Executive Briefings

Emerging Multinationals: Manufacturing In a Rapidly Changing Global Landscape

In recent years, considerable publicity has been given to the acquisition of some well-known Western companies by companies from emerging nations. Examples include: from China, Lenovo's acquisition of IBM's Personal Computing Division and SAIC's takeover of Rover; and from India, Tata Steel's acquisition of Corus and Tata Motors' acquisition of Jaguar and Land Rover. However, the trend is much broader than these high-profile examples. It is clear that some of these acquiring companies are becoming global players and it is therefore noteworthy to look at the processes by which they have emerged onto the world stage and their impact on the manufacturing industry.

Predictions indicate that the BRIC economies (Brazil, Russia, India and China) will together be more than half the size of G6 economies (United States, Japan, Canada, the United Kingdom, Germany and France) by 2025 and will overtake them by 2040; so, in all probability, the new MNC (multinational corporation) giants of tomorrow will emerge from these economies. Currently, the outward investment from these countries is relatively small compared to that from developed countries such as the US and UK; but this investment is growing, fuelled largely by inward investment and by the strong growth in their economies. This paper examines the internationalization path of companies from each of these emerging economies with the aim of identifying common themes and significant differences among them, as well as the implications they pose for Western companies.

Emerging economies are playing a greater role in global trade aided by the process of "globalization." As they evolve, a new breed of companies with ambitious internationalization objectives is appearing. These "emerging multinationals" (EMs) are changing the configuration of global industries. This report examines the growth of some of these companies to understand their behavior and the implications for existing multinational corporations. The key findings are listed below.

Global Level: A Shift in the Global Economy -- The globalization of markets has resulted in dramatic changes in the patterns of supply and demand around the world. One indicator of these changes is the amount of foreign direct investment (FDI) i.e. the sums invested in one country from another. Global FDI has generally increased more rapidly than global GDP, but it is more variable. An apparently irresistible rise from the mid 1990s was reversed at the beginning of the new century, but growth picked-up again and by 2006 global FDI had reached levels comparable to the 2000 peak. The growth in FDI reflects many factors and a large part of this investment flows between developed countries as industries become more global, however the newly emerging economies such as Brazil, Russia, India and China, the BRICs, are attracting increasing levels of FDI as companies in developed nations attempt to access their rapidly growing domestic markets and/or to take advantage of the low local cost of production. A more recent, and less reported, trend is the growth of FDI from these emerging economies, which is examined in this report.

National Level: Overseas Investments from Emerging Economies are Increasing -- The "break-out" point at which outward FDI from the BRICs started to take off varies slightly from country to country. For Brazil, Russia and China, it seems to have been 2003-04, whilst for India growth was relatively modest from 2000, followed by dramatic acceleration in 2006. Outward investment from the BRICs now approaches the global GDP average, although China lags in this respect. As these are potentially major future markets for MNCs, inward investment has generally exceeded outward investment. The gap is closing, but China's outward investment remains significantly less than inward investment. A substantial part of this outward FDI is in the form of mergers and acquisitions (M&A). Over the period 2004-06 more than half of the FDI from Brazil, India and China was in the form of M&A, but so far Russia has used M&A less extensively.

Company Level: Early Growth in Protected Environments -- The majority of the companies studied experienced their earlier growth in market conditions that either encouraged local monopolies or sheltered them from intense competition from Western MNCs. Each was located in a large country with a huge domestic market. As a result, they gained scale and experience before facing formidable international competition.

Partnerships: Learning from Others -- Several of these companies engaged early in significant collaborations, which helped them develop their competencies. In some cases, this was with a Western joint venture partner hoping to penetrate their home market (e.g. Ranbaxy-Lapetit, Embraer-Piper Aircraft, MTS-T-Mobile, Birla-Kaiser Aluminum and Chemicals, TCL- Luk's Industrial and Thomson Electronics). In other cases, the competence was developed as a contract manufacturer for an established company (e.g. Wanxiang-Zeller, Haier-Liebherr and Welbilt). The Chinese companies, in particular, seem to have actively sought out competencies to help them grow.

Strategic Leadership: Long-term Vision -- Most of the Brazilian, Russian and Chinese companies started as state-owned enterprises (SOEs). The others were privately held companies of one form or another. The Indian companies were primarily family-owned with a dominant equity holder. As a result, all were free to take a longer-term view of strategy. In the Indian and Chinese cases, a key leader, who was often but not necessarily the founder, can be identified as the person behind the company's strategy and internationalization (e.g. Birla-Aditya Birla, Ranbaxy-Parvinder Singh, Haier-Zhang Ruimin, Wanxiang-Lu Guanqiu, TCL-Li Dongsheng).

