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Emerging
markets and curent economic slowdown
Economic slowdown that various economies are passing through
presently has already resulted in adverse movements in output,
unemployment and prices. The first sign of decline was felt
when off take of consumer durables slowed down and inventory
started building up. Thereafter, a number of negative factors,
such as reduced investment in plant and machinery, declining
demand for labor, increasing layoff and unemployment emerged.
These factors led to decline in firm level profits and depressed
stock prices. Traditional corrective actions such as lowering
of interest rates has already been initiated by many countries
to boost credit off take and consumer sentiments; alongside
various fiscal and monetary steps have been taken to prevent
the recession snowballing into a persistent and profound slump.
With all these actions in place, it now remains to be seen
when and to what extent the countries at large can come out
of the current slowdown. At the latest reckoning, the most
liberal estimates show that US economy will start looking
up from March 2002 and countries such as India will have to
wait till the last quarter of the same year.
The big five emerging markets, consisting of India, China,
Brazil, Indonesia and Mexico, also got affected by recent
slowdown, though in some cases not to the same degree as experienced
by certain developed countries. These emerging markets have
a combined purchasing power that is already half as that of
Group of Seven nations and a combined population of more than
2.6 billion, which is four times that of Group of Seven nations.
These five nations provide enormous opportunities to both
domestic as well as multinational firms operating in these
markets. In select industries, the advantage is more skewed:
for example, in case of soft drinks industry, Mexico and Brazil
are the second and third largest markets in the world while
China, Brazil and India are among the five largest markets
for TVs and refrigerators1
In general, emerging economies, such as those mentioned above,
are characterized by their large size and the average GDP
growth rate that is higher than the world average. In such
economies, government controls are currently on the decline
but not completely removed. In most of these countries, Government
policies provide some form of protection to firms already
operating in such markets. Similarly, though investments in
improving the infrastructure are being made, the magnitude
is miniscule when compared to advanced countries. Attempts
are being made to address the absence of world class infrastructure
but a lot of work still remains to be completed before the
same can be termed as efficient2.
These characteristics provide certain opportunities for firms
that are already well entrenched in such emerging markets.
For example, certain protections such as high import tariffs,
weak patent laws etc., as available to both domestic firms
and affiliates of MNCs already operating within such economies,
will be operational in most of these emerging markets till
2005, implying availability of some valuable breathing time
to reposition such companies against global competition. One
good example is the Indian pharmaceutical industry which thrived
over the last 50 years or so, thanks to the slack patent laws
that exist even today. However, India is committed to introduce
product patent laws beginning 2005 which will imply that opportunities
that are currently available to introduce new products through
“reverse engineering” will no more be available.
Considering these adverse prospects beginning 2005, a number
of Indian pharmaceutical companies have initiated steps towards
strategic repositioning of their firms. The steps include
plough back of super profits currently being earned, taking
advantage of slack patent laws to build R&D capabilities
and utilizing the remaining three years to take guard against
incoming global competition. Other advantages that will accrue
to existing firms in emerging markets are:
1. Possession of intimate knowledge
of operating in economies with institutional and infrastructure
deficiencies (including knowing how to overcome such deficiencies
in a cost and time effective manner),
2. Possession of strategic assets
such as location, privileged access to raw materials and other
inputs and the relationships that have been built over the
years with political and administrative machinery of the country.
All these advantages can accrue to only those firms which
are “insiders” .Domestic firms as well as affiliates
of MNCs operating in emerging markets must understand and
appreciate the profound implications of their being an “insider”
and should take advantage of their special context to fight
global economic slowdown through adopting correct strategic
initiatives and building capabilities that matter most. Examples
of some such initiatives can be, the steps taken to reach
the customers particularly in the middle and low income levels,
identifying correct segments and categories, building strong
brands and a well spread distribution network, and putting
in place the organization and systems that take into account
local talent, culture and other contextual variables. For
affiliates of MNCs operating in such economies, these initiatives
will of course have to be weighed against the need for global
integration in key areas. Companies such as Unilever, Coca
Cola, Pepsi, Nestle, Gillette and Colgate Palmolive understand
the potential of emerging markets and have already captured
more than one third of their revenues from big emerging markets3
This paper argues, that during a period of economic slow down,
an aggressive stance is likely to be more beneficial to firms
that desire to strengthen their long term competitive position
in the industry. There will however be a need to adopt a correct
business model to realize such a winning strategy. In the
paragraphs below, we will first describe some select features
of the suggested business model and then briefly examine what
kind of firms will be able to pursue such an aggressive stance
during economic slowdown. Experiences of companies operating
in India will be used to provide the required validation of
the approach suggested in this paper.
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