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The New Global Challengers

H o w 1 0 0 To p C o m p a n i e s f r o m R a p i d l y D e v e l o p i n g E c o n o m i e s A r e C h a n g i n g t h e Wo r l d

BCG REPORT

Since its founding in 1963, The Boston Consulting Group has focused on helping clients achieve competitive advantage. Our firm believes that best practices or benchmarks are rarely enough to create lasting value and that positive change requires new insight into economics, markets, and organizational dynamics. We consider every assignment a unique set of opportunities and constraints for which no standard solution will be adequate. BCG has 61 offices in 36 countries and serves companies in all industries and markets. For further information, please visit our Web site at www.bcg.com.

The New Global Challengers

H o w 1 0 0 To p C o m p a n i e s f r o m R a p i d l y D e v e l o p i n g E c o n o m i e s A r e C h a n g i n g t h e Wo r l d

MARCOS AGUIAR

ARINDAM BHATTACHARYA

THOMAS BRADTKE

PASCAL COTTE

STEPHAN DERTNIG

MICHAEL MEYER

DAVID C. MICHAEL

HAROLD L. SIRKIN

M A Y 2 0 0 6

www.bcg.com

For information or permission to reprint, please contact BCG at: E-mail: [email protected] Fax: +1 617 973 1339, attention BCG/Permissions Mail: BCG/Permissions

The Boston Consulting Group, Inc. Exchange Place Boston, MA 02109 USA

2 BCG REPORT

Table of Contents

A Word from the Authors 4

The New Global Challenge 5

Many Companies on the Move 5

RDEs as Platforms for New Types of Global Competitors 6

The RDE 100 Emerging Global Challengers 7

Where They Come From 8

The Industries They Represent 9

Why They Are Going Global 9

Their Huge Economic Muscle 10

The Shareholder Value They Create 11

How Global They Are Today 11

How the RDE 100 Are Going Global 13

Their Six Strategic Models for Globalization 13

How They Are Growing: Buying and Building 16

Where They Are Growing: Next Door and Around the World 18

The Competitive Strengths and Weaknesses of Emerging Global Challengers 20

Low-Cost Resources 20

Home-Market Environments 21

Operations 21

Innovation 22

Supply Chain Management 22

Going to Market 22

Management Talent 23

Rigorous Strategy and Road Maps 23

Looking Ahead 24

Implications for Challengers 24

Implications for Incumbents 25

Closing Thoughts 26

The New Global Challengers

In our discussions with executives at the world’s largest companies, globalization and its challenges are often at the top of the agenda. Invariably, one key question comes up: Which are the new companies based in China, India, and other rapidly developing economies that I need to know about? Executives recognize that a new class of company is arising in the world today—a group of emerging challengers that are becoming important players in both developing and developed markets around the globe.

Indeed, many companies based in RDEs are going global fast. As this report highlights, a sample of 100 lead- ing RDE-based companies already have combined annual revenue of $715 billion—and are growing at an average rate of 24 percent per year. Companies in this sample are gaining global market share, making major acquisitions, and emerging as important customers, business partners, and competitors for the world’s largest companies.

The Boston Consulting Group recently assessed the activities and strategies of these newly globalizing com- panies. We identified and profiled 100 of them, focusing on those with large businesses, significant global activity, an evident commitment to further globalization, and solid prospects for continued success. A global team of senior BCG consultants, based principally in Beijing, Moscow, Mumbai, and São Paulo but also span- ning other RDEs, contributed to this effort. We would like to acknowledge particularly valuable contribu- tions to the research and analysis by our colleagues Evgeni Agronik, Jean Chen, Rahul Guha, Vladimir Kim, Xin Liu, and Fernando Machado. We would also like to acknowledge the editorial and production assistance of Barr y Adler, Gar y Callahan, Kim Friedman, Gina Goldstein, and Kathleen Lancaster.

Our analysis of this sample of 100 companies has yielded important insights into the broader trend of RDE- based companies that are expanding globally. This trend is only beginning. Ultimately, its implications will affect ever y industr y and market. We hope that you will find this report interesting and useful. As always, we would be pleased to talk with you about our obser vations and conclusions.

