Looking beyond the obvious: globalization and new opportunities for ...

Looking beyond the obvious: globalization and new opportunities for ...

Looking beyond the obvious: globalization and new opportunities for ...


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About this report<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth draws on threesources of original research: <strong>the</strong> 2012 Globalization Survey, an online survey of 730 globalbusiness executives from around <strong>the</strong> world conducted <strong>for</strong> Ernst & Young by <strong>the</strong> EconomistIntelligence Unit; in-depth interviews with senior executives <strong>and</strong> high-level experts conducted at<strong>the</strong> end of 2012; <strong>and</strong> data from Ernst & Young’s 2012 Globalization Index, which was developedby <strong>the</strong> Economist Intelligence Unit <strong>for</strong> Ernst & Young to measure <strong>the</strong> 60 largest countries/territories by GDP according to <strong>the</strong>ir degree of <strong>globalization</strong>. Among <strong>the</strong> respondents to <strong>the</strong>2012 Globalization Survey, 433 were from developed markets <strong>and</strong> 297 from rapid-growthmarkets; of <strong>the</strong> latter group, 139 were from Brazil, Russia, India <strong>and</strong> China <strong>and</strong> 158 from o<strong>the</strong>rrapid-growth markets. Among <strong>the</strong> companies surveyed, <strong>the</strong> reported annual revenues were asfollows: 23%, US$10 billion or more; 24%, US$1 billion to US$9.9 billion; 49%, US$100 million toUS$999.9 million; <strong>and</strong> 4%, under US$4 million.ContentsIntroduction................................................................................ 1Executive summary.................................................................... 2Section 1Section 2Section 3Section 4Section 5Section 6Globalization continues, but it’s different this time around........... 4Companies must make “big bets” on markets <strong>the</strong>y may nothave considered be<strong>for</strong>e............................................................... 6The BRICs are still reliable options — <strong>for</strong> now … ......................... 10… But <strong>the</strong> momentum is shifting to o<strong>the</strong>r hot spots.................... 12Are developed markets worth betting on?................................. 18Operational changes are essential to picking <strong>the</strong> right big bets<strong>and</strong> increasing <strong>the</strong>ir chances of a payoff.................................... 24The 2012 Globalization Index ................................................... 30Growing Beyond

Executive summaryExecutive summaryThe changing face of <strong>globalization</strong> willpresent <strong>new</strong> challenges <strong>for</strong> companies in<strong>the</strong> coming years. Our research <strong>for</strong> this report,based on Ernst & Young’s 2012 GlobalizationIndex <strong>and</strong> Survey, reveals a businessl<strong>and</strong>scape of uncertainty <strong>and</strong> ambiguity, setagainst a backdrop of slowing cross-borderintegration. In this uncertain world, companieswill need to look <strong>for</strong> growth in <strong>new</strong> ways <strong>and</strong>from <strong>new</strong> places. The trends <strong>and</strong> issues <strong>the</strong>ymust consider include <strong>the</strong> following:Globalization continues, but it’s differentthis time around. Although <strong>globalization</strong> —<strong>the</strong> cross-border integration of business — willcontinue in <strong>the</strong> years ahead, its pace willslow, with <strong>the</strong> financial crisis <strong>and</strong> subsequentrecessions providing a tipping point. Trade,technology, culture, labor <strong>and</strong> capital willintegrate at different rates across <strong>the</strong> 60countries measured in <strong>the</strong> Index.Companies must make “big bets” onmarkets <strong>the</strong>y may not have consideredbe<strong>for</strong>e. To stimulate <strong>the</strong> global economy,head off competitors <strong>and</strong> ride <strong>the</strong> next waveof <strong>opportunities</strong>, businesses will need to beton markets or regions of <strong>the</strong> world that maynot be <strong>obvious</strong> choices today. This may meanconsidering not only rapid-growth marketsoutside Brazil, Russia, India <strong>and</strong> China (BRIC)but also developed markets, as well ascreating nuanced <strong>and</strong> customized strategies<strong>for</strong> different markets, sectors, areas, regions<strong>and</strong> countries. Taking “big bets” on carefullychosen markets, categories or technologies— those that match a business’s existingcompetencies — offers <strong>the</strong> best chance ofsecuring a sustainable competitive advantage.The BRICs are still reliable options — <strong>for</strong>now … For many multinational companies,Brazil, Russia, India <strong>and</strong> China were <strong>the</strong>big bets of <strong>the</strong> past decade. And <strong>the</strong>re’s noquestion that <strong>the</strong>se powerhouses will continueto be major players in <strong>the</strong> world economy. Butas <strong>the</strong>ir growth slows over <strong>the</strong> next few years<strong>and</strong> <strong>the</strong>ir operating environments becomemore challenging, companies must look <strong>for</strong>additional engines of growth.… But <strong>the</strong> momentum is shifting to o<strong>the</strong>rhot spots. Increasingly, non-BRIC rapidgrowthmarkets (such as Mexico, Turkey,South Africa <strong>and</strong> Vietnam) are emergingas attractive locations <strong>for</strong> global business.Despite <strong>the</strong>ir risks, <strong>the</strong>se markets are moreglobally integrated than <strong>the</strong> BRICs on arange of trade, investment, cultural <strong>and</strong>technological criteria, <strong>and</strong> in <strong>the</strong> past threeyears have improved markedly in termsof ease of doing business, infrastructure,government policies <strong>and</strong> labor productivity.In particular, several countries <strong>and</strong> regions inAfrica are shaping up to be among <strong>the</strong> mostdynamic parts of <strong>the</strong> world <strong>for</strong> investment.2 Growing Beyond

Executive summary“To compete in a volatile <strong>and</strong> dynamic business l<strong>and</strong>scape,organizations must invest in continuous learning so <strong>the</strong>y canrespond to change quickly <strong>and</strong> effectively. Turning diffuse datainto usable in<strong>for</strong>mation has never been more important.Using in<strong>for</strong>mation technology <strong>and</strong> social media well helps — itallows organizations to capture <strong>the</strong> in<strong>for</strong>mation <strong>the</strong>y needfaster <strong>and</strong> use it more collaboratively.”Mark Weinberger, Global Chairman <strong>and</strong> CEO-elect, Ernst & YoungAre developed markets worth betting on?It may not seem like it, given <strong>the</strong> problemsin <strong>the</strong> Eurozone, uncertainty over <strong>the</strong> US’stax <strong>and</strong> budget policies, <strong>and</strong> <strong>the</strong> slow growthprospects <strong>for</strong> most of <strong>the</strong> world’s advancedeconomies. But <strong>the</strong>re are pockets of exciting<strong>opportunities</strong> in some developed markets,which can leverage <strong>the</strong>ir technologicaladvantage. The penetration of broadb<strong>and</strong>,social, digital, mobile <strong>and</strong> o<strong>the</strong>r advancedtechnologies is much higher in matureeconomies, allowing <strong>the</strong>m to have a largeshare in <strong>the</strong> export of goods <strong>and</strong> services <strong>and</strong>maintain <strong>the</strong>ir dominant position in certainmarkets. The US, which is already benefitingfrom a wave of re-shoring <strong>and</strong> a resurgenceof domestic manufacturing, may see growthin some industries thanks to <strong>the</strong> tremendoustechnological advances in <strong>the</strong> development ofunconventional oil <strong>and</strong> natural gas resources,such as shale gas <strong>and</strong> “tight” oil, which couldsignificantly move <strong>the</strong> country towards <strong>the</strong>long-held goal of energy independence. Theavailability of domestic energy at an af<strong>for</strong>dableprice will have a profound effect on globalcompanies’ decisions about where to locateproduction.Operational changes are essential topicking <strong>the</strong> right big bets <strong>and</strong> increasing<strong>the</strong>ir chances of a payoff. To choose <strong>the</strong> best<strong>opportunities</strong> from a wide variety of markets,companies must adapt <strong>the</strong>ir operations to a<strong>new</strong> growth cycle — one that requires highlydisciplined <strong>and</strong> rigorous strategic planning,execution <strong>and</strong> learning, all supported <strong>and</strong>enhanced by technology. A possible approachto this <strong>new</strong> growth cycle might include:• Strategic planning: allocate resourcesin a bold <strong>and</strong> focused way. Deciding howto apportion scarce resources involvesresolving many trade-offs <strong>and</strong> conflictsbetween slow-growth <strong>and</strong> rapid-growthmarkets, short-term <strong>and</strong> long-termreturns, <strong>and</strong> volume-to-margin ratios. Oncecompanies decide on <strong>the</strong> right balanceof <strong>the</strong>se elements, <strong>the</strong>y must settle on ah<strong>and</strong>ful of key investments that offer <strong>the</strong>best promise of future growth. Making<strong>the</strong>se bets clearly requires a high degreeof confidence that an investment will work.Technology plays a big role here: businessanalytics, <strong>for</strong> example, can help companiesbuild an investment case, evaluate risks,look at potential scenarios <strong>and</strong> simulateoutcomes.• Execution: make your big bet investmentsas local <strong>and</strong> granular as possible.Succeeding in <strong>the</strong> world’s <strong>new</strong> marketsmeans being immersed in <strong>the</strong>m — tailoringofferings to meet <strong>the</strong> exacting needs oflocal customers, <strong>for</strong>ming close relationshipswith local officials <strong>and</strong> communities,manufacturing locally or establishingregional supply chains, <strong>and</strong> empoweringlocal managers to make decisions so that<strong>the</strong>y can act on <strong>opportunities</strong> swiftly. Again,technology can help by providing corporateparameters <strong>for</strong> decision-making.• Learning: trans<strong>for</strong>m your company intoa “learning organization.” It’s no <strong>new</strong>s toanyone that rapid change is <strong>the</strong> <strong>new</strong> normalin business today <strong>and</strong> that many outcomeswill remain unpredictable. Yet companiescan learn to manage change better. This iswhere <strong>the</strong> power of technology really comesinto play. Applications such as businessintelligence <strong>and</strong> analytics, mobility solutions,<strong>and</strong> social networking allow businessesaccess to a wealth of data that <strong>the</strong>y can feedinto future strategic planning <strong>and</strong> use tobecome lean <strong>and</strong> flexible organizations thatare well positioned to thrive in <strong>the</strong> globaleconomy of <strong>the</strong> future. An organizationwith a mindset of continuous learning willbe best equipped to manage successfullyin a turbulent <strong>and</strong> ever-shifting businessl<strong>and</strong>scape.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth3

Section 2Companies must make “big bets” on markets<strong>the</strong>y may not have considered be<strong>for</strong>e6 Growing Beyond

