Understanding Emerging Markets

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CAVUMC09_254-283hr 10/15/07 11:23 AM Page 263 The Distinction between Advanced Economies, Developing Economies, and Emerging Markets 263 Population GDP (PPP basis) Energy consumption Exports Foreign direct investment, net inflows Stock market capitalization 0 20 40 60 80 100 Exhibit 9.5 Why They Matter: Emerging Markets as a Percent of World Total Note: Taiwan is not included because of insufficient data. SOURCES: Economist. (2006). “The New Titans,” September 14, survey section; International Monetary Fund at www.imf.org; Central Intelligence Agency. (2006). World Factbook, at www.cia.gov; World Bank at web.worldbank.org Bangladesh. Orascom now has roughly 50 million subscribers and more than $3 billion in annual revenues. Operating expenses in Egypt are perhaps a tenth of what they are in Europe, because engineers and sales people work for less. Orascom’s advantage is growth, which provides a continuous stream of capital to fund expansion plans. Management has excelled at local branding and tailoring telephone products and services to local pocketbooks. 8 United States Britain Euro countries Canada Australia Japan China Venezuela Argentina India Peru Advanced economies Exhibit 9.6 GDP Growth Rates in Advanced Economies and Emerging Markets SOURCE: Norris, Floyd. (2006). “Maybe Developing Nations Are Not Emerging but Have Emerged,” New York Times, December 30, p. 8. Colombia Singapore Emerging markets Hong Kong Russia 0 +2 +4 +6 +8 +10%
CAVUMC09_254-283hr 10/15/07 4:55 PM Page 264 264 Chapter 9 Understanding Emerging Markets China is the largest emerging market, and its role in international business is expanding rapidly. With a population of 1.3 billion people (one-fifth of the world total), the Chinese economy continues to grow at an impressive rate of nearly 10 percent per year. The country has already produced numerous new global challengers, such as Shanghai Automotive (China’s top automaker), Sinopec (a large oil company), and Shanghai Baosteel (a steel manufacturer). The Global Trend feature highlights China’s growing role in international business. > GLOBAL TREND China: Growing Role in International Business Ahuge population and rapidly growing economy make China a huge importer of consumer products, technology, and commodities. Long a communist regime, China began pursuing market reforms in the late 1970s. It achieved explosive economic growth, quadrupling its GDP during the succeeding 30 years. China’s growth was especially fast in the 1990s— while exports amounted to just $78 billion in 1993, they surged to $974 billion by 2006. Although income per person is still modest at around $6,800, China in 2007 stood as the second-largest economy in the world (after the United States). China’s economic reforms have progressed in fits and starts, with the national government periodically loosening and tightening central controls. China has struggled to sustain job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the workforce. Roughly one hundred million rural workers drift between villages and the huge cities, many subsisting through parttime, low-paying jobs. Poor infrastructure in communications and transportation remains a major challenge, especially in the countryside. After joining the WTO in 2001, China’s role as a global manufacturing site expanded, triggering massive exports to Europe, the United States, and elsewhere worldwide. Investment has poured into China from MNEs who perceive a bright future for the country both as a manufacturing platform and huge consumer market. China buys roughly 20 percent of the world’s aluminum, copper, washing machines, soybeans, poultry, and ice cream. It consumes roughly one-third of the world’s coal, cotton, fish, rice, and cigarettes. The country buys onequarter of the world’s steel and onehalf its pork. It is home to 20 percent of the world’s cell phone users. Rapid industrialization means that the country needs to import aircraft, machinery, production equipment, telecommunications technology, and various raw materials. These trends are both a boon and a bane to international business. While it is a booming new market, China also puts considerable strain on world resources, leading to higher commodity prices. It also means environmental degradation. Eight of the 10 most polluted cities in the world are now in China. The country now releases 13 percent of global carbon dioxide emissions, second only to the United States (23 percent). There are also serious problems of water pollution, deforestation, desertification, and soil problems. 9 Nevertheless, all this suggests opportunities for western firms marketing technologies and equipment for the protection of the environment. To profit from China’s low-cost labor and growing affluence, thousands of foreign companies set up sales offices and manufacturing facilities there. For most of these firms, however, success has come slowly, or not at all. The biggest problem is that China is still relatively poor. Out of a total population of 1.3 billion, the realistic target consumer segment is much smaller, perhaps 250 million middle-class residents of urban areas, largely along the more developed eastern coastal regions. Other challenges include regional differences in language, autonomous local governments, and inadequate infrastructure. Yet, many companies have succeeded in China, including Coca-Cola, General Motors, McDonald’s, Motorola, Airbus, and Volkswagen. Wal-Mart saved immense sums by sourcing over $30 billion of merchandise from China in 2007. Success in China requires a deep understanding of the market and long-term commitment. The country holds huge long-term potential for firms that take the time and invest the resources to succeed there. Sources: Central Intelligence Agency. (2007). World Factbook, www.cia.org; Fortune. (1999). “China’s Tough Markets,” October 11, p. 282; Fortune. (2004). “What China Eats (and Drinks and. . . )” October 4, pp. 151–53; Garten, Jeffrey. (1997). The big ten: The big emerging markets and how they will change our lives. New York: Basic Books.
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Understanding Emerging Markets

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