A Word from the Authors

4 BCG REPORT

Marcos Aguiar Vice President and Director São Paulo [email protected]

Arindam Bhattacharya Vice President and Director New Delhi bhattachar [email protected]

Thomas Bradtke Manager Boston [email protected]

Pascal Cotte Senior Vice President and Director Paris [email protected]

Stephan Dertnig Senior Vice President and Director Moscow [email protected]

Michael Meyer Consultant Beijing [email protected]

David C. Michael Senior Vice President and Director Beijing [email protected]

Harold L. Sirkin Senior Vice President and Director Chicago [email protected]

The New Global Challenge

A revolution in global business is under way. Companies based in rapidly developing economies (RDEs) such as Brazil, China, India, and Russia, armed with ambitious leaders, low costs, appealing products or ser vices, and modern facilities and sys- tems, are expanding overseas and will radically transform industries and markets around the world. As this movement unfolds, established incumbent companies will meet the new RDE- based challengers in many arenas: in the com- petition for supplies, in the search for talent, in the quest for innovation, on the acquisition front, and in markets at home and abroad. Each of these encounters will pose threats but will also offer opportunities for part- nering and cooperation. So it will be vital for all companies, regardless of their home location, to understand these developments and take action ahead of them, lest their competitive positions deteriorate.

Many Companies on the Move

The handful of RDE-based companies that have recently captured media attention—prominent examples include the Chinese manufacturers Haier Company and Lenovo Group and the Indian soft- ware houses Infosys Technologies and Wipro—rep- resent only a small fraction of a much larger phe- nomenon. The number of RDE-based companies that are actively expanding beyond their home mar- kets, or planning to, approaches several thousand.

Already, RDE-based companies have started assum- ing leadership positions in lucrative developed mar- kets and have established beachheads in other RDEs. Here are just 15 examples:

• Bharat Forge (India) is now the world’s second- largest forging company

• BYD Company (China) is the world’s largest man- ufacturer of nickel-cadmium batteries and has a 23 percent share of the market for mobile-hand- set batteries

• Cemex (Mexico) has developed into one of the world’s largest cement producers

• China International Marine Containers Group Company (China) has a 50 percent share of the marine container market, supplying the top ten shipping companies globally

• Chunlan Group Corporation (China) has a 25 percent share of the Italian air-conditioner market

• Embraco (Brazil) is the world leader in com- pressors, with a 25 per- cent share

• Embraer (Brazil) has surpassed Bombardier as the market leader in regional jets

• Galanz Group Company (China) commands a 45 percent share of the microwave market in Europe and a 25 percent share in the United States

• Hisense (China) is the number-one seller of flat- panel TVs in France

• Johnson Electric (China) is the world’s leading manufacturer of small electric motors

• Nemak (Mexico) is one of the world’s premier suppliers of cylinder head and block castings for the automotive industr y

• Pearl River Piano Group (China) is the global vol- ume leader in piano manufacturing

• Ranbaxy Pharmaceuticals (India) is among the top ten generic-pharmaceutical players in the world

• Techtronic Industries Company (China) is now the number-one supplier of power tools to Home Depot in the United States

• Wipro (India) has become the world’s largest third-party engineering-ser vices company

To be sure, not all challengers will be successful. Some may meet the same fate as D’Long Group, a Chinese investment company that acquired

The New Global Challengers

Established incumbent companies will meet the new

RDE-based challengers in many arenas.

Fairchild Dornier, a German aircraft manufacturer, with great fanfare in 2003, only to seek bankruptcy protection a year later. But many others will break through to become established global players. Just as many companies based in South Korea and Japan are now firmly global, so too will today’s RDEs pro- duce future global leaders. Indeed, the RDEs them- selves possess characteristics that constitute particu- larly powerful platforms for the creation and development of future global companies.

