Until the 19th century, traders from the European seafaring powers were the principal commercial force in globalisation. They searched for spices, silks, furs and other exotic products in distant lands, and often were involved with the building of large empires for their countries as they sought to secure their sources and their markets for whatever they sold in return. (The most famous example of that is, of course, the East India Company.) This was the "First Wave" of globalisation.
In the Second Wave, in the 20th century, corporations in these richer and more industrially advanced Western countries began to seek out markets in each other's countries, and thus emerged the multinational corporations. MNCs also looked for markets in less developed countries outside the triad of North America, Europe and Japan.
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The management styles and orientations of firms in the three waves were significantly different. |
Now, in the 21st century, companies from the countries that were the erstwhile sources of goods for the First Wave of global trading companies and markets for the Second Wave globalisers, have emerged to look out for markets for their own products and capabilities.
Analysis by the Boston Consulting Group shows that between 1995 and 2015, over 50 per cent of real industrial GDP growth globally will come from these emerging markets of China, India, Russia, the Asean and South America.
However, in this Third Wave of globalisation, the companies that will compete for these markets will not only be the MNCs from the triad. A new breed of "attacker firms" is also emerging from these countries, who are not only capturing growth in their own countries but are also moving into the home markets of the MNCs.
The Third Wave
That's not the only difference between the Third Wave globalisers and their Second Wave counterparts. Perhaps the biggest change lies in a recent economic phenomenon: in the coming decades, the richest countries by overall economic size will nevertheless by poor countries in terms of per capita incomes, especially in comparison to the triad.
Thus, while China and India will become the largest economies in the world in real terms, they will continue to have much lower per capita incomes (40 to 60 per cent lower even in 2050, according to BCG estimates).
Designing and selling products to low-income customers in these emerging markets have forced successful firms to not just take advantage of low-cost labour but make very different trade-offs between capital and labour to meet the price-performance needs of their customers.
Wave Three globalisers are seeking to create new segments in new markets with their home-grown, highly cost-competitive products. For instance, Indian motorcycle manufacturers have developed world-class capabilities in reducing fuel consumption since local customers demand this performance.
Their Japanese competitors, on the other hand, have been focusing on a combination of power and fuel consumption, which is what customers in mature markets demand.
Global value chains
Wave Three globalisers are converting their home country cost advantage to build a different model of globally cost-competitive value chains by keeping much of the value-added activities in their home countries.
A prime example of this trend is the so-called "global delivery" model of Indian IT firms, which decomposes the value chain so that most of the delivery is done out of the low-cost home markets. And it's not just Indian IT: Hong Kong/China-based manufacturing firm Johnson Electric is also leveraging the same global delivery model to become a leader in its product category of small horsepower electric motors.
A key factor that has helped this trend is the growth of the Internet and availability of broadband along with dramatic fall in telecom prices, all of which has driven the "de-construction" of the value chain. In stark contrast, when it comes to replicating similar "new age" value chains, Second Wave MNCs are hobbled by their huge legacy assets in their high-cost home markets.
Not surprisingly, the most common approach by attacker firms to expand beyond their home market has been through acquisitions. An ongoing BCG study shows that 40 per cent of the top 100 attacker firms from emerging markets (BCG has been building a database of such firms) have used acquisition as the principal means to enter new markets. Techtronic of China has bought a portfolio of brands to become the fastest growing and current No. 2 player in power tools in the US.
This in itself is not remarkable, since most MNCs have also used this approach to globalise. What is worth noting, however, is that nearly 65 per cent of the acquisitions of "attacker firms" are in rapidly developing economies, which suggests that these firms are creating regional power houses within emerging markets before attacking the mature markets of the triad.
Also, unlike the MNCs who move quickly to integrate new acquisitions to capture cost synergies, many Indian and Chinese firms move more slowly and are more sensitive to the local and cultural sensitivities of the acquired firms.
They appear to be more concerned about building comfort with the acquired company first, and understanding the nuances of the new markets and technologies they have access to before proceeding to the cost synergies.
Come together
Attacker firms are willing to leverage their privileged position in their home markets to partner with a large number of players to access and rapidly climb the technology curve.
Some examples are Tata Autocomp in India for automotive technologies, Huawei in China for telecom technologies, and Bajaj Auto of India, which has partnered with Kawasaki to develop some of its new motorcycle models and is now using Kawasaki's distribution channel to sell its own branded motorcycles in south east Asia and other markets.
The final element is more difficult to quantify or describe. It stems from the historical and cultural moorings of these attacker firms and the relatively poor physical and institutional infrastructure in the home markets.
Many emerging markets, especially the large ones such as China and India, are in themselves multiple markets with very different needs. Consequently, most home-grown firms have had to deal with more complexity and uncertainty, and must be more innovative and "non-standard" to meet local market needs.
For instance, Haier of China is willing to play the price game in the US market while in India it is aiming to build a premium position for itself. Another example of organisational innovation is India's Tata Group.
Unlike most MNCs, where the business units drive and control expansion in a new market, the Tata Group has built a highly successful, "local" Tata company in South Africa that operates more independently, while being a valuable partner to various business units in the group.
How do these differences show up in the Third Wave attackers' approach to globalisation? They're not the adventuring opportunists centred on relatively loose management networks; but nor are they as rigidly structured as the Second Wavers.
They have less rigid, structured (and globally standard processes) with more innovative approaches that seem to have elements of both the country- and BU-centric globalisation models.
They are systematically building leadership in their own and similar regional markets while opportunistically seeking acquisition targets in high cost countries.
Their competitive strategy is centred in the "low cost" mind-set of their home markets and leverages low-cost human capital in many ways as well as their home-grown "management know-how" to build delivery models for products and services.
Arun Maira is the chairman and Arindam Bhattacharya is vice-president and director, Boston Consulting Group.