Early International Experience: Methods and Motives Were Varied -- Most of these EMs studied gained international experience well before the respective economic breakouts in their countries. There is no single pattern to explain this early internationalization and their methods and motives appear to have been varied, including:

Exports to new markets (all companies)

International investment greenfield facilities, joint ventures or mergers and acquisitions to facilitate access to new markets (virtually all of the companies)

Upstream investment to secure raw materials (e.g. Petrobras, Vale and Aditya Birla)

Downstream investment to improve value capture and secure routes to market (e.g. Aditya Birla, Norilsk Nickel)

Escape from restrictive legislation in the home market (Aditya Birla)

Many of the companies made their early international investments in other developing markets often with cultural or political links to the home economy (e.g. Birla, Haier and TCL in Southeast Asia, Ranbaxy in sub-Saharan Africa, and MTS in the former Commonwealth Independent States). Those companies seeking raw materials had to invest where the resources were located (e.g. Vale in Canada and Birla's Hindalco in Australia). Wanxiang is an exception in that its first international investment was in the USA, but this is explained by its earlier position supplying this market as a subcontractor. Many of the companies have subsequently invested in North America and/or Western Europe as a means of penetrating these rich markets.

Growth Strategy and Tactics: Reliance on M&A Grows -- All of these companies benefit from a cost advantage over companies operating in the West. This has enabled them to be profitable in countries or market segments that were unattractive to Western companies. For example, the Indian and Chinese companies have sought to exploit their cost advantage by attacking low-margin segments from textiles (Birla) and generic pharmaceuticals (Ranbaxy) to cardan universal joints (Wanxiang) - sometimes with unbranded products, but often as subcontractors for Original Equipment Manufacturers (OEMs). The profits earned have been invested in product development to move up into higher profitability segments in developed economies. The cases demonstrate all the modes of international expansion (greenfield, joint ventures and M&A), with the companies selecting that which was expedient at the time. One clear trend, however, is the recent reliance on mergers and acquisitions; this fits with the companies' increasingly strong financial positions, their increasing access to capital and the global surge in M&A activity. Recent examples (in 2007) include Brazil's Vale purchase of Inco for US$17bn and India's Hindalco (Aditya Birla Group) purchase of Novelis for US$6.4bn.
CapGemini

In recent years, considerable publicity has been given to the acquisition of some well-known Western companies by companies from emerging nations. Examples include: from China, Lenovo's acquisition of IBM's Personal Computing Division and SAIC's takeover of Rover; and from India, Tata Steel's acquisition of Corus and Tata Motors' acquisition of Jaguar and Land Rover. However, the trend is much broader than these high-profile examples. It is clear that some of these acquiring companies are becoming global players and it is therefore noteworthy to look at the processes by which they have emerged onto the world stage and their impact on the manufacturing industry.

Predictions indicate that the BRIC economies (Brazil, Russia, India and China) will together be more than half the size of G6 economies (United States, Japan, Canada, the United Kingdom, Germany and France) by 2025 and will overtake them by 2040; so, in all probability, the new MNC (multinational corporation) giants of tomorrow will emerge from these economies. Currently, the outward investment from these countries is relatively small compared to that from developed countries such as the US and UK; but this investment is growing, fuelled largely by inward investment and by the strong growth in their economies. This paper examines the internationalization path of companies from each of these emerging economies with the aim of identifying common themes and significant differences among them, as well as the implications they pose for Western companies.

Emerging economies are playing a greater role in global trade aided by the process of "globalization." As they evolve, a new breed of companies with ambitious internationalization objectives is appearing. These "emerging multinationals" (EMs) are changing the configuration of global industries. This report examines the growth of some of these companies to understand their behavior and the implications for existing multinational corporations. The key findings are listed below.

Global Level: A Shift in the Global Economy -- The globalization of markets has resulted in dramatic changes in the patterns of supply and demand around the world. One indicator of these changes is the amount of foreign direct investment (FDI) i.e. the sums invested in one country from another. Global FDI has generally increased more rapidly than global GDP, but it is more variable. An apparently irresistible rise from the mid 1990s was reversed at the beginning of the new century, but growth picked-up again and by 2006 global FDI had reached levels comparable to the 2000 peak. The growth in FDI reflects many factors and a large part of this investment flows between developed countries as industries become more global, however the newly emerging economies such as Brazil, Russia, India and China, the BRICs, are attracting increasing levels of FDI as companies in developed nations attempt to access their rapidly growing domestic markets and/or to take advantage of the low local cost of production. A more recent, and less reported, trend is the growth of FDI from these emerging economies, which is examined in this report.