RDEs as Platforms for New Types of Global Competitors

Why are we now seeing the emergence of global challengers from RDEs? A variety of fast-moving globalization forces are spurring this trend. These include the Internet, the World Trade Organization, the dramatic surge in low-cost communications tech- nologies, and economic reforms in key RDEs. In addition, the development of RDE markets them- selves is a strong enabler for the creation and growth of globally ambitious companies. Once those mar- kets begin developing, many companies realize that they need to move beyond their home markets in order to grow further, create value, and sustain long- term competitiveness. We briefly explore the role of RDE countries as platforms for new global chal- lengers below; later in the report we address the companies’ own motives for globalization.

RDEs have rapidly growing markets, some of which are very large. Markets such as China, India, and Russia are sufficiently large and fast growing to sup- port large domestic companies. For example, China’s Huawei Technologies Company, a telecom equipment maker, has achieved domestic sales of more than $3 billion. The rapid growth of RDE markets in general over the past decade means that domestic companies have an opportunity to become quite large on their home turf.

RDEs have low-cost resources. All RDEs have an abundance of low-cost basic labor, and most offer other resources at low cost. Domestic companies in these markets are often better than foreign companies at exploiting these low-cost resources. We discuss this issue extensively later in the report.

Difficult operating environments in RDEs produce some highly capable companies. The challenges of operating in RDEs include selling profitably to low-income customers, dealing with immature logistics and distribution environments, navigat- ing ambiguous legal environments, handling rapid external change, and managing despite shortages of management talent. A company that has addressed these issues in its home market will have an advantage when seeking to grow in similar mar- kets abroad. Such companies may also have devel- oped the ability to innovate quickly and to make ver y rapid decisions—skills that are essential to capturing fast-moving opportunities.

RDEs are training grounds for competing with global incumbents. Increasingly, RDEs are key mar- kets for multinational companies (MNCs) that are the incumbent leaders in developed-countr y mar- kets. RDE-based companies have the opportunity to learn from these competitors in their midst. Consumer electronics companies such as Hisense and TCL Corporation in China, for example, com- pete aggressively in their home markets against global incumbents Matsushita, Philips, Samsung, and Sony.

Despite providing all these advantages, RDE mar- kets in themselves do not allow companies to attain global scale, no matter how big or fast growing they are. Ultimately, many RDE-based companies find that they must seek opportunities abroad. We will discuss this point further.

6 BCG REPORT

The RDE 100 Emerging Global Challengers

To better assess the globalization strategies of RDE- based companies, we have identified 100 large RDE- based companies that, in our opinion, are at the leading edge of globalizing their businesses. Having identified this group of companies, we then looked

at their similarities, differences, and globalization patterns and derived some interesting implications from this analysis. Our list of 100 emerging global challengers comprises a diverse group of companies based in ten RDE countries. (See Exhibit 1.) We

The New Global Challengers

Industry yrtnuoCynapmoC Nonferrous metals

Telecommunications services Automotive equipment Automotive equipment Computers and IT components Petrochemicals Consumer electronics Building materials Food and beverages Aerospace Automotive equipment Fossil fuels Shipping

Nonferrous metals Telecommunications services

Automotive equipment

Telecommunications services

Fossil fuels

Shipping Home appliances Pharmaceuticals Fossil fuels Mining Shipping Textiles Engineered products Automotive equipment Pharmaceuticals Engineered products Aerospace Textiles Food and beverages Computers and IT components Home appliances Fossil fuels Steel Home appliances Food and beverages Food and beverages Home appliances Nonferrous metals Consumer electronics Telecommunications equipment Food and beverages IT services/business process outsourcing Engineered products Home appliances Consumer electronics Engineering services Computers and IT components Textiles

Aluminum Corporation of China (Chalco)

América Móvil Bajaj Auto Bharat Forge BOE Technology Group Company Braskem BYD Company Cemex Charoen Pokphand Foods China Aviation Corporation China FAW Group Corporation China HuaNeng Group China International Marine

