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Emerging Markets
Different challenges
for different markets
Groupings such as BRICS (Brazil,
Russia, India, China and South
Africa) hold little meaning when it
comes to planning to win in these
markets. A detailed understanding of
the differences is essential to define
growth aspirations in these markets
and rethinking service offerings and
go-to-market strategies in order to meet
the needs of existing and new clients.
Overview
Businesses that rely on the assumption
that there is uniformity across
emerging markets are mistaken.
Each nation differs in its laws, taxes,
politics, business environment, and
culture. Even within a country, vast
regional and local differences must be
taken into account.
The global economic landscape is
undergoing fundamental changes.
Emerging markets are more than just
a rising force: they’re now the main
game in economic growth. E71 is
expected to overtake G7 by 2040. By
2050, E7 will be 50% larger than G72
economies.Companies around the
world and across industrial sectors
are seeking out opportunities in these
markets and what they represent in
terms of new consumers. But it is
fundamental to recognize and accept
that these emerging markets are
fundamentally different from one
another and different from developed
countries, especially as they mature.
The maturity path that many of the
emerging economies are following is
different from the one that developed
countries once followed and hence
the demands at the macro and micro
economic level are quite different. The
end result being different from the one
developed countries reached.
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These countries typically have:
• High growth rates and potential to
become developed economies in the
mid/long term;
• A unique risk profile;
• Lower per-capita income, with
differences in consumption
behaviour when compared to
developed economies;
• Either untapped talent pools or
are undergoing specialized labour
shortages (e.g. Brazil);
• Transparency, market regulation
and operational efficiency under
development;
• Unique economic and political
environments which are still
stabilizing.
Success lies in placing emphasis on a
complex set of global vs. local
trade-offs whilst attempting to capture
and market cross country best practices
(within emerging markets and between
developed and emerging markets),
clearly understanding potential areas
of cooperation, and strengthening
economic/business links within an
emerging markets context.
E7 China, India Brazil, Russia, Indonesia, Mexico, Turkey
G7 US, Japan, Germany, UK, France, Italy, Canada
(2)
Emerging Markets
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Major challenges
Since the macroeconomic parameters
and features of development vary
within BRICS and other emerging
economies, the challenges they face to
make their growth process sustainable
also vary. Furthermore, governments
in these regions have a strong
development agenda and having
their support/approval is key to drive
growth (i.e. obtaining regulatory
approvals, fiscal benefits, etc.).For
example, in Brazil, and not limited
to, macroeconomic stabilization is
a key precondition for successful
reforms and sustainable growth. The
challenges that the Brazilian economy
face are: (i) that its tradeable goods
sector is small when compared to
other EMs like China; (ii) saving and
investment rates have to increase as in
other BRICS economies like China and
India; (iii) improvements are required
in public sector management; and (iv)
it also needs to enhance the depth of
the financial sector as well as improve
long-term financing structures for the
private sector. In the case of Russia,
the key challenges are accelerating
the implementation of structural
reforms, particularly in inefficient and
undercapitalized natural monopolies,
and strengthening the investment
climate. For India, the major
challenges are (i) making the growth
process more inclusive,
(ii) improving physical infrastructure,
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(iii) developing the agriculture sector,
and (iv) enhancing delivery of essential
public services, such as education and
health, to large parts of the population.
Similarly for China, policy changes
are needed to address both domestic
and external challenges. The policy
challenge for China is to sustain rapid
and stable economic growth, driven
by both exports and domestic demand
in a more balanced way. To facilitate
restructuring of the economy, financial
sector reforms are needed to improve
the intermediation of China’s large
private savings. The government also
needs to raise social spending in the
areas of education, healthcare, and
pensions, which will serve to reduce
precautionary saving and boost
consumption over time. There is also
a need to improve the investment
structure, advance reforms in the
healthcare, pension, and education
systems, and provide more support to
rural areas and less-developed regions.
