The slowdown of 2008-09 has transformed markets the world over. While developed markets are experiencing sluggish recovery, activity is quickening among the emerging economies. Companies from emerging markets have been highly competitive and gained shares in both domestic and overseas markets in a number of industries. Meanwhile, developed-market companies have regrouped and are striving to win back lost ground. The winners will be those who can position themselves at the forefront of the change. An Accenture research, titled “New Waves of Growth for India”, identifies the trends that are reshaping the business landscape for Indian companies and highlights the key actions that they must take to be on the forefront of the change. The first of the three-part series discusses emerging market opportunities and their implication for business.
Ask business leaders today for their assessment of global economic prospects, and the pervading sense one gets is some degree of optimism tempered with a large dose of uncertainty. India’s business leaders take a similar mixed view of the future. They are optimistic, because India’s rising incomes and rapid economic growth will almost surely continue to bode well for business. And they are uncertain, because continued risk and volatility make it difficult to know what is needed to maximise India’s potential and capitalise on the new opportunities arising abroad.
This leads us to ask: Amidst continued volatility, what are the new avenues of growth that the Indian economy can pursue to raise economic growth and living standards? And what new routes to profitable business expansion are now on offer?
Accenture’s recent research titled “New Waves of Growth for India” confirms that much faster growth is indeed possible for the Indian economy and there are key business opportunities to be seized. Adopting a new perspective on the trends reshaping the economic landscape — many of which are often viewed as challenges — reveals a tremendous upside that includes fresh drivers of business growth. This study identifies three key trends that hold enormous promise for India in the decade ahead; namely, the emerging-markets surge, the eruption and convergence of new technologies, and the burgeoning resource economy.
Accenture research suggests that with the right responses from business and government, these trends can strongly drive future economic growth and job creation for India. The Indian economy has the potential to grow by 8.7 per cent per year, instead of 8.0 per cent in the current trajectory, over the next decade. This equates to an extra Rs 11 trillion ($244.4 billion) of GDP by 2020 and 37.5 million additional jobs, over and above what India would otherwise achieve. Three-quarters of these jobs would arise from India’s exports to other emerging markets; one-quarter from the green and high-tech sectors.
There is growing recognition that emerging economies are taking their place on the international stage and are increasingly driving economic growth. In 2009, emerging economies accounted for over 50 per cent of global GDP at purchasing power parity, up from 37 per cent in 1980, and their share of global output is set to rise still further to 65 per cent by 2030. The ascendancy of emerging-market power is mirrored in the corporate arena as well, with emerging-market multinationals now making up 95 of the Fortune Global 500, compared with just 20 in 1995. In fact, the IMF forecasts that the total GDP of emerging markets could overtake that of the developed economies as early as 2014.
New opportunities
One of the most striking trends is the rapid growth in intra-emerging markets trade. At $4.6 trillion, the five BRICS countries (Brazil, Russia, India, China and South Africa) account for almost 15 per cent of global trade volume, and trade among them is about $230 billion a year. A primary driver of India’s trade growth has also been a rise in trade with other emerging economies. Over the last decade, India’s exports to emerging markets as a share of total exports have increased from 35 per cent in 2000 to 52 per cent in 2010. Share of developed economies (such as the US) as export and import partners with India has decreased, while share of emerging economies (such as China) has risen. Emerging markets are no longer viewed as merely low-cost production locations; they are also considered as sources of new consumer demand. As emerging market economies continue to grow, so do their incomes, their middle class, and their consumption of goods and services. Estimates show that the number of households in emerging markets with annual incomes above $5,000 is set to rise from 320 million in 2009 to 400 million by 2014. The growth opportunities are tremendous and run across every sector. Business leaders in India are recognising this soaring potential and are placing strategic bets in countries like Indonesia, Nigeria, South Africa and Bangladesh, looking beyond the obvious choices such as Brazil and China.
According to Accenture research and analysis, the emerging-markets surge could add about 28.2 million Indian jobs by 2020. In addition, services, low-cost business models, infrastructure development, a focus on emerging-market middle classes, and medical tourism could enhance India’s GDP by Rs 7 trillion ($15.4 billion) by 2020, an increase of 4.9 per cent above the current trajectory.
Buoyed by robust growth in consumer and government spending as well as domestic investment, demand from emerging markets is opening up opportunities in the full spectrum of products, services and infrastructure.
One obvious area is service sector exports. After gaining a strong foothold in the domestic market, Indian service companies are now ready to extend their reach in other emerging countries in Africa, Latin America and Asia Pacific in a variety of sectors including information technology, telecommunication, financial services and education. Bharti Airtel, for instance, is now a major player in 16 African nations.
The expansion of the emerging market middle class not only provides competition for labour and resources, but also enormous potential for global consumer markets. In 2000, developing countries were home to 56 per cent of the global middle class, but by 2030 that figure is expected to reach 93 per cent. Indian consumer goods companies seek a share in these fast-growing consumer markets. Many such companies and retailers are currently focusing on markets that have many non-resident Indians, such as West Asia and South-East Asia, places culturally similar to India. The sizeable population of Indians in Africa also gives Indian companies an advantage over global competitors in the African continent.