Section 2In this world of changing <strong>globalization</strong>patterns, extensive technology integration<strong>and</strong> rapidly shifting demographics,organizations are faced with great complexity<strong>and</strong> uncertainty. It’s not always clear where<strong>the</strong> next big opportunity lies, <strong>and</strong> it may betempting <strong>for</strong> companies to play it safe <strong>and</strong>stick to proven investment destinations. Butto ride <strong>the</strong> next wave of growth, businesseswill need to bet on markets or regions of <strong>the</strong>world that may not be <strong>obvious</strong> choices today.Our 2012 Globalization Survey, conductedalongside <strong>the</strong> Globalization Index research,shows that leading companies are adoptinga multi-market approach. While <strong>the</strong> BRICsremain critical to <strong>the</strong>ir strategy, <strong>the</strong>y’re alsolooking closely at <strong>opportunities</strong> in non-BRICemerging markets <strong>and</strong> developed markets.They’re discovering that a st<strong>and</strong>ard strategy<strong>for</strong> a group of markets — e.g., an “emergingmarkets” strategy — no longer works.Instead, what <strong>the</strong>y will need are nuanced <strong>and</strong>customized strategies <strong>for</strong> different markets,areas, regions, sectors <strong>and</strong> countries.HeathrowGlobal decision-making takes offOver <strong>the</strong> past decade, <strong>the</strong> profile of <strong>the</strong> passengers passing throughUK airports, such as Heathrow, Stansted <strong>and</strong> Glasgow, has changed.Travelers from rapid-growth regions of <strong>the</strong> world, including Asia <strong>and</strong><strong>the</strong> Middle East, were once rare visitors, but as economic weight shiftsto <strong>the</strong> South <strong>and</strong> East, <strong>the</strong> number of passengers touching down from<strong>the</strong>se regions has increased significantly.It is not just <strong>the</strong> passenger profile that has changed <strong>for</strong> Heathrow AirportHoldings Limited, <strong>for</strong>merly BAA, which owns Heathrow Airport. Its capitalstructure has also moved in line with changes to <strong>the</strong> global economy,becoming more heavily weighted toward rapid-growth markets.These <strong>new</strong> investors add to a base that is already international.Ferrovial, <strong>the</strong> Spanish building company, owns more than one-thirdof Heathrow Limited’s shares, following <strong>the</strong> company’s £10.4 billionacquisition in 2006. Heathrow Limited also has significant investorsfrom Canada, <strong>the</strong> US <strong>and</strong> Singapore.“Heathrow Limited has a well-diversified investor base with a globalgeographical focus <strong>and</strong> a range of strategic <strong>and</strong> financial perspectives,”says Mat<strong>the</strong>ws. “Having a global investor base allows us to raise equitycapital at a low cost, reducing our cost of capital. And our internationalinvestors’ support has also allowed us to continue developing our airports.”In October 2012, CIC International, a subsidiary of China InvestmentCorporation, China’s main sovereign wealth fund, acquired a 10%holding in Heathrow Limited. This deal followed an investment by QatarHolding — <strong>the</strong> direct investment arm of Qatar’s sovereign wealth fund— that, assuming <strong>the</strong> deal is approved by European Union competitionauthorities, would make it <strong>the</strong> second-largest shareholder in <strong>the</strong>company with 20%.“As growth has moved to <strong>the</strong> emerging markets, <strong>the</strong>y have beenaccumulating trade surpluses year after year, <strong>and</strong> <strong>the</strong>y have <strong>the</strong> cash toinvest,” says Colin Mat<strong>the</strong>ws, CEO of Heathrow Limited. “At <strong>the</strong> sametime, <strong>for</strong>eign pension funds have been attracted because <strong>the</strong> long-termreturns available in <strong>the</strong> airport industry match <strong>the</strong>ir liabilities.”International investors also own Heathrow Limited’s debt, with bondsissued in sterling, Swiss francs, euros, <strong>and</strong> Canadian <strong>and</strong> US dollars.“In <strong>the</strong> current context, companies like ours offer attractive returns toinvestors who o<strong>the</strong>rwise might have lent money to governments,” saysMat<strong>the</strong>ws.The Qatari <strong>and</strong> Chinese investments will mean that representativesfrom <strong>the</strong>se investors will gain a seat on <strong>the</strong> airport’s operating board.For Mat<strong>the</strong>ws, this heralds a <strong>new</strong> phase in <strong>the</strong> company’s <strong>globalization</strong>,in which its decision-making will also become international. “It’s goingto be interesting having a group of investors sitting around <strong>the</strong> boardtable who are plugged into a very global set of views on investment <strong>and</strong>trade,” he says.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth7

Section 2“We do not align ourselves with markets in<strong>the</strong> traditional way of thinking about emergingversus developed,” says Maher Al-Haffar,Senior Vice President of Communications,Investor Relations <strong>and</strong> Public Affairs at MexicobasedCEMEX, one of <strong>the</strong> world’s leadingmanufacturers of cement, concrete <strong>and</strong>related building materials.“What we try to look at is <strong>the</strong> structure of<strong>the</strong> market. Sometimes you have emergingmarkets that do not have a high-growthtrajectory, <strong>and</strong> you also have high-growthmarkets that are not particularly profitable.China, <strong>for</strong> example, has high growth butis much lower on <strong>the</strong> priority list thansomewhere like Mexico or India because <strong>the</strong>structure of <strong>the</strong> market is different.”With many investment possibilities availableworldwide, companies will need to considerwhere <strong>the</strong>y allocate <strong>the</strong>ir scarce resources.Not every opportunity needs to be seized.Taking “big bets” on carefully chosen markets,categories or technologies — those thatmatch or complement a business’s existingcompetencies – offers <strong>the</strong> best chance ofsecuring a sustainable competitive advantage.The National Football LeagueScoring with technologyThe National Football League (NFL) has experienced numerous bumpson <strong>the</strong> road to <strong>globalization</strong>. Ef<strong>for</strong>ts to make American football aglobal sport began in <strong>the</strong> 1970s with occasional exhibition gamesplayed in various countries around <strong>the</strong> world. The following decade,<strong>the</strong> NFL established a European League, but closed it down in 2006,disappointed by its per<strong>for</strong>mance. “Ultimately, our European fanswanted to access <strong>the</strong> best product, <strong>and</strong> that was <strong>the</strong> NFL games thatwere played locally in <strong>the</strong> US,” says Chris Parsons, <strong>the</strong> NFL’s VicePresident of International Business.Since <strong>the</strong>n, <strong>the</strong> NFL has sought to bring <strong>the</strong> real product to <strong>the</strong> fansdirectly in key markets, by playing regular NFL season games overseas.“We focused on a number of strategic geographies, like <strong>the</strong> UK, Mexico<strong>and</strong> Canada, where we felt we could create <strong>for</strong>ward momentum,”says Parsons. “These are markets with good scale, a sizable businessopportunity, <strong>and</strong> a competitive media market with strong dem<strong>and</strong> <strong>for</strong>good sports content.”At <strong>the</strong> same time, <strong>the</strong> NFL built up local organizations in <strong>the</strong>sekey markets to drive fan interest <strong>and</strong> engagement throughout <strong>the</strong>course of <strong>the</strong> season. “The aim was to create local events, bring onboard sponsorship, <strong>and</strong> work with our licensing partners to createcomprehensive marketing strategies that activate fan engagement,”says Parsons. “This has been key to succeeding in overseas markets.”But perhaps <strong>the</strong> biggest enabler of all has been technology. In <strong>the</strong> past,<strong>the</strong> NFL relied on broadcasting as its primary route to market, but <strong>new</strong>channels, such as social media <strong>and</strong> online, have created powerful <strong>new</strong>ways through which <strong>the</strong> NFL can distribute its product to a growinginternational fan base. “Technology has allowed us to have much morelocalized messaging <strong>and</strong> communications,” says Parsons. “In addition tobroadcasting games, we now have multiple digital products that allowour fans to access <strong>the</strong> NFL, such as subscription products to streamgames <strong>and</strong> websites in local languages.”8 Growing Beyond

Section 3The BRICs are still reliableoptions — <strong>for</strong> now …10 Growing Beyond

Section 3For many multinational companies, Brazil,Russia, India <strong>and</strong> China were <strong>the</strong> big betsof <strong>the</strong> past decade. And <strong>the</strong>re’s no questionthat <strong>the</strong>se powerhouses will continue to bemajor players in <strong>the</strong> world economy. Notonly will <strong>the</strong> BRICs’ gross domestic product(GDP) grow faster than that of <strong>the</strong> o<strong>the</strong>rcountries included in <strong>the</strong> Index (see Figure3), but <strong>the</strong> BRICs will also integrate fur<strong>the</strong>rwith <strong>the</strong> global economy. Yet <strong>the</strong> challengesof operating in <strong>the</strong> BRICs are increasing, as<strong>the</strong>ir slowing real growth, rising inflation <strong>and</strong>labor costs, political instability, infrastructureshortfalls, <strong>and</strong> bureaucratic obstacles chipaway at business confidence.“Emerging markets have had a bit of arough ride over <strong>the</strong> past 12 months, provingonce again that on a cyclical basis <strong>the</strong>y arevulnerable to disappointments in o<strong>the</strong>r partsof <strong>the</strong> world,” says Stephen King, ChiefEconomist at HSBC. “China wobbled this year,but with more stimulus, its growth shouldcome back on track. India has struggled witha lack of supply, re<strong>for</strong>m <strong>and</strong> investment in<strong>the</strong> right areas. Brazil, always a very cyclicaleconomy, slowed significantly through <strong>the</strong>course of this year, <strong>and</strong> its recovery willdepend to some extent on growth in o<strong>the</strong>rparts of <strong>the</strong> world.”Gavyn Davies, a macroeconomist <strong>and</strong> <strong>for</strong>merhead of <strong>the</strong> global economics department atGoldman Sachs, notes that over <strong>the</strong> courseof 2012, GDP projections <strong>for</strong> <strong>the</strong> BRICs havedropped substantially <strong>for</strong> <strong>the</strong> first time inmany years. “The financial markets havebeen adjusting to slower growth in general,but slower growth particularly in <strong>the</strong> BRICs,where <strong>the</strong>re have been downgrades of atleast 1% to GDP in 2012,” he says. Growingprotectionism is yet ano<strong>the</strong>r threat to <strong>the</strong>Figure 3: BRIC countries continue to grow at a faster pace than o<strong>the</strong>r marketsAverage real GDP growth (%)121086420-2-41995 1997BRICs’ attractiveness. Nearly half of <strong>the</strong>respondents to our 2012 Globalization Surveysay <strong>the</strong>y expect declining growth, along withincreased global competition, to spark moreprotectionism among <strong>the</strong> BRICs (see Figure4). In fact, companies based in <strong>the</strong> BRICsare <strong>the</strong>mselves looking <strong>beyond</strong> <strong>the</strong>ir homemarkets <strong>for</strong> <strong>opportunities</strong> to sustain growth,as Ernst & Young’s Beyond Asia series ofreports reveals. 1GDP all index countries GDP BRIC countries1999 2001 2003 2005 2007 2009 2011 2013 2015Source: International Monetary Fund, World Economic Outlook Database, October 2012 outlook, accessed December 2012Figure 4: Protectionism is more likely to increase among <strong>the</strong> BRICs compared witho<strong>the</strong>r rapid-growth marketsIncrease No change DecreaseFootnote1. Beyond Asia: strategies to support <strong>the</strong> quest <strong>for</strong>growth, Ernst & Young, July 2012; Beyond Asiahighlights (individual market reports) <strong>for</strong> Mainl<strong>and</strong>China, Hong Kong (SAR), Indonesia, Malaysia,Singapore, South Korea, Taiwan, Thail<strong>and</strong>, Vietnam,Ernst & Young, July-August 2012; Beyond Asia:developed-markets perspectives — meeting <strong>the</strong>challenge of changing global competition,Ernst & Young, October 2012BRICRapid-growth marketsexcluding BRIC23%32%32%33%35%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: How do you expect <strong>the</strong> level of protectionism in <strong>the</strong> following markets to change in <strong>the</strong> next 12 months?46%<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth11