Countries in E7 present some
differences and challenges at various
levels (non-exhaustive):
China
Regulatory and
political factors
Economic and
financial factors
Technological
factors
Socio-economic
factors
Infrastructure and
assets factors
• Challenges
around corruption,
bureaucracy,
imposing rule of law
and tax complexity
• Continued growth
• Improve tecnological
skills of population
• Emerging middle
class
• Improve road
infrastructure
• Internet access
• Demographic bonus
• Challenges
around corruption,
bureaucracy,
imposing rule of law
and tax complexity,
trading across
borders
• Lack of availability
of domestic
banking credit and
developing equity
market
• Challenges around
imposing rule of
law, tax complexity,
enforcing contract
and bureaucracy
• Government needs
to provide stimulus
for infrastructure
and education
investments for
growth
• Improve volume and
quality of domestically
produced high
technology
• Growing middle
class
• Increase level of
innovation
• Growing middle
class
• Risk of social
conflicts
• Developing equity
market
• Food shortage
Russia
Brazil
Turkey
• Challenges around
imposing rule of law
and political stability
• Needs to improve
monetary policy
and potential issues
with inflation
• Developing equity
market
• Availability of
domestic banking
credit
• Government needs
to provide stimulus
for growth
India
• Challenges around
imposing rule of
law, political stability
and corruption
• Continued growth
• Growing middle
class
• Large number of
investment targets
• Improve volume and
quality of domestically
produced high
technology
• Size of population
• Falling life
expectancy
• Improve port
productivity and road
infrastructure
• Emerging middle
class
• Improve road
infrastructure
• Demographic bonus
• Improve port
productivity/capacity
• Improve technological
skills of population
• Internet access
• Improve technological
skills of population
• Improve volume and
quality of domestically
produced high
technology
• Skilled labor
shortage
• Young workforce
• Large population
• Improve technological
skills of population
• Improve volume and
quality of domestically
produced high
technology
• Improve technological
skills of population
• Emerging middle
class
• Demographic bonus
• Risk of social
conflicts
• Improve road
infrastructure
• Improve port
productivity/capacity
• Challenges
around improving
overall transport
infrastructure
• Internet access
Mexico
• Challenges around
imposing rule of
law, tax complexity,
registering property
and corruption
• Developing equity
market
• Improve technological
skills of population
• Availability of
domestic banking
credit
• Internet access
• Large population
• Size of workforce
(skilled)
• Improve road
infrastructure
• Improve port
productivity/capacity
• Low GDP growth
South Africa
• Challenges around
trading across
borders
• Stimulate GDP
growth
• Improve volume and
quality of domestically
produced high
technology
• Risk of social
conflicts
• Improve technological
skills of population
• Improve road
infrastructure
• Improve port
productivity/capacity
• Internet access
As we can see, each of these countries, even though growing, individually presents differences across
the board, from institutions all the way to the firm level. These factors continue to influence business
organizations and managerial behaviours in their respective markets.
Emerging Markets
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Institutional
factors
Country
institutions
Upsides
• The legal system
• Potential for political instability
• The government (regulations,
public sector governance)
• The society (religion, culture,
ideology, custom, social norm)
• Typically have low levels of debt
• Politically less stable
governments and internals
tensions can create difficulty
operating environment for
companies
• Healthy banking systems
• Prudent fiscal policies
• Currency fluctuations
• Government involvement
Markets
• Product (technology, innovation, etc.)
• Labor (quality and availability)
• Management
• Raw materials
• Financial capital
Firms
• Firm boundary (vertical
integration, diversification)
• Ownership and control structures
• Governance structures
(accounting, board of directors,
executive compensation, etc.)
• Stock and bond markets are less
mature in their functions. Rules of
conduct and liquidity (volatility)
• Lack of sound fiscal and
monetary policies can undercut
growth
• Availability of natural resources
• Growing household income
• Young working age population
• Export strenghts
• Regulatory environment
• Geographic expansion
(cross‑country)
• Rules and regulations tend to
be under development
• Profissionalization
• Market regulation, corporate
governance, transparency and
accounting standards may not
be reliable
• Higher costs to invest
Downsides
Finding new sources for growth is
the key reason developed economy
companies are vigorously investing
in emerging markets. By entering
emerging markets, traditional
multinationals are playing both
offense and defence. They know they
must be on the ground in emerging
economies, investing for the long
term, physically close enough to
learn the ways of markets that differ
from those they’re used to. However,
emerging economies are beginning
to produce their own powerful
multinationals—Haier in China and
Tata in India, Vale and JBS in Brazil,
are examples which are posing
unprecedented competitive challenge.
Any move into emerging markets
will require innovations in products,
technology, and services, as well
as major changes in operating
procedures. No longer can a company
simply export a product to a
distribution network in an emerging
market and expect it to succeed.
Multinationals’ business models are
based on practices established in
the markets of the developed world,
where the game is won slowly by
finding cost savings and making
product improvements that capture
single percentage points of market
share over time.
Multinationals’ business models are based on practices established in the
markets of the developed world, where the game is won slowly by finding
cost savings and making product improvements that capture single
percentage points of market share over time.
