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Harvard Business Review Exclusive: The new frontiers

How the global slowdown is reshaping competition from emerging markets.

Anand P. Raman        Print Edition: September 6, 2009

In 1893, American historian Frederick Jackson Turner declared that a frontier isn’t just a place; it’s also the process of adaptation and change that shifting borders force on people and institutions. The young Wisconsin professor was describing the role that the frontier had played for three centuries in creating the American nation, but the Turner thesis applies to modern business, too.

Over the past three decades, the borders of the corporate world have constantly shifted as developing countries opened their economies to foreign businesses. As a consequence, multinational companies have had to cope with runaway growth, intense competition, greater complexity— and constant change.

Even so, little they have learned has prepared Western companies for the impact of today’s great recession on globalisation. Not only is the worldwide slowdown hurting developed economies more than emerging economies, but it’s affecting the latter differently and substantively altering their role in the global economy. By the time the slowdown ends, the frontier will have shifted again in unexpected ways.

Today’s great crisis is forcing change at three levels. First, the developing countries are becoming relatively bigger markets. Defying the odds, they seem likely to expand by 1.6 per cent overall in 2009, with the International Monetary Fund (IMF) projecting in April 2009 that China’s economy would grow by 6.5 per cent, India’s by 4.5 per cent, and the West Asia’s’s by 2.5 per cent. The pace is much slower than the spanking 6.1 per cent at which the emerging markets grew collectively in 2008, but it’s remarkable considering the IMF’s forecast that the developed economies will shrink by 3.8 per cent this year.

Second, governments are reshaping the contours of economic development even as they stoke growth through monetary and fiscal policy measures. No government is doing that more than China’s, which is using the $586 billion stimulus package it announced in November 2008 to influence demand and supply in 10 industries that together account for 50 per cent of the country’s GDP. “The government calls it a stimulus, but it’s really redesigning industries,” says David Michael, the Greater China head of the consulting firm BCG. “The ‘new normal’ in many rapidly developing economies will be different after the recession.”

Third, competition in developing countries has become more intense. With exports shrinking, companies in those countries are concentrating more on growing their sales at home. The rivalry is particularly heated in markets for commodities, such as steel, cement, and aluminium, and for upmarket and middle-market consumer segments. With multinational companies trying to squeeze more revenues out of developing countries, too, only the fittest businesses seem likely to survive the slowdown.

Smart companies in emerging markets have started responding to the challenges these changes pose. In fact, a few of them saw the downturn coming and modified their strategies quickly. Companies in these countries already have an edge because they’re the world’s cheapest manufacturers and don’t need to develop low-cost business models. But before the downturn began, rising resource costs and appreciating currencies had eaten away at their profit margins. Many businesses are using the recession as a pretext to do some spring cleaning and reduce costs. They’re restructuring portfolios, halting iffy diversification plans, and consolidating operations.

Some businesses are using the cash they’ve freed up to develop value-for-money products and services, particularly for rural consumers and those in the lower middle class. Several Chinese manufacturers are using the slackening of demand as an opportunity to develop advanced products of their own, so that they won’t always have to serve as subcontractors. In India, Tata Motors’ March 2009 launch of the world’s most inexpensive car, the $2,000 Nano, has made low-cost innovation a priority for companies and entrepreneurs. There’s even a name for the trend: the Nano Effect. And in China, BYD Auto’s December 2008 launch of the world’s first massproduced plug-in electric car, the F3DM, which sells for $22,000, has created a similar BYD Effect.

Most Western companies are preoccupied with the crisis in their home markets, but they need to start focussing on the next phase of global growth. If they want to avoid being blindsided tomorrow, they must track five tectonic shifts that are emanating from the developing world.

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