Section 4… But <strong>the</strong> momentum isshifting to o<strong>the</strong>r hot spots12 Growing Beyond

Section 4Against this backdrop, it’s critical <strong>for</strong>businesses to look <strong>for</strong> alternatives –<strong>and</strong> <strong>the</strong> search may well involve makingunconventional choices. Increasingly, non-BRIC rapid-growth markets are emerging ashot spots <strong>for</strong> global business. These marketsare more globally integrated than <strong>the</strong> BRICson a range of trade, investment, cultural<strong>and</strong> technological criteria, <strong>and</strong> this is set tocontinue through 2016, as our Index datashows. Many of <strong>the</strong>se markets also showconsistently high economic growth close tothat of <strong>the</strong> leading BRICs. For example, Turkey,Mexico <strong>and</strong> Indonesia closely shadow China<strong>and</strong> India in terms of GDP growth from 2000through 2015. O<strong>the</strong>r promising locationsinclude Peru, Colombia, Venezuela, Malaysia<strong>and</strong> Vietnam, as well as several countries <strong>and</strong>regions in Africa that are shaping up to beamong <strong>the</strong> most dynamic parts of <strong>the</strong> world<strong>for</strong> investment.In our survey, <strong>the</strong> number of executives whoview rapid-growth markets o<strong>the</strong>r than <strong>the</strong>BRICs as <strong>the</strong> most important source of <strong>new</strong>revenue nearly doubles from 26% today to45% in three years. And <strong>the</strong>y’re following<strong>the</strong> money. Executives from all geographicregions expect to increase investment in <strong>the</strong>semarkets — 82% plan to do so, <strong>and</strong> 4 in 10expect to increase it by more than 10%. Ourrespondents believe Indonesia, Mexico, SouthAfrica <strong>and</strong> Turkey to be <strong>the</strong> most competitivelocations because of <strong>the</strong>ir access to nearbymarkets, political stability, <strong>and</strong> transport <strong>and</strong>technology infrastructure (see Figure 5). Infact, our survey shows a significant shift infundamentals: a vast majority of executivessee improvement in non-BRIC rapid-growthmarkets in terms of ease of doing business,infrastructure, government policies <strong>and</strong> laborproductivity.Figure 5: Top three competitive drivers <strong>for</strong> non-BRIC rapid-growth marketsIndonesiaMexicoSouth AfricaTurkeyAccess to nearby markets40%49%34%40%Political stability36%30%29%41%Labor costs37%45%30%23%Technology infrastructure9%21%34%40%Quality of talent8%25%24%24%Transport infrastructure19%14%24%16%Access to natural resources25%13%24%10%Protection of <strong>for</strong>eign investors’ rights8%20%17%19%Regulatory environment12%6%16%13%Taxes4%7%3%4%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: Which of <strong>the</strong> following non-BRIC rapid-growth markets will be <strong>the</strong> most promising <strong>for</strong> your company over <strong>the</strong> next three years? For your number one rated market,please indicate what makes it most competitive in its peer group. Please select up to three.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth13

Section 4This can be seen as part of a broader cycleof economic development. As an increasingnumber of emerging markets around<strong>the</strong> world develop <strong>the</strong> capability to bemanufacturing leaders, <strong>the</strong>y leapfrog o<strong>the</strong>rcountries — a cycle driven by <strong>the</strong> development<strong>and</strong> dispersion of <strong>new</strong> technologies. “Astechnology has became more accessible, <strong>and</strong>as <strong>the</strong>ir education base grew, certain countriessuddenly found <strong>the</strong>mselves in <strong>the</strong> positionwhere <strong>the</strong>y could build things that historically<strong>the</strong>y would never have been able to,” saysColm Reilly, Head of <strong>the</strong> UKTI InvestmentServices group. “And that is why you’restarting to see <strong>the</strong> growth of markets <strong>beyond</strong><strong>the</strong> BRICs, like Mexico, Indonesia or somecountries in Africa, where you’re starting tosee a propensity <strong>for</strong> <strong>the</strong>m to leapfrog becauseof technology. Mexico, <strong>for</strong> example, is now <strong>the</strong>No. 1 producer of flat-screen TVs. And as longas <strong>the</strong>y keep educating <strong>the</strong>ir young people,which <strong>the</strong>y are doing very successfully, <strong>the</strong>nyou would expect that to continue. Thesecountries have available capacity in skills at arelatively low cost, which is not something thatevery country can claim at <strong>the</strong> moment.”Businesses are also looking to non-BRICrapid-growth markets primarily to grow <strong>the</strong>irdem<strong>and</strong> base, ra<strong>the</strong>r than to cut costs. This isan important shift in mindset. It reflects <strong>the</strong>relatively attractive economic fundamentalsin <strong>the</strong>se markets, such as favorabledemographics <strong>and</strong> <strong>the</strong> potential <strong>for</strong> incomegrowth, although higher inflation is altering<strong>the</strong> equation on production costs (see Figures6 <strong>and</strong> 7).Tata PowerEnergizing <strong>the</strong> communityTo succeed in rapid-growth markets, companies that invest in <strong>the</strong>mmust do more than just deliver a product or service tailored to <strong>the</strong>needs of <strong>the</strong> local population. They must also contribute to societyin ways that often go well <strong>beyond</strong> <strong>the</strong> scope of making a profit. Withmany of <strong>the</strong>se markets in urgent need of health care, education,infrastructure <strong>and</strong> o<strong>the</strong>r basic services, global companies would be welladvised to work closely with local governments <strong>and</strong> communities tocombine commercial interests with long-term social development.Tata Power, India’s largest integrated power company, pays closeattention to how it can help <strong>the</strong> communities in <strong>the</strong> rapid-growthmarkets where it operates. In recent years, <strong>the</strong> company has beenexp<strong>and</strong>ing its geographical reach into four key regions: Africa, <strong>the</strong>Middle East <strong>and</strong> Turkey, South Asia, <strong>and</strong> <strong>the</strong> ASEAN region.“When we are exp<strong>and</strong>ing into a <strong>new</strong> geography, <strong>the</strong>re is one keyconcern at <strong>the</strong> top of our mind: not to act like a <strong>for</strong>eign company,”says Anil Sardana, CEO of Tata Power. “We try to behave like a localcompany by partnering with government <strong>and</strong> local players <strong>and</strong> bydeveloping a genuine sustainability program. This encompassescorporate social responsibility, biodiversity <strong>and</strong> engaging with everystakeholder. And all of this goes h<strong>and</strong>-in-h<strong>and</strong> with a long-termcommitment to <strong>the</strong> markets.”Underlying this strategy is a deeply held belief that companies need togive back to society be<strong>for</strong>e <strong>the</strong>y earn <strong>the</strong> right to exp<strong>and</strong>. “You have tomake sure you make a positive impact be<strong>for</strong>e you can expect societyto share <strong>the</strong>ir l<strong>and</strong> or resources,” says Sardana. “O<strong>the</strong>rwise, you don’tearn <strong>the</strong> entitlement to stay.”A year ago, <strong>for</strong> example, Tata Power embarked on a 50/50 jointventure with Exxaro, a South African mining group, to develop aportfolio of re<strong>new</strong>able <strong>and</strong> non-re<strong>new</strong>able fossil-fuel based projects.As part of <strong>the</strong> investment, Tata committed to developing schools <strong>and</strong>supporting village programs, water projects <strong>and</strong> o<strong>the</strong>r communityrelatedef<strong>for</strong>ts. “Working closely with <strong>the</strong> local government helpsdevelop long-term relationships based on trust,” says Sardana. “Peoplehave faith that we have not come to take advantage of <strong>the</strong>m. There is asense of equality <strong>and</strong> of being all in it toge<strong>the</strong>r.”This philosophy is at <strong>the</strong> heart of Tata — <strong>and</strong> is embedded in <strong>the</strong>company’s governance. Approximately two-thirds of <strong>the</strong> equitycapital of Tata Sons, <strong>the</strong> parent company of Tata Power, is held byphilanthropic trusts endowed by members of <strong>the</strong> Tata family. “Themain goal of <strong>the</strong>se trusts is to invest <strong>the</strong> dividends back into society,”emphasizes Sardana. “And <strong>the</strong>y have been doing this every year <strong>for</strong> <strong>the</strong>past 100 years. It is literally in our DNA.”14 Growing Beyond

Section 4“It will take strong <strong>and</strong> decisive leaders to stimulate global economicgrowth. And those leaders must come from diverse backgrounds<strong>and</strong> have international experience, as well as a global mindset.That is <strong>the</strong> key challenge <strong>for</strong> organizations today: developing apipeline of <strong>the</strong> type of leaders we need <strong>for</strong> <strong>the</strong> future.”Beth Brooke, Global Vice Chair, Public Policy, Ernst & YoungSub-Saharan Africa, in particular, is a magnet<strong>for</strong> investors. The International MonetaryFund estimates that <strong>for</strong>eign direct investment(FDI) in <strong>the</strong> region has surged 50% since2005. FDI projects abound in manufacturing,infrastructure <strong>and</strong> services. Seventy-threepercent of respondents to Ernst & Young’s2012 Africa attractiveness survey of morethan 500 investors <strong>and</strong> business leadersanticipate that Africa’s attractiveness willimprove over <strong>the</strong> next three years. 2“There is a lot of pent-up dem<strong>and</strong> acrossAfrica, whe<strong>the</strong>r it’s <strong>for</strong> manufacturedgoods, white goods, consumer productsor technology,” says Austin Okere, CEOof Computer Warehouse Group, based inNigeria. “If you look at a region like WesternEurope, almost everybody has a fridge, almosteverybody has a television set <strong>and</strong> <strong>the</strong>y arecovered by medical insurance of one sortor ano<strong>the</strong>r. In Western Europe, it’s all aboutreplacements, whereas in Africa it’s aboutfirst-time acquisition. This means that Africahas more headroom <strong>for</strong> growth.”Footnote2. Building bridges: Ernst & Young’s attractivenesssurvey 2012 — AfricaFigure 6: Non-BRIC rapid-growth markets offer a major end-dem<strong>and</strong> opportunity …Contribution to boosting revenue growthContribution to boosting market share31%61%To follow clientsSpreading risk across different locationsAccess to <strong>new</strong> distribution channelsTap a gap in <strong>the</strong> market <strong>for</strong> <strong>new</strong>products/servicesCutting costs23%23%23%22%20%Access to natural resourcesAn increasingly important base <strong>for</strong> R&D <strong>and</strong> innovationMore attractive regulatory environmentReduce tax burden10%10%9%7%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: What are <strong>the</strong> main drivers <strong>for</strong> your company’s investment in <strong>the</strong>se frontier markets over <strong>the</strong> next three years? Select up to three.Figure 7: … And <strong>the</strong>ir business environment has improved markedly in <strong>the</strong> past three yearsWorseImprovedEase of doing businessInfrastructure, roads, electricity, technologyGovernment policies that make investment easierLabor productivitySupport <strong>for</strong> entrepreneurs <strong>and</strong> business start-upsTalent attractionEducation system12%5%7%6%6%8%6%57%53%52%51%47%63%77%Access to creditLabor costs32%16%33%43%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: How have <strong>the</strong> following aspects of <strong>the</strong> business environment in frontier markets changed in <strong>the</strong> past three years?<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth15