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Different types of markets dictate different growth strategies and process challenges:
Types of Market
Growth
Challenges in terms of
Value
proposition
Channel
management
Integrating
supply and demand
Emerging
Generate volume
growth
Medium
High
Medium
Established
Achieve value
growth through
High
High
High
Developing
Ensure availability
establish
Medium
Low
Medium
As a result, companies will face challenges in
developing their EM strategies around some key
implementation issues such as:
• How to orchestrate the organization;
• How to allocate resources;
• How to manage resources;
• How to improve performance;
• How to manage risk.
The world’s customers, even the poorest, have
become too sophisticated. In fact, companies
may have to rethink repetitive business models
to compete effectively. All of this is easier said
than done, of course, because consumers in
emerging markets are extremely diverse. In
some ways, they resemble those in developed
nations: they are aware of and have a fondness
for brands and want access to a variety of
products at different prices, including products
they aspire to but can’t currently afford. Yet their
tastes are often localized, and while they are
middle-class in regional terms, they are still not
wealthy enough to replace products regularly,
because their percentage of truly discretionary
income is lower: in China and India, for
example, about 40 percent of average household
income is spent on food and transportation,
compared with 25 percent in the United States.
Even multinational companies that despite
having strong global brands face challenging
competition in emerging markets from local
players have had to adapt to a new reality.
For example:
• PepsiCo (Frito-Lay) in India had to create
a new platform called Kurkure with a
local feel, for younger consumers and as a
consequence shaped the snack market;
• Wal-Mart entered Brazil with aggressive
growth plans which went awry because
they tried to replicate the basic store format
prevalent in the US in Brazil and they
failed to understand the needs of the local
markets. Now, after the initial problems,
Wal-Mart planned and implemented new
strategies that included acquisitions, new
store formats, bringing in experienced store
personnel, etc;
• Chinese beverage maker Hangzhou Wahaha,
for example, has built a $5.2 billion business
against global competitors such as Coca-Cola
and PepsiCo by targeting rural areas, filling
product gaps that meet local needs, keeping
costs low and appealing to patriotism.
Emerging Markets
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Addressing these differences may well determine success
or failure. Companies doing well in one region often
falter in another.
Macro economic
trends
Established
Emerging (E7)
Rest of developing
world
• Mature rates of growth
• Second wave growth
• Rapid growth
• Stable, free market
economy
• Growing middle class
• Government
involvement
• Aging population
• Trade liberalization
• No or low regional
boundaries
Differing levels of
requirements to
stimulate the market
vs. respond to
market
• Fragile economy
Infrastructure realities
• Regional scale,
integrated core
infrastructure
• Primarily still
region oriented
but approaching
estabilished standards
• Infrastructure still
being constructed
Differing ability to
bind into global
network/economy
Consumer priorities &
needs
• Fragmented niche
consuption
• Brand awareness as
a symbol of status/
quality
• Needs driven
Complex mix of
shared and differing
values
• Channels evolving
• Traditional channels
are still predominant
• Total value provides
driver for use
Channel costumer
behavior
• Patnership for growth
in satureted markets
• Alternate channels
evolving
Industry challenge/
strategy
Achieve value share
growth
When a business with a
value-generating or managerial
capability invests abroad, its
shareholders and the host country’s
citizens both stand to benefit. But
no matter how good the apparent
fit between what foreign companies
offer and what host countries
need, success is far from assured.
Understanding specific market
challenges, pertinent to each emerging
market, is key. Companies have
to ensure that they have clearly
understood the market structure, its
dynamics and peculiarities. Issues
such as changing regulatory and tax
environment, taxation of executive
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• Legal and political
instability
For each type of
market
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• Professionalizing
Generate volume
share growth
• Foreign goods
attractive
Ensure availability
and capitalize on
growth of market
compensation, the proper scope of
financial regulation, elections and
other political events, economic
crises, and changing societal attitudes
can disrupt the best-laid plans in
emerging economies. Companies best
able to anticipate and manage the
related risks and opportunities will
have the strongest competitive edge
as they seek to compete in emerging
economies.
PwC Brazil has put together a multidisciplinary team prepared to support
you with these issues either while you
are considering investing in Brazil or
with existing investments.
Variable retailer/
supplier balance of
power
Contacts
For further information, please contact:
Otavio Maia
[email protected]
[55] (11) 3674 2620
Federico Servideo
[email protected]
[55] (11) 3674 3577
Rogério Gollo
[email protected]
[55] (11) 3674 2333
Sachin Mehta
[email protected]
[55] (11) 3674 2583
Emerging Markets
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