BRICS: a US$ 30 trillion-decathlon

Where are the most prominent business markets around the world? They are in emerging markets, especially in the BRICS countries (group composed by Brazil, Russia, India, China and South Africa). According to study by McKinsey Global Institute (MGI) called “Winning the US$30 trillion decathlon: Going for gold in emerging markets”, by 2025, annual consumption in emerging markets will reach US$30 trillion—the biggest growth opportunity in the history of capitalism.

In a series of surveys, MGI interviewed more than 300 executives at 17 of the world’s leading multinationals. The professionals were chosen from a range of sectors and geographies. The research was conducted by Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan.

According to the study, CEOs at most large multinational firms say they are well aware that emerging markets hold the key to long-term success, but they also recognize the complexity of seizing this opportunity as well.

The importance of emerging markets inside multinational companies has been increasing exponentially. In 2010, for example, 100 of the world’s largest companies headquartered in developed economies derived just 17% of their total revenue from emerging markets. “(…) those markets accounted for 36% of global GDP and are likely to contribute more than 70% of global GDP growth between now and 2025”, says the report.

However, the authors put on a spotlight on the challenges in order to reach success in emerging markets, and compared the efforts to a decathlon—sport that combine ten track and field events. “Our experience suggests the challenge in emerging markets more closely resembles a decathlon, where success comes from all-around excellence across multiple sports”, says. “As with a decathlon, there’s no single path to victory.”

Over the past two decades, the urbanization of emerging markets—supported by the removal of trade barriers and the spread of market-oriented economic policies—has powered growth in emerging economies and more than doubled the ranks of the consuming class, to 2.4 billion people. By 2025, MGI research suggests that number will nearly double again, to 4.2 billion consumers out of a global population of 7.9 billion people.

According to MGI’s estimates, by 2025, annual consumption in emerging markets will rise to US$30 trillion, up from US$12 trillion in 2010, and account for nearly 50% of the world’s total, up from 32% in 2010. “As a result, emerging-market consumers will become the dominant force in the global economy.”

In many product categories, such as white goods and electronics, emerging-market consumers will represent the majority of the global demand. “Even under the most pessimistic scenarios for global growth, emerging markets are likely to outperform developed economies significantly for decades”, says the report.

So, the business opportunities in emerging markets are vast. More than half of all global Internet users are in emerging markets. Over the next 15 years, just 440 emerging-market cities will generate nearly half of global GDP growth and 40% of global consumption growth.

In Brazil, for instance, social-network penetration was the second highest in the world in 2010. And a recent McKinsey survey of urban African consumers in 15 cities in ten different countries found that almost 60% owned Internet-capable phones or smartphones.

Besides, the scale of the modern exodus from farms to cities has no precedent. In emerging-market economies today, the population of cities grows by 65 million people a year—the equivalent of seven cities the size of Chicago, says the study.

Nevertheless, for developed-market companies, winning consumers in these new high-growth markets requires a radical change in mind-set, capabilities, and allocation of resources, says the study.

In Brazil, the big metro market is São Paulo state, with a GDP larger than Argentina’s. “But competition in São Paulo is brutal and retail margins razor thin”, says the research. “For new entrants to the Brazilian market, there might be better options in the northeast, Brazil’s populous but historically poorest region.”

The diversity of consumer preferences is another challenge for multinational companies.
China, for example, has 56 different ethnic groups, who speak 292 distinct languages. In case of India, the country embraces about 20 official languages, hundreds of dialects, and four major religious traditions. Brazil is one of the world’s most ethnically and culturally diverse countries in the world. And the residents of Africa’s 53 countries speak an estimated 2,000 different languages and dialects.

To win in emerging markets, developed-market companies must be willing to embrace big changes fast. “Those unable to reallocate resources radically risk a drubbing by local competitors”, says the study. According to research, emerging-market companies redeploy investment across business units at much higher rates than companies domiciled in developed markets, and they are growing faster than their developed-market counterparts.

It’s important to point that unskilled workers might be another challenge to companies which are interested in penetrating emerging societies. Skilled managers are scarce and hard to retain. “Yet there’s no escaping the importance in emerging markets of making big bets and riding them for the long term”, says the study. “The investment profile of global consumer products giants that have established a successful presence in emerging markets indicates an interval of approximately four or five years until investments pay off. M&A can accelerate progress.” 


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