Section 4“In <strong>the</strong> next decade, growth will be very substantial in Africancountries. They are <strong>the</strong> potential BRIC economies of <strong>the</strong> future.”Michael Lalor, Lead Partner, Africa Business Center, Ernst & Young South AfricaIn <strong>the</strong> 2012 World Bank Doing Businessrankings, eight African countries rank aheadof China, <strong>the</strong> highest-ranked BRIC country, 14ahead of Russia, 16 ahead of Brazil <strong>and</strong> 17ahead of India. In comparison with <strong>the</strong>Ernst & Young Emerging Markets Center’sportfolio of 25 rapid-growth markets, 3 SouthAfrica would rank sixth in terms of <strong>the</strong> relativeease of doing business, behind South Korea,Saudi Arabia, Thail<strong>and</strong>, Malaysia <strong>and</strong> <strong>the</strong>United Arab Emirates.“O<strong>the</strong>r countries are slowing, but Africa isan exception to <strong>the</strong> rule – it is <strong>the</strong> one brightspot in an o<strong>the</strong>rwise depressing <strong>for</strong>ecast,”says Michael Lalor, Lead Partner of <strong>the</strong> AfricaBusiness Center at Ernst & Young SouthAfrica. “In <strong>the</strong> next decade, growth will bevery substantial in African countries. They are<strong>the</strong> potential BRIC economies of <strong>the</strong> future.”Yet, Africa <strong>and</strong> o<strong>the</strong>r non-BRIC <strong>new</strong>markets clearly present <strong>the</strong>ir own particularchallenges. Respondents to Ernst & Young’s2012 Globalization Survey overwhelminglycite several factors, including politicalcorruption, as a great risk in <strong>the</strong>se markets(see Figure 8). Indeed, global risk consultancyControl Risks has increased <strong>the</strong> political riskratings in nearly a dozen African states over<strong>the</strong> past five years. In part, this increasedrisk can be ascribed to <strong>the</strong> huge inflowsof money into sub-Saharan Africa <strong>and</strong>governments’ desire to “acquire” a share ofit through institution building, according toMichael Denison, Research Director at ControlRisks <strong>and</strong> <strong>for</strong>mer Special Adviser to <strong>the</strong> UKForeign Secretary. “Be<strong>for</strong>e, <strong>the</strong> regulatoryenvironment was relatively open or evenunregulated in certain sectors,” he says.“Now governments are beginning to build aframework of commercial law <strong>and</strong> regulationsthat will allow <strong>the</strong> state to recover more of <strong>the</strong>revenues that have been obtained. This <strong>the</strong>nraises a whole range of second-order risks.”Footnote3. Argentina, Brazil, Chile, Colombia, Czech Republic,Egypt, Ghana, Greater China including HongKong (SAR), India, Indonesia, Kazakhstan, Korea,Malaysia, Mexico, Nigeria, Pol<strong>and</strong>, Qatar, Russia,Saudi Arabia, South Africa, Thail<strong>and</strong>, Turkey,Ukraine, United Arab Emirates, VietnamDriving toward a granular approachBy Mike HanleyGlobal Automotive LeaderErnst & YoungThe automotive industry is embarking on a <strong>new</strong> wave ofgeographical expansion. For <strong>the</strong> past few years, car makers havefaced significant challenges in developed markets <strong>and</strong> havetargeted <strong>the</strong>ir investment at <strong>the</strong> BRIC economies, especially <strong>the</strong>huge consumer markets of India <strong>and</strong> China. These will remaincritically important over <strong>the</strong> next decade, but automotivecompanies recognize that <strong>the</strong>y cannot become too dependenton <strong>the</strong>m. Growth across <strong>the</strong> BRICs is slowing <strong>and</strong> <strong>the</strong> market hasbecome extremely competitive. The operating environments in<strong>the</strong>se economies are also challenging.As a result, what we see today is a much greater emphasis onnon-BRIC rapid-growth markets. A key reason <strong>for</strong> this relatesto demographic change <strong>and</strong> economic growth. Many of <strong>the</strong>secountries are undergoing a very rapid rate of urbanization. InAfrica, <strong>for</strong> example, we see <strong>the</strong> growth of mega-cities, such asLagos, Cairo <strong>and</strong> Kinshasa. This is creating an emerging <strong>and</strong>fast-growing middle class, with citizens who see car ownership,or sometimes car sharing, as an important component of <strong>the</strong>ir<strong>new</strong> lifestyle. Automotive companies are looking very closely at<strong>the</strong>se markets <strong>and</strong> also playing an active role in helping citiesthink about urban mobility.Automotive companies have learned that when investing inany large rapid-growth market, <strong>the</strong>y need to take a granularapproach. In China, <strong>for</strong> example, <strong>the</strong> needs of customers in <strong>the</strong>major cities of <strong>the</strong> Eastern Seaboard may be very different fromthose of <strong>the</strong> population in <strong>the</strong> interior. As a result, automotivecompanies often segment <strong>the</strong>se markets, targeting luxury carsat <strong>the</strong> bigger coastal cities, <strong>and</strong> smaller, value models at <strong>the</strong>second-tier or third-tier cities.16 Growing Beyond

Section 4Figure 8: Political corruption tops list of risks in non-BRIC rapid-growth marketsPolitical corruptionIncreased protectionism30%Weak infrastructure30%Failure to sustain domestic consumption growth28%High inflation23%Asset price bubbles20%Inequality of income20%Collapse in export dem<strong>and</strong>18%Weak capital markets18%Competition from domestic companies in target countries17%Slow uptake of technology12%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: What are <strong>the</strong> key risks that could derail <strong>the</strong>se frontier markets over <strong>the</strong> next three years? Select up to three options.54%The impact of political risk also dependson <strong>the</strong> particular industry, its investmenttime horizon <strong>and</strong> its relationship with localgovernments. There is great political risk, <strong>for</strong>example, in investing large sums of money ina volatile regime where no one knows who <strong>the</strong>next head of state is going to be.“If you go to<strong>the</strong> resources sector, particularly mining <strong>and</strong>oil <strong>and</strong> gas, <strong>the</strong>se are enormous issues,” saysJulian Birkinshaw, Professor of Strategy <strong>and</strong>Entrepreneurship at London Business School.“If you ask a BP or a Rio Tinto what are <strong>the</strong>things that keep <strong>the</strong>ir chief executive awake atnight, it will essentially be around <strong>the</strong> politicalrisk or challenges of doing business in Russia,Brazil or various parts of Africa.”Companies that invest in rapid-growth markets often usepartnerships <strong>and</strong> alliances, both as a means to obtain <strong>the</strong> licenseto operate <strong>and</strong> to build on-<strong>the</strong>-ground knowledge. Local partnershave a deep underst<strong>and</strong>ing of customer needs <strong>and</strong> know how<strong>the</strong>se are evolving. This can be extremely valuable so companiesdon’t make <strong>the</strong> very expensive mistake of setting up a factoryin a <strong>new</strong> market only to find that <strong>the</strong> models being built do notmeet <strong>the</strong> needs of customers. Many automotive companies havelearned valuable lessons from <strong>the</strong>ir experience of investing in<strong>the</strong> BRICs <strong>and</strong> will be able to apply this knowledge in <strong>the</strong> nextwave of <strong>the</strong>ir investment.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth17

Section 5Are developed marketsworth betting on?18 Growing Beyond

Section 5So, while many of <strong>the</strong> non-BRIC rapidgrow<strong>the</strong>conomies are worth a big, mostlylong-term bet, <strong>the</strong>y’re only part of <strong>the</strong> picture.To create a well-rounded portfolio, investorswill need to diversify <strong>the</strong>ir bets to includeseveral mature markets, which are making acomeback in certain areas <strong>and</strong> sectors. Thatmay seem surprising in view of <strong>the</strong> currentbleak economic outlook <strong>for</strong> <strong>the</strong> G7, butit’s important to note that although rapidgrowthmarkets are picking up output share,developed markets are still major drivers ofworld economic activity (see Figure 9).For <strong>the</strong> respondents to our 2012 GlobalizationSurvey, North America <strong>and</strong> Western Europeremain critical to protecting <strong>the</strong> bottom line(see Figure 10). Although <strong>new</strong> investment in<strong>the</strong>se regions is still slow to take off (<strong>and</strong> <strong>the</strong>potential impact of <strong>the</strong> fiscal uncertainty in<strong>the</strong> US could affect corporate investment),high energy costs <strong>and</strong> shorter product lifecycles are driving global organizations topursue near-sourcing (see Figure 11). In <strong>the</strong>next three years, <strong>the</strong> number of respondentswho expect to outsource more operationalfunctions to providers in mature markets willrise to 36% from 22%; <strong>the</strong> number that plan tonear-source previously outsourced activitieswill more than double, from 14% to 35%.Figure 9: Advanced economies remain important drivers of world economic activity40353025201510502010 2011 2012 2013 2014 2015 2016G7 GDP — currentinternational dollars (trillions)G7 GDP — share of world total (%)Source: International Monetary Fund, World Economic Outlook Database, October 2012 outlook, accessed December 2012Figure 10: Developed markets are highly important to companies’ bottom lines in <strong>the</strong> next three yearsTop three (by respondent market)Developed marketsRapid-growth marketsRapid-growth markets (exc. BRIC)Western EuropeEmerging Asia(exc. China, India)39% BRICs41% Emerging Asia(exc. China, India)38%37% Emerging Asia39% BRICs(exc. China, India)32%BRICs32%North America27% North America28%North America32%Source: Ernst & Young 2012 Globalization Survey Shown: Percentage of respondents in developed markets (433); rapid-growth markets (297) <strong>and</strong> non-BRIC rapid-growth markets (158)Question: Which of <strong>the</strong> following markets is likely to be <strong>the</strong> most important <strong>for</strong> your company’s bottom line in <strong>the</strong> next three years?<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth19

