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New Twist In The Globalizing Economy’s Competitive Landscape: Emerging Global Companies Home-Grown In China, India And Other Rapidly Developing Economies (RDE’S): Boston Consulting Group (BCG) Research Identifies Hundreds of Companies Based in RDE’s With Clear Advantages not Only in their Fast-Expanding Home Markets, but also in Global Competition and Markets Around the World; Cutting Teeth in Tough Economies Breeds Smarts, Nimbleness and Extreme Cost and Labor Advantages, According to New BCG Report, Which Identifies and Tracks 100 RDE-Based “Global Challengers”.

Established multinational companies are, at various levels of effectiveness, sourcing, manufacturing and selling in rapidly developing economies (RDEs) like China and India in their fight to stay competitive in the globalizing economy. But are they coming to terms with an increasingly important, but less apparent, competitive threat: emerging global competitors based in RDEs? A new report from The Boston Consulting Group (BCG) delineates the new challenge for established companies and analyzes the advantages, strategies and impact of 100 of the many hundreds of RDE-based companies whose role in global competition is increasing quickly.

“Until recently, only a dozen or so companies based in rapidly developing countries could be described as emerging global challengers. Today there are hundreds, which is in line with the expectation that by 2050 China and India will be two of the world’s three largest superpowers,” said David Michael, BCG senior vice president and co-author of The New Global Challengers: How 100 Top Companies from Rapidly Developing Economies are Changing the World .

“Established companies must quickly become comfortable with, and envision their priorities in an environment inhabited by RDE-based challengers. The new competitors have low costs, ambitious leaders, appealing products and modern facilities. Incumbents will need to learn how to compete head on, partner and/or create their own ‘challenger’ via a subsidiary,” Michael said.

For the report, BCG used a screening process to select 100 companies –dubbed the RDE 100 – that exemplify the crop of global competitors now emerging from RDEs. The RDE 100 have $715 billion in combined revenue and are growing at rate of 24% a year. They currently derive 28% of revenue from international (non home-country) operations, and that portion will probably jump to 40% by 2010, according to the report.

Companies in the RDE 100 are in nearly all sectors: industrial goods (auto equipment, basic materials, engineered products); consumer durables (household appliances and consumer electronics); resource extraction; technology and business services. Seventy are from Asia (44 from China and 21 from India ), and 18 are from Latin America . The rest are from such countries as Russia and Turkey . Some examples are:

• BYD (China ), world’s largest manufacturer of nickel-cadmium batteries; has 23% share of mobile-handset battery market
• Bharat Forge (India ), the world’s second largest forging company
• Embraer (Brazil ), surpassed Bombardier as market leader in regional jets
• Chunlan Group Corp. (China ), has a 25% share of Italy ’s air-conditioner market
• Johnson Electric (China ), the world’s leading manufacturer of small electric motors
• Wipro (India ), the world’s largest third-party engineering services company
• Pearl River Piano Group (China ), the global volume leader in Piano manufacturing
• Ranbaxy Pharmaceuticals (India  ), among the world’s top-10 generic pharmaceutical players

The RDE 100 are growing 10 times faster than the U.S. ’s GDP, 24 times faster than Japan ’s and 34 times faster than Germany ’s. They earned $145 billion in operating profits, equivalent to a 20% margin over sales. That compares with 16% for U.S. S&P 500 companies, 10% for Japanese Nikkei companies and 9% for German DAX companies.

The RDE 100’s total shareholder return (TSR) from January 2000 to March 2006 increased more than 150%, while the TSR of S&P 500 companies declined. RDE 100 companies’ portfolios contain $520 billion in fixed assets, and, in 2004, they employed 4.6 million people and had a payroll of $20 billion. They purchase $200 billion a year in raw materials and energy, $50 billion in parts and components and $40 billion in services.

RDE 100: Why They’re Going Global and Why They’re Good at it
Emerging global companies from RDE’s are going global because they’re focused on organic growth but find that their home markets either don’t have the scale or the resources to allow them to deliver the levels of shareholder value and competitive advantage they want to achieve, according to the report.

They aim globally to tap into new profit pools or gain long-term access to raw materials. Eighty-eight of the RDE 100 are seeking the former, 12 the latter. For instance, Baosteel, China’s biggest steel maker ($19.5 billion), is focused solely on the China market and has operating margins well above the industry average; its international expansion is designed to secure stable iron-ore supplies. Hence its purchase of part of CVRD’s Auga Limpa complex in Brazil .

Emerging companies from RDEs are good at international expansion in part because of the discipline they attained succeeding in their difficult home markets, according to the report. They learned to sell profitably to low-income customers; deal with immature logistics and distribution environments; navigate ambiguous legal situations; handle rapid external change and manage despite shortages of management talent. They also learned from foreign-based multinationals operating in their markets. “A company that has addressed these challenges in their home market will have the advantage when seeking to grow in similar markets abroad,” said Hal Sirkin, BCG senior vice president and co-author of the report.

RDE-Based Companies’ Hidden Advantages

While established players may have competitive advantages in terms of traditions of innovation, brand, intellectual property and distribution channels, RDE-based global players have a leg up in other, sustainable ways. “The RDE challengers are cash rich, and they’re aware of their advantages and know how to use them,” said Sirkin.

RDE player advantages include:

Low-cost resources: RDE-based labor is 10 to 20 times less than in highly developed markets, translating to up to 40% savings in the cost of end products; setting up a manufacturing site costs 60% of the price of a comparable facility in a developed country; equipment costs are up to 60% less

• Making and selling products that appeal to price-conscious consumers: The market for low-cost products is the fastest-expanding one in the global marketplace
• Modern and efficient plants and equipment, i.e., strong operating platforms: The average age of assets for Chinese companies is 7.2 years, compared with 16.9 for U.S.   companies; production systems in RDEs are often more efficient and flexible because they often use labor instead of machinery
• Access to huge talent pools: By 2010, China   will graduate 800,000 engineers, mathematicians, technicians and scientists, and India  will graduate 600,000. Together, this is 12 times the output of the U.S. university system
• Home-market environment advantages: RDE companies’ home markets are huge and among the fastest-growing: In China, for instance, steel consumption is 2.3 times that of the U.S. RDE players have more know-how and connections in these environments, and thus greater potential to lead.
• Further, government incentives and other variables lower their cost of capital

How RDE Challengers Will Grow

The RDE 100 has achieved 80% of its total growth organically, through exporting products to new markets and/or setting up international operations. The rest of the growth has been through small acquisitions –many of them international– with narrowly focused objectives. “The organic emphasis will continue, but we will see more acquisitions, as these emerging challengers’ desire to grow will exceed their ability to develop the necessary capabilities in house,” said Arindam Bhattacharya, BCG vice president and co-author of the report.