Unlocking global value

GLOBAL INVESTOR 2.07 Lead — 11
Emerging market
brands on the rise
With the growing contribution of emerging markets (EMs) to world gross domestic product (GDP)
growth, we believe that several EM-based companies are on the verge of becoming larger and more
powerful brands. We identify two types of firms: companies that are export-oriented and gaining
market share at the expense of Western competitors, which we call “national champions,” and
companies benefitingfrom the emergence of a middle class in several EMs, which we refer to as
“mirror companies” because of the way they emulate Western business models.
Lars Kalbreier, Head of Global Equities and Alternatives Research, Hervé Prettre, Head of Commodities and Equities Trading Research, Etrita Ibroci, Trading Strategist
The rise of new brands from emerging markets (EMs) is not a new
phenomenon. The emergence of local brands follows a traditional
development pattern that is similar to the historic development of
US, European and Japanese companies in past decades. Depending
on the size of the country, a brand usually follows one of two
types of developmental models:—1.—The domestic market model:
a strong domestic market long protected from foreign competition
will support local brands. With economic growth, standards of living
rise rapidly in the developing economy. As a result, consumers
in such markets have growing amounts of disposable income and
higher salaries, which fuel domestic consumption, enabling some
local brands to gain significant size and reach the status of “brand
behemoths.” As such, they eventually achieve economies of scale,
global status and competitiveness.—2.—The export model: countries
with insufficient domestic markets choose to specialize in selected
competences and focus on the export of value-added products.
These companies are often backed by their governments and are
thus qualified as “national champions.” They have some competitive
advantages in terms of resources, an educated and cheap workforce,
and research, just to name a few.
In recent history, the two models have tended to merge into
one. In the 1970s, companies in countries such as Japan, which
emerged thanks to the rise of domestic consumption, also got a
boost from their governments to raise their competitiveness and
become national champions. The opposite is currently happening in
China, where national export champions are increasingly expanding
in the domestic market to benefit from the rising middle class. In the
past few years, the rapid acceleration of economic growth in most
EMs has revived the theme of emerging brands. Rapid economic
growth has translated into significant increases in gross domestic
product (GDP) per capita, boosting the turnover of local companies
geared to consumption. Globalization has also increased the export
opportunities of a number of companies, reinvigorating the idea of
national champions. In our view, the emergence of this new competitive
landscape in the coming years is unmatched in recent history
and can be compared to the rise of Japanese and Korean
brands in the 1970s and 1980s.
Historic benchmark: The emergence of Japanese brands
Japan’s development started in the 1960s, as the country began to
build up its own brands and distribution systems. Japan developed
innovative products and production processes at such a fast pace
that by the mid-1970s, they were dominating American and European
companies in sectors from automobiles to consumer electronics.
Brands such as Toyota and Sony became world leaders from a
zero base. In 1953, Japan accounted for 1.5% of world exports. By
1978, its export share had risen to 7.5%. Investment in its emerging
brands, based on domestic consumption or national champions,
turned out to be a profitable move. A Japanese company like Toyota
offered significant performance if included in a portfolio in 1973, by
which time it had established a presence in most Western countries
and seven years before its market share gains skyrocketed at