Section 5Mature markets offer several pocketsof promise. Innovation <strong>and</strong> exchange oftechnology <strong>and</strong> ideas give <strong>the</strong>se markets anedge over <strong>the</strong>ir rapid-growth counterparts,as our 2012 Globalization Index shows.Advanced economies that can leverage<strong>the</strong>se capabilities are at an advantage. Thediffusion of broadb<strong>and</strong>, social, digital <strong>and</strong>mobile technologies is much higher in maturemarkets, enabling <strong>the</strong>m to use it to <strong>the</strong>iradvantage <strong>and</strong> retain a high share in <strong>the</strong>export of goods <strong>and</strong> services, maintaining<strong>the</strong>ir dominant position in certain markets.Our Index data reveals a correlation betweena strong integration score on technology<strong>and</strong> ideas <strong>and</strong> a superior share of worldgoods exports, suggesting that countriesin this group are able to leverage <strong>the</strong>irtechnological strengths to dominate exportmarkets (see Figure 12). The UK, <strong>for</strong> example,is regaining its competitiveness, rankingeighth in <strong>the</strong> World Economic Forum’s GlobalCompetitiveness Report 2012-2013, afterhaving fallen from seventh to 12th between1997 <strong>and</strong> 2010. As <strong>the</strong> report highlights,<strong>the</strong> UK continues to have a sophisticated <strong>and</strong>innovative business environment.Figure 11: Companies plan to bring production capability back to developed marketsAll respondentsManufacturingOil <strong>and</strong> gas% of executivesSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)14%16%21%23%TodayFigure 12: Top export markets take advantage of technology integration31%In three yearsQuestion: For each of <strong>the</strong> following, please indicate whe<strong>the</strong>r it is applicable to your company today <strong>and</strong>/or will be in three years’ time.Percentage of executives selecting, “we are planning to bring production capability back to developed markets.”Share of world goods exports (%)10987654Lower tech/higher exportsUSAJapanGermany35%Higher tech/higher exportsFor developed markets with hightechnological integration, <strong>the</strong>reis great opportunity <strong>for</strong> growththrough exports32ItalyFrance Ne<strong>the</strong>rl<strong>and</strong>sCanadaUnited KingdomBelgiumSingaporeLower tech/lower exportsSpainAustraliaHigher tech/lower exportsSwitzerl<strong>and</strong> Markets in this quadrant1Swedenshould leverage <strong>the</strong>irAustria Norwaytechnological strengths to growPortugalIrel<strong>and</strong> Denmarkthrough exportsFinl<strong>and</strong>New Zeal<strong>and</strong>01 2 3 4 5 6 7Exchange of technology <strong>and</strong> ideasSource: Ernst & Young 2012 Globalization Index20 Growing Beyond

Section 5“The global economic environment is going to be challenging<strong>for</strong> some time to come, <strong>and</strong> issues such as <strong>the</strong> Eurozonecrisis will not be resolved in <strong>the</strong> short term. Yet <strong>the</strong> world’s<strong>new</strong> markets, particularly those in Africa, offer enormouspotential. With strong business <strong>and</strong> government leadership,<strong>the</strong>se markets can grow significantly.”Mark Otty, EMEIA Area Managing Partner, Ernst & YoungWith a strong revival of domesticmanufacturing, <strong>the</strong> l<strong>and</strong>mark discovery of <strong>new</strong>shale gas reserves (which is driving low energycosts <strong>for</strong> US producers), increasing high-tech<strong>and</strong> export-fueled growth, <strong>and</strong> narrowing laborcost differentials, <strong>the</strong> US may be a surprisinglyattractive investment destination. The countryperhaps best exemplifies <strong>the</strong> resurgence ofdomestic manufacturing, which could revivesome industries <strong>and</strong> spark <strong>new</strong> ones. A2011 study by <strong>the</strong> business consulting firmAlixPartners estimates that 10% to 30% of <strong>the</strong>manufactured goods that <strong>the</strong> US now importsfrom China could shift back to US productionby 2020, adding between US$20 billion <strong>and</strong>US$55 billion to GDP on an annual basis.Many US-based multinationals have alreadyre-shored some manufacturing capacity. Forexample:• NCR Corporation is moving all of its ATMproduction from China, India <strong>and</strong> Hungaryback to a facility in Columbus, Georgia, tocustomize products <strong>and</strong> get <strong>the</strong>m to clientsfaster.• Carlisle Transportation, a division ofCarlisle Companies, brought tire production<strong>for</strong>merly done in China back to two plants in<strong>the</strong> US. Carlisle’s Jackson, Tennessee, plantis becoming more efficient <strong>and</strong> it is nowcheaper to produce tires in <strong>the</strong> US as certainChinese subsidies have disappeared.In 2012, GE re-shored its domestic appliancemanufacturing business to <strong>the</strong> US fromMexico. “We brought back <strong>the</strong> manufacture ofrefrigeration units from Mexico to <strong>the</strong> US <strong>for</strong>one very simple reason,” says NaniBeccalli-Falco, President <strong>and</strong> CEO of GEInternational. “It takes eight hours to make arefrigerator in Mexico; it takes two hours tomake a refrigerator in Louisville.”Colm Reilly of UKTI identifies two keyphenomena underlying <strong>the</strong> recent trendtoward in-sourcing. “First, technologycontinues to drive change,” he says.“So companies find that if <strong>the</strong>y takeinto consideration <strong>new</strong> manufacturingtechnologies <strong>and</strong> <strong>the</strong> total cost of logistics,including management time <strong>and</strong> <strong>the</strong> overheadof managing a location on <strong>the</strong> o<strong>the</strong>r side of<strong>the</strong> world, <strong>the</strong>y’re able to manufacture at alower cost than <strong>the</strong> outsourcers can in somecases. We can now, <strong>for</strong> example, manufacturecertain products without <strong>the</strong> large capitalexpenditure needed to manufacture <strong>the</strong> sameproducts a decade ago. The second reasonis that <strong>the</strong> outsourcing of manufacturing hasmeant that companies have lost an inherentcapability that <strong>the</strong>y want to get back.”• Coleman announced in June 2011 that itwas canceling plans to outsource some ofits operations to China, instead choosing tobuild more factories in Kansas. The strategicpurpose of <strong>the</strong> decision was to move itsproduction base closer to <strong>the</strong> end market<strong>and</strong> reduce inventory pressures.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth21

Section 5Near-sourcing <strong>and</strong> in-sourcing are lesscommon in Europe than in <strong>the</strong> US. Thereare some examples – Steiff, a German toymanufacturer, recently decided to moveproduction back to Europe from China, citinghigh transportation costs <strong>and</strong> problems withquality — but in general, <strong>the</strong> practice is notwidespread. Part of <strong>the</strong> reason may be thatmanufacturing never really left in <strong>the</strong> firstplace. For example, in Germany, <strong>the</strong> familyownedMittelst<strong>and</strong> companies, which aresmall to midsize businesses that account <strong>for</strong>an estimated 50% of <strong>the</strong> country’s GDP, haveretained a strong manufacturing capability<strong>and</strong> been more resistant to outsourcingthan many large multinationals. Europeancountries’ less flexible rules governing laborcan also be an impediment to offshoring.Figure 13: Leading gas users, especially <strong>the</strong> US, will benefit from low gas pricesBrazilChinaOECD EuropeUS3%5%10%9%25%26%32%33%0% 5% 10% 15% 20% 25% 30% 35%Source: US Energy In<strong>for</strong>mation Administration, accessed December 20122008 2035By Dale NijokaGlobal Oil & Gas LeaderErnst & YoungRedrawing <strong>the</strong> global energy mapThe next few years will see a complete trans<strong>for</strong>mation in <strong>the</strong>global oil <strong>and</strong> gas markets. The discovery, development <strong>and</strong>exploitation of <strong>the</strong> huge reserves/resources of shale gas in <strong>the</strong>US — estimated at between 500 <strong>and</strong> 1,000 trillion cubic feet —will reshape <strong>the</strong> energy map. The International Energy Agency(IEA) expects that by 2020, <strong>the</strong> US will claim Saudi Arabia’scurrent position as <strong>the</strong> world’s largest oil producer. The IEA<strong>for</strong>ecasts that a decade after that, North America (i.e., <strong>the</strong> US,Canada <strong>and</strong> Mexico combined) will be a net oil exporter.So what will this mean <strong>for</strong> <strong>the</strong> global economy <strong>and</strong> business?One clear implication is that natural gas prices in <strong>the</strong> US willbe much lower than in Asia. Countries across Asia know thatto grow <strong>the</strong>ir economy, <strong>the</strong>y need to have a source of energyto run factories, plants <strong>and</strong> infrastructure. They are <strong>the</strong>re<strong>for</strong>edoing all <strong>the</strong>y can to make <strong>the</strong> necessary investments.Cheap energy in <strong>the</strong> US will change <strong>the</strong> calculation thatcompanies make when considering where to locate energyintensiveactivities like manufacturing. There is a growingadvantage <strong>for</strong> companies to locate <strong>the</strong>se facilities in <strong>the</strong> USbecause of <strong>the</strong> low price of natural gas <strong>the</strong>re, compared to<strong>the</strong> relatively high price in Asia. That is a major shift that willmake US manufacturing more competitive than it has been <strong>for</strong>decades.Within <strong>the</strong> next decade, we are likely to see a substantialnumber of coal-fired plants in <strong>the</strong> US retired <strong>and</strong> replaced bynatural gas-fired plants. With its distinct price advantages,we also expect to see an increasing use of natural gas as atransportation fuel, displacing some gasoline <strong>and</strong> diesel fuel.Vehicle manufacturers are exp<strong>and</strong>ing <strong>the</strong> production of trucks<strong>and</strong> automobiles that are fuelled by natural gas, <strong>and</strong> <strong>the</strong>22 Growing Beyond