Containers Group Company (CIMC) China Minmetals Corporation China Mobile

Communications Corporation China National Heavy Duty Truck

Group Corporation (CNHTC) China Netcom Group

Corporation (CNC) China Petroleum & Chemical

Corporation (Sinopec) China Shipping Group Chunlan Group Corporation Cipla CNOOC Companhia Vale do Rio Doce (CVRD) COSCO Group Coteminas Crompton Greaves Dongfeng Motor Company Dr. Reddy’s Laboratories Embraco Embraer Erdos Group Femsa Founder Group Galanz Group Company Gazprom Gerdau Steel Gree Electric Appliances Gruma Grupo Modelo Haier Company Hindalco Industries Hisense Huawei Technologies Company Indofood Sukses Makmur Infosys Technologies

Johnson Electric Koç Holding Konka Group Company Larsen & Toubro Lenovo Group Li & Fung Group

China

Mexico India India China Brazil China Mexico Thailand China China China China

China China

China

China China India China Brazil China Brazil India China India Brazil Brazil China Mexico China China Russia Brazil China Mexico Mexico China India China China Indonesia India

China (Hong Kong) Turkey China India China China (Hong Kong)

Industry yrtnuoCynapmoC Fossil fuels Automotive equipment Shipping

Home appliances Nonferrous metals Telecommunications services Automotive equipment

Cosmetics Automotive equipment Fossil fuels

Telecommunications services Musical instruments Food and beverages Fossil fuels Fossil fuels Fossil fuels Pharmaceuticals Chemicals Nonferrous metals Chemicals Food and beverages IT services/business process outsourcing Steel Automotive equipment

Steel

Steel Chemicals Building materials Consumer electronics

Aerospace Consumer electronics IT services/business process outsourcing Automotive equipment Steel Food and beverages Consumer electronics Engineered products Food and beverages Food and beverages Automotive equipment Telecommunications equipment Consumer electronics Consumer electronics Telecommunications services Process industries Automotive equipment Engineered products IT services/business process outsourcing Telecommunications equipment

Lukoil Mahindra & Mahindra Malaysia International Shipping Company (MISC) Midea Holding Company MMC Norilsk Nickel Group Mobile TeleSystems (MTS) Nanjing Automobile Group Corporation (NAC) Natura Nemak Oil and Natural Gas Corporation (ONGC) Orascom Telecom Holding Pearl River Piano Group Perdigão PetroChina Company Petrobrás Petronas Ranbaxy Pharmaceuticals Reliance Group Rusal Sabanci Holding Sadia Satyam Computer Services

Severstal Shanghai Automotive Industry Corporation Group (SAIC) Shanghai Baosteel Group Corporation Shougang Group Sinochem Corporation Sisecam Skyworth Multimedia International Company Sukhoi Company SVA Group Company Tata Consultancy Services (TCS)

Tata Motors Tata Steel Tata Tea TCL Corporation Techtronic Industries Company Thai Union Frozen Products Tsingtao Brewery TVS Motor Company UTStarcom Vestel Group Videocon Industries Videsh Sanchar Nigam (VSNL) Votorantim Group Wanxiang Group Corporation WEG Wipro

ZTE Corporation

Russia India Malaysia

China Russia Russia China

Brazil Mexico India

Egypt China Brazil China Brazil Malaysia India India Russia Turkey Brazil India

Russia China

China

China China Turkey China

Russia China India

India India India China China (Hong Kong) Thailand China India China Turkey India India Brazil China Brazil India

China

E X H I B I T 1

T H E R D E 1 0 0 S P A N M U L T I P L E I N D U S T R I E S A N D C O U N T R I E S

SOURCES: BCG RDE Challengers Database; BCG analysis.

The RDE 100 list was generated through a detailed screening process. We began with more than 3,000 companies based in 12 major RDEs, which we had selected on the basis of the size of their economies (GDP), the value of their exports, and the amount of their foreign direct investments. Our list of RDEs com- prised Brazil, China, the Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, and Turkey. The initial master list of candi- date companies was compiled on the basis of rank- ings of the largest companies in each of the selected countries, such as the top 500 companies in India selected by Businessworld, the leading Indian busi- ness magazine, and the top 500 companies in Brazil selected by Exame, the leading Brazilian business magazine.