National Level: Overseas Investments from Emerging Economies are Increasing -- The "break-out" point at which outward FDI from the BRICs started to take off varies slightly from country to country. For Brazil, Russia and China, it seems to have been 2003-04, whilst for India growth was relatively modest from 2000, followed by dramatic acceleration in 2006. Outward investment from the BRICs now approaches the global GDP average, although China lags in this respect. As these are potentially major future markets for MNCs, inward investment has generally exceeded outward investment. The gap is closing, but China's outward investment remains significantly less than inward investment. A substantial part of this outward FDI is in the form of mergers and acquisitions (M&A). Over the period 2004-06 more than half of the FDI from Brazil, India and China was in the form of M&A, but so far Russia has used M&A less extensively.

Company Level: Early Growth in Protected Environments -- The majority of the companies studied experienced their earlier growth in market conditions that either encouraged local monopolies or sheltered them from intense competition from Western MNCs. Each was located in a large country with a huge domestic market. As a result, they gained scale and experience before facing formidable international competition.

Partnerships: Learning from Others -- Several of these companies engaged early in significant collaborations, which helped them develop their competencies. In some cases, this was with a Western joint venture partner hoping to penetrate their home market (e.g. Ranbaxy-Lapetit, Embraer-Piper Aircraft, MTS-T-Mobile, Birla-Kaiser Aluminum and Chemicals, TCL- Luk's Industrial and Thomson Electronics). In other cases, the competence was developed as a contract manufacturer for an established company (e.g. Wanxiang-Zeller, Haier-Liebherr and Welbilt). The Chinese companies, in particular, seem to have actively sought out competencies to help them grow.

Strategic Leadership: Long-term Vision -- Most of the Brazilian, Russian and Chinese companies started as state-owned enterprises (SOEs). The others were privately held companies of one form or another. The Indian companies were primarily family-owned with a dominant equity holder. As a result, all were free to take a longer-term view of strategy. In the Indian and Chinese cases, a key leader, who was often but not necessarily the founder, can be identified as the person behind the company's strategy and internationalization (e.g. Birla-Aditya Birla, Ranbaxy-Parvinder Singh, Haier-Zhang Ruimin, Wanxiang-Lu Guanqiu, TCL-Li Dongsheng).

Early International Experience: Methods and Motives Were Varied -- Most of these EMs studied gained international experience well before the respective economic breakouts in their countries. There is no single pattern to explain this early internationalization and their methods and motives appear to have been varied, including:

Exports to new markets (all companies)

International investment greenfield facilities, joint ventures or mergers and acquisitions to facilitate access to new markets (virtually all of the companies)

Upstream investment to secure raw materials (e.g. Petrobras, Vale and Aditya Birla)

Downstream investment to improve value capture and secure routes to market (e.g. Aditya Birla, Norilsk Nickel)

Escape from restrictive legislation in the home market (Aditya Birla)

Many of the companies made their early international investments in other developing markets often with cultural or political links to the home economy (e.g. Birla, Haier and TCL in Southeast Asia, Ranbaxy in sub-Saharan Africa, and MTS in the former Commonwealth Independent States). Those companies seeking raw materials had to invest where the resources were located (e.g. Vale in Canada and Birla's Hindalco in Australia). Wanxiang is an exception in that its first international investment was in the USA, but this is explained by its earlier position supplying this market as a subcontractor. Many of the companies have subsequently invested in North America and/or Western Europe as a means of penetrating these rich markets.

Growth Strategy and Tactics: Reliance on M&A Grows -- All of these companies benefit from a cost advantage over companies operating in the West. This has enabled them to be profitable in countries or market segments that were unattractive to Western companies. For example, the Indian and Chinese companies have sought to exploit their cost advantage by attacking low-margin segments from textiles (Birla) and generic pharmaceuticals (Ranbaxy) to cardan universal joints (Wanxiang) - sometimes with unbranded products, but often as subcontractors for Original Equipment Manufacturers (OEMs). The profits earned have been invested in product development to move up into higher profitability segments in developed economies. The cases demonstrate all the modes of international expansion (greenfield, joint ventures and M&A), with the companies selecting that which was expedient at the time. One clear trend, however, is the recent reliance on mergers and acquisitions; this fits with the companies' increasingly strong financial positions, their increasing access to capital and the global surge in M&A activity. Recent examples (in 2007) include Brazil's Vale purchase of Inco for US$17bn and India's Hindalco (Aditya Birla Group) purchase of Novelis for US$6.4bn.
CapGemini