Section 5“Rapid-growth markets can be highly rewarding, but inmany cases <strong>the</strong>y are a long-term proposition. To reaprewards in <strong>the</strong>se markets, businesses must be preparedto make an extended commitment to <strong>the</strong>m while alsoputting in place mechanisms to deal with short-termvolatility <strong>and</strong> uncertainty along <strong>the</strong> way.”Rajiv Memani,Country Managing Partner, Ernst & Young India“If you look at vertical integration, Europehas been more effective at retainingmanufacturing compared to <strong>the</strong> US, <strong>and</strong>part of this is that <strong>the</strong>re is closer integrationbetween <strong>the</strong> manufacturing <strong>and</strong> servicefunctions,” says Javier Gimeno, Professorof Strategy at INSEAD. “In some Germancompanies, labor has more of an influenceon company strategy <strong>and</strong>, as a consequence,<strong>the</strong>se companies do not just quickly cu<strong>the</strong>adcount every time <strong>the</strong> profits are down.That means <strong>the</strong>y are not losing capabilities asfast as some of <strong>the</strong> American companies do.”putting <strong>the</strong> US on track to become moreenergy independent <strong>and</strong> increasing growthin a variety of related industries such asagriculture <strong>and</strong> petrochemicals. In particular,<strong>the</strong> US shale gas “revolution” means farcheaper feedstock costs <strong>for</strong> US manufacturersthan in recent years <strong>and</strong> an advantage <strong>for</strong> USfirms over markets — including China — thatrely on more expensive fuels (see Figure 13).The availability of domestic energy at anaf<strong>for</strong>dable price will have a profound effect onglobal companies’ decisions about where tolocate production.But American businesses may reverse thattrend in short order, thanks to <strong>the</strong> US’s biggestturnaround story in decades: <strong>the</strong> tremendoustechnological advances in <strong>the</strong> development ofunconventional oil <strong>and</strong> natural gas resources,such as shale gas <strong>and</strong> “tight” oil. This windfallwill not only reduce domestic energy costsbut will shake up <strong>the</strong> energy picture globally,refuelling infrastructure is gradually being built out. Naturalgas’s penetration into <strong>the</strong> vehicle fleet is currently being drivenby its use in heavy trucks, buses <strong>and</strong> local commercial fleets,but we expect <strong>the</strong> personal vehicle market to start to showstrong growth over <strong>the</strong> next decade.At some point, <strong>the</strong> US will also start to export natural gas too<strong>the</strong>r parts of <strong>the</strong> world. It’s very difficult to rationalize notdoing that when prices are so much higher in Asia <strong>and</strong> evenEurope. There will be barriers, of course. Natural gas is still nota global commodity, like oil, because <strong>the</strong> infrastructure is notnearly as developed. That will take time, but <strong>the</strong> incentives arecertainly <strong>the</strong>re to make it happen. And while <strong>the</strong>re have beensome political issues raised with regard to US energy exports,we would expect those issues to be successfully resolved, given<strong>the</strong> expected net economic benefits.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth23

Section 6Operational changes are essentialto picking <strong>the</strong> right big bets <strong>and</strong>increasing <strong>the</strong>ir chances of a payoff24 Growing Beyond

Section 6Companies have already learned manyof <strong>the</strong> lessons of <strong>globalization</strong>, such as<strong>the</strong> need <strong>for</strong> flexibility, agility <strong>and</strong> localization.But as <strong>globalization</strong> enters its next phase, <strong>the</strong>ymust prepare to make decisions on markets<strong>and</strong> investments without always knowingall <strong>the</strong> possible outcomes. The case studies<strong>and</strong> examples of <strong>the</strong> companies featuredin this report are by no means applicableto all multinationals or industries, but <strong>the</strong>yoffer creative approaches to dealing with<strong>the</strong> many unknowns that characterize globalbusiness. No matter <strong>the</strong>ir size or sector, tochoose <strong>the</strong> best <strong>opportunities</strong> from a widevariety of markets, companies must adapt<strong>the</strong>ir operations to a <strong>new</strong> growth cycle — onethat requires highly disciplined <strong>and</strong> rigorousstrategic planning, execution <strong>and</strong> learning, allsupported <strong>and</strong> enhanced by technology. Thefollowing are some recommendations <strong>for</strong> apossible approach to this <strong>new</strong> growth cycle:Strategic planning: allocate resources ina bold <strong>and</strong> focused way. Deciding how toapportion scarce resources involves resolvingmany trade-offs <strong>and</strong> conflicts between slowgrowth<strong>and</strong> rapid-growth markets, short-term<strong>and</strong> long-term returns, <strong>and</strong> volume-to-marginratios. Once companies decide on <strong>the</strong> rightbalance of <strong>the</strong>se elements, <strong>the</strong>y must settleon a h<strong>and</strong>ful of key investments that offer <strong>the</strong>best promise of future growth. Because <strong>the</strong>risk is so concentrated, making <strong>the</strong>se betsclearly requires a high degree of confidencethat an investment will succeed.This is a tough call to make, particularly inrapid-growth markets, which are not onlyvolatile but also, in many cases, a long-termproposition. Businesses need to be willing tomake an extended commitment to <strong>the</strong> marketto reap rewards — <strong>and</strong> to live with early startuplosses <strong>and</strong> o<strong>the</strong>r short-term volatility along<strong>the</strong> way. “Foreign markets are a long-termgame,” says Julian Birkinshaw of <strong>the</strong> LondonBusiness School. “So profits are likely to takea hit in <strong>the</strong> short term as companies learnhow to make <strong>the</strong> investment work. Markets— famously short-term — are looking <strong>for</strong> <strong>the</strong>chief executive to tell <strong>the</strong>m a story of how <strong>the</strong>company is going to succeed over <strong>the</strong> longterm.”It’s also important to look at <strong>the</strong> big picturewhen allocating resources. Oracle’s Alfonsodi Ianni advises taking a balanced regionalapproach to emerging economies, focusingnot on company per<strong>for</strong>mance in anyspecific market but ra<strong>the</strong>r on a portfolio ofcountries <strong>and</strong> prioritizing accordingly. “Seniormanagement wants to see consistent overallgrowth in Oracle’s designated emergingregions in <strong>the</strong> Eastern Central Europe, MiddleEast <strong>and</strong> Africa region,” he says. “The regionmay include developed countries that willemerge from recession <strong>and</strong> developingcountries experiencing better growth.However, we apply a strategy of establishingcommon regional business support structuresthat lower barriers to entry, reduce risk <strong>and</strong>allow us to work our markets efficiently withina broad growth b<strong>and</strong>. This means that evenif a particular market does not grow at <strong>the</strong>expected rate, or if ano<strong>the</strong>r experiences aspike, we are well placed to continue doingbusiness successfully. Within <strong>the</strong> budget, I c<strong>and</strong>efine my priorities. I recommend that wehave a portfolio of assets to balance <strong>the</strong> ups<strong>and</strong> downs.”<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth25

Section 6Of course, with market conditions changingso quickly, what at first seems like an optimalresource allocation strategy may soon becomeless than optimal. The challenge, <strong>the</strong>re<strong>for</strong>e, isto maintain as much flexibility with resourcesas possible while keeping an eye on <strong>the</strong>bottom line. Companies need <strong>the</strong> flexibility notonly to make strategic bets but also to changecourse or exit if an investment doesn’t panout. Technology plays a vital role in decisionmakinghere: business analytics, <strong>for</strong> example,can help companies build an investment case,evaluate risks, look at potential scenarios <strong>and</strong>simulate outcomes. Nearly half of our 2012Globalization Survey respondents say thatbusiness intelligence <strong>and</strong> analytics will have<strong>the</strong> greatest impact on <strong>the</strong>ir internationalexpansion strategy (see Figure 14).Execution: make your big bet investmentsas local <strong>and</strong> granular as possible. Succeedingin <strong>the</strong> world’s <strong>new</strong> markets means becomingimmersed in <strong>the</strong>m — tailoring offerings tomeet <strong>the</strong> exacting needs of local customers,<strong>for</strong>ming close relationships with local officials<strong>and</strong> communities, manufacturing locallyor establishing regional supply chains, <strong>and</strong>empowering local managers to make decisionsso that <strong>the</strong>y can act on <strong>opportunities</strong> swiftly.Again, technology can help by providingacceptable risk parameters <strong>for</strong> local decisionmaking.In fact, <strong>the</strong> ability to “go local” seamlessly mayvery well be <strong>the</strong> key to making strategic betsyield positive results. One way to do this is toconnect with local markets by contributingto <strong>the</strong>ir economic development, says AndrewKakabadse, Professor of InternationalManagement Development at <strong>the</strong> CranfieldUniversity School of Management. “A vastmajority of smaller markets are fundamentallylacking in infrastructure, even in basicslike police, education <strong>and</strong> health,” he says.Figure 14: Business intelligence <strong>and</strong> analytics will have <strong>the</strong> most impact onglobal expansion strategiesBusiness intelligence <strong>and</strong> analytics (managingglobal supply chain, etc.)Mobility solutions, e.g., use of smart phones <strong>for</strong>business purposesBusiness process managementRisk <strong>and</strong> compliance systemsVirtualization, e.g., webinars <strong>and</strong> e-commerceCollaboration <strong>and</strong> social networkingSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: Which technological advances are likely to have <strong>the</strong> greatest impact on your company’s strategy <strong>for</strong> international expansion?“Companies need to think long-term in thosemarkets <strong>and</strong> create an investment patternthat will maintain <strong>the</strong>ir presence but alsoindicate <strong>the</strong>ir commitment by investing in <strong>the</strong>infrastructure that is relevant to <strong>the</strong>ir businessin those markets. That will create a sustainableinvestment plat<strong>for</strong>m, but that is a very longtermstrategy.”The drive to localize brings up a longst<strong>and</strong>ingdebate: how do companies find <strong>the</strong>right balance between localization <strong>and</strong><strong>globalization</strong>, between <strong>the</strong> search <strong>for</strong>economies of scale <strong>and</strong> differentiation,between centralization <strong>and</strong> decentralization?The companies we interviewed offer a varietyof responses, but <strong>the</strong> overall <strong>the</strong>me is <strong>the</strong>same: become granular, specific, customized.Of course, a granular approach increasescomplexity, particularly because mostcompanies now recognize that marketing <strong>and</strong>customer relationships need to be h<strong>and</strong>led at<strong>the</strong> local level. There<strong>for</strong>e, businesses need tothink about commonalities across markets <strong>and</strong>how to take successes from one <strong>and</strong> repeat<strong>the</strong>m in ano<strong>the</strong>r to derive economies of scale.19%26%25%33%36%46%26 Growing Beyond