An international BCG research team consisting of business analysts and economists from Brazil, China, India, Mexico, and Russia, and a panel of senior BCG experts in Asia, Europe, and the United States then conducted a rigorous four-step triage. In step one, we ensured that only truly RDE-based companies were selected, omitting foreign joint ventures and RDE sub- sidiaries of multinational corporations. In step two, we homed in on those players with annual revenue of at least $1 billion (as of 2004), a threshold we believe is necessary to drive a serious globalization campaign. In step three, we eliminated players whose current international business presence amounted to less than 10 percent of revenue (we made an exception for

M E T H O D O L O G Y F O R S E L E C T I N G T H E R D E 1 0 0

companies that were close to 10 percent and whose international business activity had grown swiftly in the recent past).

In step four, we scored the major globalization cre- dentials of those companies that had passed all three previous thresholds. The scoring was based on five criteria: the international presence of the company as indicated by its owned and operated subsidiaries, sales networks, manufacturing facilities, and R&D centers; the major international investments it had pursued in the past five years, including mergers and acquisitions (M&A); its access to capital for financing international expansion, whether through free cash flows, stock markets, or other sources; the breadth and depth of its technologies and its intellectual-prop- erty portfolio; and the international appeal of its exist- ing offerings and value propositions.

This analytically rigorous approach generated a list of 80 companies that fully met our criteria. Twenty com- panies that did not pass the $1 billion minimum-rev- enue hurdle are nonetheless included among our RDE 100 because they have created unique globalization capabilities or business models. From the original list of 12 countries, no companies from the Czech Repub- lic, Hungary, or Poland made it through the screening, primarily because the larger globalizing companies in these countries are actually subsidiaries of foreign multinationals. We also included a company from Egypt in the final list, although Egypt was not among the markets in our initial screening.

8 BCG REPORT

identified these companies from a pool of more than 3,000 candidates by screening primarily for size, extent of overseas revenue, and prospects for further expansion. (For details, see the sidebar below.) Although these companies employ different strate- gies and are at different stages of globalization, they share a strong ambition to grow globally. They also share a set of compelling competitive advantages that they are leveraging in various ways to pursue global growth.

Where They Come From

Asia is home to the large majority—70—of our RDE 100 companies, followed by Latin America with 18. Another 12 are based in Egypt, Russia, and Turkey.

China is by far the dominant home-base countr y, with 44 of the RDE 100, followed by India with 21 and Brazil with 12. (See Exhibit 2.)

Relative to the current size of their national economies, China and India are disproportionately represented on the list. China’s share of the total GDP of the 100 RDE countries is 29 percent, but Chinese companies account for 44 percent of the companies on our list; for India, the numbers are 13 percent and 21 percent, respectively. At the other extreme, Russia and Indonesia are greatly underrepresented.

Among the RDEs studied, China and India in par- ticular have already produced an impressive set of

companies with strong global ambitions. Where the globalizing Chinese companies differ dramatically from the globalizing Indian companies is in their ownership structures. More than two-thirds of the Chinese companies among the RDE 100 are state owned or state controlled, often with publicly traded subsidiaries or with minority stakes in the hands of strategic investors (both domestic and for- eign). Of the remaining companies, some have a mixed-ownership structure but only four Chinese companies on the list are privately owned (and these include one company actually domiciled in Hong Kong).

The shares of Indian companies are usually divided among private owners, strategic investors, and the

9The New Global Challengers

general public, with no single investor possessing a majority stake. All the Indian companies on our list are publicly traded and all have foreign strategic investors as stockholders. Only one Indian com- pany on the list is state controlled. Companies from other countries display a wide range of ownership patterns. In some countries, such as Mexico, strate- gic investors play an important role while in others, such as Turkey, the families of the founders still exert control.

