upmarket models through shops in fashionable city centres. The aim is to create a brand that is at once universal and aspirational."

Innovation in Emerging Market: Dilemma Managent vs. Problem Solving

In Economist's recent report on innovation in emerging markets here, the article "Easier said than done" talks about differentiated and unique approaches to putting economically profitable business ideas into practice. An exceptional example is from Kenya:

"East African Breweries, a division of Diageo, launched a cut-price beer, Senator Keg, to help reduce demand for illicit alcohol, which is cheap but is frequently contaminated with methanol, fertilisers and battery acid. The company reduced the cost of the beer by negotiating a tax waiver with the government and by distributing it in kegs rather than bottles. The company made use of the shadow economy to get the beer delivered to the outlets. It also trained bar staff to understand the importance of rotating kegs to make sure the beer was fresh, and of washing glasses. Senator Keg is now ubiquitous in Kenya, sold in every makeshift roadside bar, and is affectionately known as “Obama”."

This is 21st Century Dilemma management vs. 20th Century Problem Solving. Thinking beyond maximizing the shareholder value on a quarterly basis yields the above innovative solution.

Innovation in Emerging Market: Data Points

"The engineering gap" in the January Economist states:

"According to the [Aspiring Minds, India], only 4.2% of India’s engineers are fit to work in a software product firm, and just 17.8% are employable by an IT services company, even with up to six months’ training. A larger share could cope in business-process outsourcing (call centres and the like). These findings are even gloomier than the 25% figure for employability that has been bandied about since 2005, when McKinsey released the results of a survey of international companies."

Download the complete report here.

The article "Grow, grow, grow", in Economist's recent report on innovation in emerging markets here, states: "McKinsey reckons that only 25% of India’s engineering graduates, 15% of its finance and accounting professionals and 10% of those with degrees of any kind are qualified to work for a multinational company."

The emerging market growth is fantastic, yet reviewing the thorough report from the Aspiring Minds raises or should raise questions for the multinationals. Also, curious if this level of employability applies to the Indian scientists as well?

In the report on innovation in emerging markets, the following statistics provide food for thought:

"The number of companies from Brazil, India, China or Russia on the Financial Times 500 list more than quadrupled in 2006-08, from 15 to 62. Brazilian top 20 multinationals more than doubled their foreign assets in a single year, 2006...

Multinationals expect about 70% of the world’s growth over the next few years to come from emerging markets, with 40% coming from just two countries, China and India...

Fortune 500 [companies] have 98 R&D facilities in China and 63 in India. ... General Electric’s health-care arm has spent more than $50m in the past few years to build a vast R&D centre in India’s Bangalore... Cisco is splashing out more than $1 billion on a second global headquarters—Cisco East—in Bangalore... Microsoft’s R&D centre in Beijing is its largest outside its American headquarters in Redmond... a quarter of Accenture’s workforce is in India."

Mohamed El-Erian

Mr. Mohamed El-Erian, CEO of PIMCO is someone I have listened to closely when it comes to understanding investments in global markets.

"As a group emerging markets have become stabilizers in the system, old days we thought of them a disruptor."

See the video here.

21st Century Dilemma Management

A report from the Brookings Institution and the Center on International Co-operation at New York University, "Confronting the Long Crisis of Globalization", download here, discusses that the sort of problems governments will face in the 21st century will be unpredictable versus those faced during old great power rivalries.  Concerns related to demography, climate change and shifts in economic power build up quietly for a long time and finally trigger sudden, disruptive shifts.

The authors suggest institutional level changes and changes in the frame of mind in solving the needs or crisis.  They recommend risk mitigation and resilience to shocks - "Resilient systems are those that can absorb disturbance and reorganize while undergoing change, so as to retain or enhance effective function, structure, identity and feedbacks."

The days of narrow focused, blinders on, problem solving are over as the deeply interconnected world continues to grow to be more so.  This is the century of the "butterfly effects".

Jeremy Grantham on Financial Bubbles - Excellent!

Jeremy Grantham states - "Bernake has happily picked up the mantle, and seems totally unconcerned about creating another bubble.  He has got interest rates so low, banks can't possibly not make a fortune, savers are being penalized, anyone who wants to buy cash faces a painful experience... so we are all tempted into speculating, which is apparently what he wants and we have just had one of the great speculative rallies in history second only to 1932-33."  Watch the complete interview here.

China Update

Good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co. forwards valuable insights on China's approach and management of its ownership of USA debt and foreign exchange reserves, and how it is perceived globally.

Do we have a new leader that now begins to manage the economics of the globe?  Perhaps China has been one for a long while!

A horse may look like it is pulling the cart... but the one who holds the reins, reigns.

"How does China deal with the risk of holding US Treasury bonds?
"Convertible bonds" are not a solution for China in hedging the risk of holding US Treasury bonds. This could make things worse for China. Given the huge amount of foreign exchange reserves, what China should do is commit to adjusting its structure for economic growth, purchase strategic materials at the right time and persist in renminbi internationalization so as to ensure the security of China's investment in US Treasury bonds."

"World Bank believes China understands the risks of an asset-price bubble
Juan Jose Daboub, managing director of the World Bank, points out on Dec. 14 that the World Bank believes that Chinese authorities understand the risks of an asset-price bubble and will take the measures that they believe are more appropriate. They have done so in the past."

Stephen Roach: I'm starting to worry about China's economy

Via Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co.:

"This is an article written by Stephen Roach, chairman of Morgan Stanley Asia, which is posted on the website of the Financial Times. Its original title is "I've been an optimist on China. But I‘m starting to worry". On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009. A back-of-the envelope calculation suggests China may have accounted for as much as 2% of annualized growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow the global gross domestic product to eke out a small positive gain for the first time since last summer.That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting the macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending. A macro strategy that exacerbates troubling imbalances is ultimately a recipe for failure. In many respects, that's what the global crisis and the recession of 2008-09 are all about. China will not get special dispensation from the most critical lesson of this post-crisis era."

See the complete article here.

Product Innovation from India

While at P&G, I developed a R&D center outside of the USA. It is exciting to read this article "Outsourcing: Product Innovation from India" here, highlighting how India has slowly but steadily moved up the product innovation value chain at RealInnovation.com. Even though the article is based on a white paper originally published by Zinnov in 2005, it is insightful. The article states:

"As of 2005, more than 150 international companies, large and small, were doing R&D in India. Multinational companies started hiring strong leaders to run their development centers in India. Some of these companies imported expats (professionals returning from the United States, the United Kingdom and other Western countries) to run their operations in India. The leadership teams of these companies understood that they could do a lot more from India than simply being a back office to the product teams in their home countries. Thus began a quiet revolution. The India-based leadership teams of these companies convinced their executive management to allow them to take ownership of certain products whereby the Indian teams could conceptualize and build new features and modules."

Here an excellent diagram from the article showing the product companies operating in India as of 2005.



Update: A macro-economic number showing India had 5.4% growth in Q1 2009 vs. projected growth of 5.2%.