From manufacturing the cheapest car in the world (Tata’s Nano) to providing low-cost mobile handsets, India has emerged as the laboratory for not just Indian companies but also multinationals experimenting with low-cost business models in India. GE Healthcare, for instance, has manufactured affordable advanced cardiac care and electrocardiograph (ECG) machines in India, which GE now also sells in developed markets. Indian companies are now looking to export these low-cost business models in other emerging markets.
Rapid development in emerging markets will demand massive infrastructure upgrades. The total urban population in today’s developing world is expected to increase from 2.3 billion in 2005 to 5.3 billion by 2050. The rapid influx of new inhabitants creates a need to develop new ways of planning and managing basic services like public transport, roads, electricity and water. Some Indian infrastructure companies are seizing advantage of this opportunity — scaling up their operations, acquiring design skills and building strong balance sheets to support projects in other emerging markets. For instance, GMR Group became the first Indian company to operate an airport abroad, with the opening of the new terminal at Istanbul Sabia Gokcen International Airport. The company has recently also won the bid to construct the $360-million airport in Male, defeating the Aeroport De Paris (which operates airports in the Paris region, including Charles de Gaulle).
India is also speedily gaining popularity as a destination for medical tourism globally, as the amount of money spent on a treatment is between half and one-third the cost of similar treatments in neighbouring medical tourism destinations such as Singapore and Thailand. Interestingly, most medical tourists treated by private hospitals in India come from South Asian Association for Regional Cooperation (SAARC) countries, and from West Asia and Africa. These hospitals often have facilitation centres in emerging markets, which educate local residents about the medical facilities available in India.
Making it happen
Emerging economies hold great promise for long-term growth, for businesses operating in India. However, access to emerging markets is often hindered by various factors, such as restrictions on trade and investment, inadequate infrastructure or distribution systems, and cultural and social differences affecting the nature of consumer demand. Indian business needs to now think about how it can unlock demand amongst emerging middle class. But to do this business leaders will have to consider a range of issues: How can they adapt their product to local tastes and needs? How can their business use technology to eliminate geographic boundaries?
We see five key actions for organisations to unlock the growth and employment potential of the emerging markets opportunity:
* Use India as a learning laboratory: A number of Indian and multinational companies are using their knowledge of how to operate in India to strengthen their operations in other emerging countries. For instance, Bajaj Auto trained roadside mechanics in Angola to fix their bikes, because many parts of Angola could not support a proper dealer and service-centre network. India is emerging as a laboratory for testing business models and product offerings which companies can use to serve other emerging markets.
* Be authentically local: No two markets are the same — tastes, customs, regulations and political environments differ widely from country to country. Being authentically local can help companies access and multiply the value inherent in diverse markets. To develop and sell products in other emerging economies, Indian companies must understand local consumers and adapt their product development, design, pricing and marketing strategies to meet local tastes and preferences.
Businesses in India are increasingly taking this approach as they expand their base in other emerging markets. For instance, when Dabur set up its international arm, Dabur International, in 2001, the objective was to get closer to its Indian-origin customers in West Asia. Today, almost 90 per cent of Dabur’s customers are locals — not the Indian diaspora. Dabur’s closer proximity to non-Indian consumers enabled it to adapt its products to locals’ needs and aspirations. To do so, the company not only modified existing products’ formulations, it also created new products exclusively for these markets.
* Hire local talent: By recruiting local talent in emerging markets, companies can not only save money (as expat executives usually command higher salaries and need time to absorb the local culture), but equally important, build credibility amongst the local population. It also helps in deepening their understanding of local markets so that they can tailor their offerings accordingly.
* Develop mutually beneficial partnerships: Developing local partnerships can unlock vital knowledge about the region or area, and help companies source information, develop new products and increase their distribution reach. Local partners offer deep expertise and valuable insights into market trends, consumer preferences, government regulations, and procurement and distribution channels.
* Design a flexible international operating model: Companies aspiring to do business in emerging markets must determine how to achieve growth on a regional scale while maintaining the local focus. Surmounting this challenge requires a flexible operating model that is aligned to the realities of the external business and economic environment. As market dynamics evolve at a more rapid pace, so must the operating model be prepared to change and align with the new opportunities and risks. Companies must ensure that the critical levers of their operating model are capable of sensing, flexing and adapting to signals for change. This is true across their management processes, technologies, organisational structures, people and culture.
To summarise, companies that ignore trade with emerging markets will lose a valuable business opportunity. Moreover, their own economies miss out on the productivity benefits that arise from trade. To make the most of the growth in emerging markets, India needs to play a more proactive role in building new bridges to the emerging world by fostering links in investments, trade, tourism, labour movements and aid extensions. Indian companies must understand and respect those markets’ cultures, institutions, laws and business practices. In many areas, growth has been founded on the exploitation of historical and cultural ties between geographies. If they can avoid stifling these abilities in the quest for scale, they will be well positioned to achieve — and sustain — greater growth in the future.
The author is chairman and country managing director, Accenture India. The second part of the series next week discusses the rise of new technologies and its implication for Indian businesses