The Industries They Represent

The RDE 100 are active in a wide range of indus- tries. The largest is industrial goods, which includes 32 companies active in the automotive equipment sector, basic materials, and various engineered products. The second-largest group is consumer durables, comprising 18 companies involved mainly in household appliances and consumer electronics. Resource extraction is the third-largest cluster, with 15 players. Food-and-beverage and cosmetics com- panies come in fourth, with 11 players, and tech- nology equipment companies fall into fifth place, with 6. The remaining 18 companies represent a broad spectrum of industries ranging from phar- maceuticals and mobile-communications ser vices to shipping and infrastructure.

When we view the industr y distribution of the RDE 100 together with their geographic distribution, certain clusters of regional capabilities emerge. (See Exhibit 3, page 10.) China possesses the most diverse set of emerging global challengers. Chinese companies are well represented in consumer elec- tronics, household appliances, telecommunications and IT equipment, and automotive equipment manufacturing. India is well represented in auto- motive equipment manufacturing, IT ser vices, and pharmaceuticals, especially generic drugs. Most other countries have large domestic players in only one or two clusters, as well as perhaps a few indi- vidual challengers in other sectors. Examples include raw-material extraction in Russia, house- hold appliances in Turkey, and food processing in Thailand.

Why They Are Going Global

For RDE-based companies, the decision to globalize is ultimately driven by the need to create sustain-

RDE 100 by industryRDE 100 by geography

India (21)

China (44)

Other (10)1

Mexico (6)

Russia (7)

Brazil (12)

Consumer durables (18)

Industrial goods (32)

Other (18)

Technology equipment (6)

Food and cosmetics (11)

Resource extraction (15)

Including • Telecommunications services (6) • IT services/business process outsourcing (4)

Including • Fossil fuels (9) • Nonferrous metals (5)

Including • Home appliances (6) • Consumer electronics (8)

Including • Automotive equipment (12) • Steel (5) • Engineered products (5)

E X H I B I T 2

T H E R D E 1 0 0 R E P R E S E N T A V A R I E T Y O F C O U N T R I E S A N D I N D U S T R I E S

SOURCES: BCG RDE Challengers Database; BCG analysis.

1These companies are located in Egypt, Indonesia, Malaysia, Thailand, and

Turkey.

able advantage and shareholder value. Inter- national opportunities can provide a strong plat- form for shareholder value creation. Our research indicates that for 88 of the RDE 100 companies, the key motive for globalization is gaining access to new profit pools. Overseas markets may bring RDE- based companies higher margins and revenue, as well as higher volumes (which contribute to scale economies) and opportunities for growth-enhanc- ing acquisitions.

For the remaining 12 of our RDE 100 companies, such as China’s CNOOC (fossil fuels), globalization is driven by the need to secure long-term access to raw materials. The underlying motives may be both nationalistic and related to shareholder value. These companies are less likely to compete for overseas customers and instead will challenge developed-market companies for access to supply and for M&A opportunities.

Their Huge Economic Muscle

In aggregate, the RDE 100 accounted for $715 bil- lion in revenue in 2004—similar to the 2004 GDP of the entire national economies of Mexico and Russia. Already, 28 percent of the group’s collective rev- enue, or $200 billion, comes from international sales. Among other impressive statistics:

• The RDE 100 grew at a rate of 24 percent per year from 2000 through 2004, ten times as fast as the GDP of the United States, 24 times that of Japan, and 34 times that of Germany. They earned $145 billion in operating profits, equivalent to a margin of 20 percent over sales, compared with 16 percent for the United States’ S&P 500 compa- nies, 10 percent for Japan’s Nikkei companies, and 9 percent for Germany’s DAX companies.

• In 2004 their collective portfolio contained $520 billion in net fixed assets, which is more than those of the world’s top 20 automobile man- ufacturers combined. That year the RDE 100 invested around $110 billion. They employed 4.6 million people and had a collective payroll of approximately $20 billion. And they purchased an estimated $190 billion to $200 billion in raw materials and energy, $50 billion to $60 billion in parts and components, and $40 billion to $50 bil- lion in ser vices such as third-party IT and engi- neering, shipping, and logistics.