Section 6“Only those companies that st<strong>and</strong> out as innovators arelikely to succeed in a slow-growth environment.To capitalize on pockets of growth, businesses needto be bold, entrepreneurial <strong>and</strong> willing to take riskson <strong>new</strong> products <strong>and</strong> services.”Maria Pinelli, Global Vice Chair, Strategic Growth Markets, Ernst & Young“Our business of ready-mix concrete isextremely local,” says Maher Al-Haffar ofCEMEX. “The radius of an effective marketis somewhere between 50 <strong>and</strong> 75 miles <strong>and</strong><strong>the</strong> shelf-life of <strong>the</strong> product is four hoursmaximum. But while our business is local,we recognize that <strong>the</strong>re is enormous valueto be gained by identifying best practices,globalizing <strong>the</strong>m, st<strong>and</strong>ardizing <strong>the</strong>m <strong>and</strong>allowing <strong>the</strong> local units to add value in termsof <strong>the</strong> innovation <strong>and</strong> improvement of <strong>the</strong>sebest practices.”Finding commonalities might includecreating plat<strong>for</strong>m technologies that can bedeveloped centrally <strong>and</strong> <strong>the</strong>n adapted locallyto suit market needs. Hubs offer one way<strong>for</strong> companies to develop a core presence tocentralize service delivery across a region <strong>and</strong>build a basis to exp<strong>and</strong> at <strong>the</strong> local level. “Hubsare very important in large territories,” saysOracle’s Alfonso di Ianni. “In Central Asia, <strong>for</strong>example, we use Istanbul, Baku <strong>and</strong> a little bitof Almaty. In <strong>the</strong> hub, we try to hire peoplewho potentially can <strong>the</strong>n move on into <strong>the</strong>country that <strong>the</strong>y serve remotely, becausewe know that those countries are critical <strong>and</strong>we may open an office <strong>the</strong>re. So we havecontinuity in our own investment in terms ofpeople.”Successful companies often centralize corefunctions, such as financial control, <strong>and</strong>release operational control more <strong>and</strong> moreto <strong>the</strong> local level. This sets up a structurethat supports <strong>the</strong> core pillars of <strong>the</strong> businesswhile setting clear expectations <strong>for</strong> <strong>the</strong>local outcomes required. “But <strong>beyond</strong> that,local managers do what <strong>the</strong>y need to do,<strong>and</strong> that helps <strong>the</strong> innovation cycle as well,”notes UKTI’s Colm Reilly. Innovation, in fact,is ano<strong>the</strong>r vital component of success inexp<strong>and</strong>ing globally, as our respondents pointout: most agree that innovation – largelyenabled by technology – will help <strong>the</strong>m bettercompete with companies of all sizes <strong>and</strong> fromall geographies (see Figure 15).Figure 15: Companies believe innovation lowers geographical barriersInnovation better enables us to compete withcompanies of all sizes <strong>and</strong> geographiesKnowledge-sharing across my organizationwill be critical to sustained innovationMost innovation at my firm flows fromadvances in technologyInnovation at our company is decentralized;organizational structures <strong>and</strong> hierarchies arenot barriers to <strong>new</strong> ideas emergingAdvances in technology have had no impacton our rate of innovation24%54%63%78%85%Source: Ernst & Young 2012 Globalization SurveyPercentage of all respondents (730) who responded “Strongly agree” <strong>and</strong> “Somewhat agree”Question: Do you agree or disagree with <strong>the</strong> following statements on <strong>the</strong> role of innovation in your business?<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth27

Section 6Figure 16: Technology investments are set to increase markedly in <strong>the</strong> next 12 monthsIncrease No change DecreaseBusiness intelligence <strong>and</strong> analytics(managing global supply chain, etc.)4%26%71%Learning: trans<strong>for</strong>m your company intoa “learning organization.” It’s no <strong>new</strong>s toanyone that rapid change is <strong>the</strong> <strong>new</strong> normalin business today <strong>and</strong> that many outcomeswill remain unpredictable. Yet companies canlearn to manage change better. This is where<strong>the</strong> power of technology really comes intoplay. Applications such as business intelligence<strong>and</strong> analytics, mobility solutions, <strong>and</strong> socialnetworking allow businesses access to awealth of data, both global <strong>and</strong> local. They canfeed that data into future strategic planning<strong>and</strong> use it regularly to become lean <strong>and</strong>flexible organizations that are well positionedto thrive in <strong>the</strong> global economy of <strong>the</strong> future.Over <strong>the</strong> next 12 months, a majority of oursurvey respondents expect to increase <strong>the</strong>irinvestments in a variety of digital technologiesthat promote mobility, collaboration <strong>and</strong>knowledge sharing (see Figure 16).Mobility solution, e.g., use of smartphones <strong>for</strong> business purposesBusiness process managementCollaboration <strong>and</strong> social networkingRisk <strong>and</strong> compliance systemsVirtualization, e.g., webinars <strong>and</strong>e-commerceSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)6%6%6%6%8%Question: How is your company’s investment in technology across <strong>the</strong> following categories likely to change over <strong>the</strong> next 12 months?31%38%38%40%41%54%54%53%57%64%Underst<strong>and</strong>ing <strong>the</strong> four trans<strong>for</strong>mational <strong>for</strong>ces of technologyBy Pat HyekGlobal TechnologyIndustry LeaderErnst & YoungTechnology has long been one of <strong>the</strong> fundamental driversof <strong>globalization</strong>, but in <strong>the</strong> years ahead, its role will becomeeven more important. Underlying this trend are fourtrans<strong>for</strong>mational <strong>for</strong>ces that are having a profound impact onhow businesses operate <strong>and</strong> engage with <strong>the</strong>ir customers <strong>and</strong>how o<strong>the</strong>r communities/netwoks engage with each o<strong>the</strong>r.The first of <strong>the</strong>se disruptive <strong>for</strong>ces — mobile — is creating anentirely different relationship between employers <strong>and</strong> <strong>the</strong>irwork<strong>for</strong>ce, <strong>and</strong> gives companies <strong>the</strong> opportunity to interactwith customers in <strong>new</strong> <strong>and</strong> powerful ways.Social media, <strong>the</strong> second trans<strong>for</strong>mational <strong>for</strong>ce, also enablescompanies to build <strong>new</strong> relationships with customers.Businesses can underst<strong>and</strong> how customers perceive <strong>the</strong>irbr<strong>and</strong>s, products <strong>and</strong> services, <strong>and</strong> engage in two-wayconversations that can help to pave <strong>the</strong> way <strong>for</strong> refinements orinnovations.Digital video <strong>and</strong> emerging technologies like social mediacreate huge amounts of data, but much of it is still in a <strong>for</strong>mthat cannot be easily analyzed. Over <strong>the</strong> next few years, <strong>the</strong>third trans<strong>for</strong>mational trend — big data — will change this. Byanalyzing data from social media <strong>and</strong> many o<strong>the</strong>r sources,companies can better underst<strong>and</strong> where <strong>the</strong>y should invest<strong>the</strong>ir capital <strong>and</strong> resources <strong>and</strong> how <strong>the</strong>y should customize<strong>the</strong>ir offering to suit customers.Huge amounts of data require storage <strong>and</strong> large complexsoftware applications to analyze it all. These are among <strong>the</strong>roles that one of <strong>the</strong> four trans<strong>for</strong>mational trends, <strong>the</strong> cloudwill play. The cloud allows companies to access storage <strong>and</strong>many o<strong>the</strong>r powerful computing resources without <strong>the</strong> need toinvest in infrastructure/application software, giving <strong>the</strong>m <strong>the</strong>flexibility to scale up or down depending on <strong>the</strong>ir needs.These four trans<strong>for</strong>mational <strong>for</strong>ces are powerful enablers of28 Growing Beyond

Section 6“You constantly have to look over <strong>the</strong> horizon, but <strong>the</strong>horizon is changing so quickly <strong>and</strong> what you thoughtwas on <strong>the</strong> horizon today is suddenly so much closeror has moved somewhere else.”Ian Hudson, President <strong>for</strong> Europe, Middle East <strong>and</strong> Africa, DuPontThe term “continuous learning” may be acliché, but without it organizations cannotthrive in <strong>the</strong> <strong>new</strong> growth cycle, which requires<strong>the</strong>m to learn quickly, apply that knowledge to<strong>the</strong>ir strategic plan, execute on <strong>the</strong> plan, <strong>and</strong><strong>the</strong>n begin <strong>the</strong> cycle again. Although it cannotpredict <strong>the</strong> future, a learning organizationcan make effective use of real-time digitaltechnology to react to changes moreefficiently, bypassing traditional hierarchiesto enable faster decision-making <strong>and</strong>implementation of key strategies.l<strong>and</strong>scape. Ian Hudson of DuPont best sums up<strong>the</strong> monumental challenge of navigating thisterrain. “You constantly have to look over <strong>the</strong>horizon, but <strong>the</strong> horizon is changing so quickly<strong>and</strong> what you thought was on <strong>the</strong> horizontoday is suddenly so much closer or hasmoved somewhere else,” he says. “Humanshaven’t necessarily evolved quickly enough tokeep pace with such rapid change.”A learning organization also will be bestequipped to manage successfully in a VUCAworld – a volatile, uncertain, complex <strong>and</strong>ambiguous world – a US military termoften used in <strong>the</strong> private sector to describe<strong>the</strong> turbulent <strong>and</strong> ever-shifting business<strong>globalization</strong>. But <strong>the</strong>y also have <strong>the</strong> potential to change <strong>the</strong>competitive l<strong>and</strong>scape dramatically <strong>and</strong> at an unprecedentedspeed. We have already seen entire industries, such as retailor <strong>the</strong> media, being disrupted by <strong>new</strong> competitors leveragingtechnology. Over <strong>the</strong> next decade, we are certain to see moredisruption as <strong>new</strong>, agile, technology-savvy firms displace <strong>the</strong>more traditional incumbents.The scale of <strong>the</strong>se <strong>opportunities</strong> <strong>and</strong> challenges emphasizes<strong>the</strong> importance <strong>for</strong> business leaders to underst<strong>and</strong> <strong>the</strong>sefour trans<strong>for</strong>mational <strong>for</strong>ces. Technology is a fundamentalcompetitive <strong>for</strong>ce that should be at <strong>the</strong> heart of C-suite <strong>and</strong>boardroom discussions. If companies are not thinking about<strong>the</strong>se trans<strong>for</strong>mational <strong>for</strong>ces, <strong>the</strong>n <strong>the</strong>re is a good chance that<strong>the</strong>ir competitors are. The lesson of <strong>the</strong> past few decades isthat disruption happens quickly. If companies do not keep pacewith technology, <strong>the</strong>y will put <strong>the</strong>ir business models at risk.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth29

