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03
July
2012

Timing is still everything: Emerging markets

There was an article and blog in the Wall Street Journal today about India’s energy crisis that underscores much of what we have been cautioning about emerging markets for the past two years.
For those midmarket companies that hope to capture emerging market consumer demand, it helps to look at some pictures of what those ‘consumers’ look like, and how primitive their living conditions are currently.

If 77% of the population is standing in line for water, and their main occupation is ‘garbage recycler’ — then it will be decades before there is a middle class of any sort in India able to buy the world’s products, in spite of rosy projections. It’s like the dot.com bubble. Yes, the Internet changed everything, and yes, 22 years later, we are looking at a new frontier of consumers of products no one knew existed. But tell that to pets.com and the other business failures that bet the store it would appear overnight in 1990.

While the huge manufacturing build out of both China and other countries in Asia has created a market for equipment and components to build products for developed markets, it has not created enough jobs to support a middle class, and was born from heavy FDI, not organic growth. That means that any sizable domestic market is probably 50 years away. End of story.

The data that strategic planners must consider are not growth projections from history, but common sense analyses of demographics and infrastructure build-out. Will the governments of India and China, and other emerging markets have the transparency, public service mentality and long-range focus — and the will to resist crony capitalism and corruption — to invest in sustainable energy, water and sanitation infrastructure to create the kind of consumer middle class base that will enable long-term, healthy domestic demand for global producers?

And will foreign companies be allowed to do business and make money in global markets that are increasingly protectionist, predatory as far as intellectual property protection, and unstable?

Those are the questions that should be asked by companies setting up shop in the global marketplace.

Does this mean that companies should pull their turtle heads back in their shells and not consider global markets? Of course not. But chasing low-cost labor and justifying it as a strategy to penetrate domestic demand should be a myth of global manufacturing that is dispelled forever.

Better to design a supply solution based on a strategy of regionalization, where companies have solid knowledge of real customers and create a supply network to service those actual customers from local manufacturing centers. And in projecting future growth, understand that many emerging markets will hit a wall at some point until basic infrastructure is built. Don’t just look at population numbers and assume the future will look like the past.
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