• The RDE 100 spent $9 billion on R&D in 2004, equivalent to 1.3 percent of sales, to support the work of their 250,000 to 300,000 engineers and scientists.

• On the acquisition front, the RDE 100 completed 200 publicly announced international transac-

10 BCG REPORT

Russia • Fossil fuels (2) • Steel and nonferrous metals (3)

Mexico • Food and beverages (3)

Brazil • Food and beverages (2) • Engineered products (2)

Turkey • Home appliances (2)

Southeast Asia • Food and beverages (3)

India • Automotive equipment (5) • IT services /business process outsourcing (4) • Pharmaceuticals (3)

China • Consumer electronics (6) • Home appliances (5) • Automotive equipment (6) • Telecommunications equipment (3) • Computers and IT components (3)

E X H I B I T 3

M A N Y O F T H E R D E 1 0 0 F A L L I N T O R E G I O N A L C O M P E T E N C E C L U S T E R S

SOURCES: BCG RDE Challengers Database; BCG analysis.

tions between 2001 and 2005. That number does not take into consideration the sizable number of acquisitions in individual companies’ domestic markets, which further strengthened these com- panies’ platforms for launching global growth.

The Shareholder Value They Create

Sixty of BCG’s RDE 100 are public companies or have subsidiaries that are publicly traded in major international capital markets. The total market cap- italization of these entities is $680 billion (as of March 2006). These companies’ collective stock performance has been impressive. From Januar y 2000 to March 2006, their total shareholder return (TSR) increased by more than 150 percent, while the TSR of companies listed in Morgan Stanley’s Emerging Market Index rose by 100 percent and that of the S&P 500 companies declined slightly. (See Exhibit 4.)

How Global They Are Today

As a group, the companies in the RDE 100 already represent a formidable force in the global econ-

omy. Given their growth rates, most will continue to gain strength in the coming years. The picture becomes more complicated, however, when we look at individual companies. Whereas some of the RDE 100 players have established themselves firmly in the global marketplace, others are rapidly doing so now, and others are still in the early experimenta- tion phase.

In terms of the maturity of their globalization drive, our RDE 100 can be divided into three groups: the early movers, the fast followers, and the up-and-comers.

The Early Movers. At the top is a relatively small group of ten players that started to globalize early and have gained global leadership positions in their industries. Mexico’s Cemex, for example, has grown through a series of international acquisitions to become one of the largest cement producers in the world. The company has consistently generated superior returns compared with its international competitors and has developed unique capabilities in the form of a highly scalable operating model, a serial acquisitions approach, and a global logistics

11The New Global Challengers

TSR index (December 31, 1999=100)

December 31, 1999 March 8, 2006

100

150

200

250

300

RDE challengers 252.5 152.5

Emerging markets 200.1 100.1

S&P 500 93.0 (7.0)(7.0)

TSR index as of

March 8, 2006

Change since December 31,1999

(%)

E X H I B I T 4

T H E R D E 1 0 0 C R E A T E S H A R E H O L D E R V A L U E Total shareholder return index, December 31, 1999, to March 8, 2006

SOURCES: Datastream; BCG analysis.

NOTE: The TSR index of RDE challengers is based on the TSR of 60 RDE companies or their subsidiaries listed in Hong Kong, London, Mumbai, New Delhi, and New York; the TSR of emerging markets is based on Morgan Stanley’s Emerging Market Index.

system. Other companies in this categor y include $1.1 billion Johnson Electric, the world leader in small electric motors, with more than 40 percent market share. Headquartered in Hong Kong, this company is building its advantage with a strong Chinese operating base. Also well established glob- ally is Brazil’s Embraco, the $800 million world leader in compressors, with a 25 percent global market share.