Index rankings2012 Globalization Index30 Growing Beyond

Index rankingsGlobalization has become more nuanced since 2011 as different aspects of <strong>the</strong>Ernst & Young Globalization Index have become more important in driving globalintegration. The per<strong>for</strong>mance of <strong>the</strong> major Index components shows higher growth in <strong>the</strong>integration of goods <strong>and</strong> services, technology, <strong>and</strong> capital in <strong>the</strong> medium term. By contrast,labor <strong>and</strong> cultural integration are expected to show less progress toward fur<strong>the</strong>r integration thanin <strong>the</strong> five years be<strong>for</strong>e <strong>the</strong> financial crisis. The biggest increases in cross-border integrationcontinue to be driven by technology, particularly global connectivity through broadb<strong>and</strong>penetration <strong>and</strong> internet access, as well as increases in R&D trade.While integration in mature markets appears to be slowing down, reflecting <strong>the</strong> already highpenetration levels of technologies such as <strong>the</strong> internet <strong>and</strong> broadb<strong>and</strong>, it is ramping up <strong>for</strong>rapid-growth markets. This suggests that <strong>the</strong> BRICs <strong>and</strong> o<strong>the</strong>r emerging economies can reapparticularly big <strong>opportunities</strong> from fur<strong>the</strong>r technological integration through 2016.Updated Globalization Index methodology <strong>and</strong> variables <strong>for</strong> 2012Ernst & Young’s annual Globalization Index was developed in 2009 in conjunction with <strong>the</strong>Economist Intelligence Unit. The Index is based on a comprehensive underst<strong>and</strong>ing of <strong>the</strong>underlying drivers <strong>for</strong> <strong>globalization</strong> across five main pillars: openness to trade, capital flows,exchange of technology <strong>and</strong> ideas, labor movements, <strong>and</strong> cultural integration. With <strong>the</strong>se keycategories, <strong>the</strong> Index incorporates a broad range of sub-indicators <strong>for</strong> 60 countries <strong>and</strong> spans <strong>the</strong>years 1995 to 2016. www.ey.com/<strong>globalization</strong>As <strong>globalization</strong> evolves, <strong>and</strong> <strong>new</strong> <strong>and</strong> better datasets become available, it is appropriate toreview <strong>the</strong> index data <strong>and</strong> methodology to accurately reflect <strong>the</strong>se developments. In 2012 weintroduced revisions to <strong>the</strong> Globalization Index scoring system <strong>and</strong> included several <strong>new</strong> subindicatorsto better reflect <strong>the</strong> state of play in <strong>the</strong> global economy, technology <strong>and</strong> markets.The <strong>new</strong> scoring system uses a dynamic normalization technique. In addition, <strong>the</strong> followingvariables are included in <strong>the</strong> 2012 Index: share of main trading partners in total trade, as apercentage of GDP (trade in goods <strong>and</strong> services); trade in in<strong>for</strong>mation <strong>and</strong> communicationstechnology (ICT) goods, as a percentage of GDP (technology); <strong>for</strong>eign direct investment (FDI)stocks, as a percentage of GDP (capital <strong>and</strong> finance); <strong>and</strong> total international fixed telephonetraffic (culture). The last two of <strong>the</strong>se variables are substitutions <strong>for</strong> FDI flows as a percentage ofGDP (capital <strong>and</strong> finance) <strong>and</strong> international outgoing fixed telephone traffic (culture). The subindicatorweights in <strong>the</strong> Index have been redistributed to reflect <strong>the</strong> changes in <strong>the</strong> variables.The purpose of <strong>the</strong>se changes is to better capture relative country per<strong>for</strong>mance <strong>and</strong>per<strong>for</strong>mance over time across <strong>the</strong> five main drivers of <strong>globalization</strong>. The changes are reflectedin some larger-than-normal historical revisions to <strong>the</strong> 2011 rankings, but <strong>the</strong> updated Indexmethodology better captures <strong>the</strong> nuances in <strong>globalization</strong> in <strong>the</strong> world today, suggestingimproved <strong>for</strong>ecasting capability <strong>and</strong> insights into key business <strong>opportunities</strong> <strong>and</strong> challenges.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth31

32 Growing Beyond2012 Globalization Index1234567891011121314151617181920212223242526272829307.816.315.635.495.305.194.964.944.754.744.724.664.624.584.554.554.554.534.514.454.444.374.364.344.334. Kong (SAR)*SingaporeIrel<strong>and</strong>BelgiumSwitzerl<strong>and</strong>Ne<strong>the</strong>rl<strong>and</strong>sSwedenDenmarkHungaryUnited KingdomGermanySlovakiaFinl<strong>and</strong>FranceCanadaIsraelTaiwanCzech RepublicAustriaSpainNew Zeal<strong>and</strong>BulgariaNorwayAustraliaUnited StatesMalaysiaPol<strong>and</strong>ChilePortugalItalyCountry/territory 2012scoreChange inscore since2011Change inscore since1995Trade Capital Labor Technology CultureOverallIndex rankings*Special Administrative Region of China

33<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth3132333435363738394041424344454647484950515253545556575859604.<strong>and</strong>South KoreaPhilippinesGreeceVietnamMexicoPeruSri LankaColombiaSaudi ArabiaEgyptJapanChinaBrazilTurkeyUkraineRussiaEcuadorPakistanAzerbaijanSouth AfricaArgentinaIndiaNigeriaKazakhstanIndonesiaVenezuelaAlgeriaIranCountry/territory 2012scoreChange inscore since2011Change inscore since1995Trade Capital Labor Technology CultureOverallIndex rankings

Index rankings2012 Globalization Index — indicators, sources <strong>and</strong> weightingsErnst & Young’s 2012 Globalization Index was developed by <strong>the</strong> Economist Intelligence Unit <strong>for</strong>Ernst & Young to measure <strong>the</strong> 60 largest countries/territories by GDP according to <strong>the</strong>ir degree of<strong>globalization</strong>. The table below shows, <strong>for</strong> each of <strong>the</strong> headline categories, <strong>the</strong> individual indicatorsused <strong>and</strong> <strong>the</strong>ir source. The categories were <strong>the</strong>n weighted.Indicators Weight SourceMovement of goods <strong>and</strong> services (Business leader weighting: 22%)Total trade (exports <strong>and</strong> imports)Trade openness (5=very high)Tariff <strong>and</strong> non-tariff barriers (5=very low)Ease of trading (cross-border) (5=very easy)Current-account restrictions (5=very low)Share of main trading partners in total trade (%)Movement of capital <strong>and</strong> finance (Business leader weighting: 21%)FDI stocks (in <strong>and</strong> out, % GDP)Portfolio capital flows (in <strong>and</strong> out, % GDP)Government policy towards <strong>for</strong>eign investment (5=very encouraging)Expropriation risk (5=non-existent)Investment protection schemes (5=very good)Domestic favoritism by government (5=no favoritism)State control/ownership (5=no state interference)40.0%10.0%10.0%10.0%10.0%20.0%50.0%8.3%8.3%8.3%8.3%8.3%8.3%National accountsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsNational accountsIMF International Financial statisticsIMF International Financial statisticsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsExchange of technology <strong>and</strong> ideas (Business leader weighting: 21%)Trade in ICT goods (exports <strong>and</strong> imports) as % of GDPTrade in creative goods <strong>and</strong> services (exports <strong>and</strong> imports) as % of GDPBroadb<strong>and</strong> subscriptions (per 100 people)Internet subscribers (per 100 people)30.0%30.0%20.0%20.0%UNCTADUNCTADInternational Telecommunications UnionInternational Telecommunications UnionMovement of labor (Business leader weighting: 19%)Net migration rate (per 1,000 population)Current transfers (in <strong>and</strong> out, as % GDP)Hiring of <strong>for</strong>eign nationals (5=very easy)Cultural integration (Business leader weighting: 17%)Tourism (in <strong>and</strong> out, per 1,000 population)International total fixed telephone traffic (minutes) per capitaOpenness of national culture to <strong>for</strong>eign influence (5=very open)40.0%40.0%20.0%33.3%33.3%33.3%United NationsIMF International Financial StatisticsScored on 1 - 5 scale by EIU analystsWorld Tourism OrganizationInternational Telecommunications UnionScored on 1-5 scale by EIU analysts34 Growing Beyond

Related Ernst & Young thought leadershipGrowing BeyondGrowing BeyondGrowing BeyondBeyond Asia:developed-markets perspectivesMeeting <strong>the</strong> challenge ofchanging global competitionGrowing painsCompanies in rapid-growth marketsface talent challenges as <strong>the</strong>y exp<strong>and</strong>Paradigm shiftBuilding a <strong>new</strong> talent management modelto boost growthBeyond Asia: developed-marketsperspectivesThis report examines how companiesbased in developed markets can explore<strong>the</strong> implications of Asian overseasexpansion, coping with changing globalcompetition <strong>and</strong> maximizing <strong>new</strong><strong>opportunities</strong>.Growing Beyond: how high per<strong>for</strong>mersare accelerating aheadThe shocks of 2007 <strong>and</strong> 2008heralded one of <strong>the</strong> longest periodsof economic retrenchment in history,but high per<strong>for</strong>mers have learned tomaster <strong>the</strong> <strong>new</strong> economy. This reportshows you how.Growing pains: companies in rapidgrowthmarkets face talent challengesas <strong>the</strong>y exp<strong>and</strong>Getting <strong>the</strong> talent equation rightis proving exceptionally difficult ascompanies globalize. Learn about fourmajor talent-related challenges that thisreport identifies.Paradigm shift: building a <strong>new</strong> talentmanagement model to boost growthBusinesses are on <strong>the</strong> brink of atalent crisis. Only a major shift inthinking can help tackle <strong>the</strong> talentshortfall. This report offers some keyrecommendations.Growing BeyondGrowing BeyondGrowth, actuallyErnst & Young’s 2012 European attractiveness surveyGrowing BeyondAfrica by numbersAssessing market attractiveness in AfricaGrowing BeyondBeyond AsiaStrategies to support <strong>the</strong> quest <strong>for</strong> growthBeyond AsiaNew patterns of tradeBeyond Asia: strategies to support <strong>the</strong>quest <strong>for</strong> growthThis report explores <strong>the</strong> practical issues— <strong>and</strong> ways to resolve <strong>the</strong>m — that bothregional <strong>and</strong> global Asian companies willneed to consider in order to succeed in<strong>the</strong> next few years.Beyond Asia: <strong>new</strong> patterns of tradeThis report examines how trade in <strong>and</strong>between <strong>the</strong> nine largest or most rapidlygrowing economies in Asia-Pacific willaffect global business. It presents avariety of scenarios.Growth, actually: Ernst & Young’s2012 European attractivenesssurveyThe Eurozone crisis continues, butEurope’s fundamental strengthsendure. Western Europe rankssecond only to China as a <strong>for</strong>eigninvestment destination. Read thisreport to learn why.Africa by numbers: assessing marketattractivenessForeign direct investment in Africa hasincreased significantly over <strong>the</strong> lastdecade, <strong>and</strong> this trend is set to continue.Our latest report sets out <strong>the</strong> risk profileof 17 of <strong>the</strong> most popular countries <strong>for</strong>investment in Africa.<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth35

Growing Beyond Borders (GBB)Ernst & Young’s Growing Beyond Borders (GBB)is an interactive tool that helps you navigate <strong>the</strong>challenges <strong>and</strong> <strong>opportunities</strong> in doing businessacross <strong>the</strong> globe. During a GBB session you’llexplore publicly available data depicted in heatmaps, competitive footprint views <strong>and</strong> comparisontables, both regionally <strong>and</strong> globally, to help youmake better business decisions.Your GBB session will help you:• Identify <strong>and</strong> analyze risks tailored to yourindividual priorities <strong>and</strong> displayed visually to giveyou instant insights• Seize <strong>opportunities</strong> <strong>for</strong> profitable growth basedon a clear overview of your competitors’ currentposition <strong>and</strong> gaps in <strong>the</strong> market• Accelerate your decision-making, freeing up timeto focus on implementing your strategy36 Growing Beyond

<strong>Looking</strong> <strong>beyond</strong> <strong>the</strong> <strong>obvious</strong>: <strong>globalization</strong> <strong>and</strong> <strong>new</strong> <strong>opportunities</strong> <strong>for</strong> growth37

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