The Fast Followers. The next group of companies, 46 of the 100, are currently making rapid progress in their globalization, building on significant ini- tial experiences. Companies in this group include China’s Haier Company (household appliances); India’s Infosys Technologies (IT ser vices and busi- ness process outsourcing); India’s Bharat Forge (automotive equipment); and Turkey’s Koç Holding (household appliances). These compa- nies have ambitious globalization plans and a crit- ical mass of international business in their portfo- lios. They have already signaled their global ambitions to the investment community. Other players in this group include the large RDE resource conglomerates seeking either access to new raw-material sources, such as China’s CNOOC, or access to downstream markets, such as Russia’s Lukoil, which demonstrated its intentions

by acquiring parts of the Getty gas-station network in the United States.

While these companies have already received sig- nificant public attention, others have so far kept a relatively low international profile. These less well- known players include, for example, China’s Pearl River (pianos), China’s Hisense (consumer elec- tronics), Mexico’s Nemak (automotive equipment), and Turkey’s Vestel Group (consumer electronics).

The Up-and-Comers. The last group consists of 44 companies. These are players that are at an early stage of globalization or whose ambitions have, until recently, been more regional than global. Companies in this categor y include India’s Tata Motors (automobiles), Egypt’s Orascom Telecom Holding (telecommunications ser vices), Turkey’s Şişecam (glass), and Brazil’s Braskem (petrochem- icals). Spanning a wide range of industries and home countries, this group includes many compa- nies that merit careful watching in the future.

Regardless of where in the globalization process each of our 100 companies stands, all of them share the ambition to become truly global players. In pur- suit of this goal, they are devising and deploying a variety of strategic models.

12 BCG REPORT

How the RDE 100 Are Going Global

13The New Global Challengers

The companies on our RDE 100 list are pursuing globalization in their own unique ways. They are also truly operating all over the map. But certain patterns are discernible in their actions to date.

Their Six Strategic Models for Globalization

Each company’s overall approach tends to follow one of six primar y globalization strategies:

• Model 1: Taking RDE brands global

• Model 2: Turning RDE engineering into global innovation

• Model 3: Assuming global categor y leadership

• Model 4: Monetizing RDE natural resources

• Model 5: Rolling out new business models to mul- tiple markets

• Model 6: Acquiring natural resources

We should note that these six strategies, while dis- tinct, often overlap in practice. Moreover, they have certain aspects in common. All of them build on low cost positions—a key competitive advantage of RDEs. And virtually all the companies are voracious when it comes to learning and adapting. This skill gives them the advantage of being able to learn from other, more established companies, as well as from their own bold, entrepreneurial experience and will- ingness to adapt to changing market conditions. We discuss the six globalization models below.

Model 1: Taking RDE Brands Global. Twenty-eight of our RDE 100 are growing internationally by taking their established home-market product lines and brands to global markets. A representative company employing this strategy is China’s Hisense, a $3.3 bil- lion consumer-electronics group. The company is one of China’s premier manufacturers of TV sets (it has an 11 percent share of the domestic market), air conditioners, PCs, and telecom equipment. In addi- tion to manufacturing in China, Hisense has pro- duction sites in Algeria, Hungar y, Iran, Pakistan, and South Africa. The company has expanded mainly through organic growth and is now selling 10 million

TV sets and 3 million air conditioners each year in more than 40 countries. International sales account for $490 million, or 15 percent, of total revenue. Hisense has the best-selling brand of flat-panel TV sets in France, where its products are being distrib- uted through major retail chains such as Carrefour.

Hisense’s success to date is based on its stylish con- sumer products, which provide ver y good value for an affordable price. The company brings to the international marketplace a continuous stream of new products developed by its world-class R&D cen- ter, which is located in one of the world’s fastest-mov- ing and most demanding consumer-electronics mar- kets—China itself. The domestic market also gives Hisense a superscale, low-cost manufacturing base, allowing it to leverage a network of low-cost compo- nent suppliers and specialized assembly crews. In addition, Hisense is getting a jump-start by building on experience gained through joint ventures and alliances with global players such as Hewlett- Packard, IBM, and Panasonic.

Companies in this categor y build international momentum on the basis of home-market products that have broad global appeal or are easy to cus- tomize for new markets. In developed-countr y target markets, these companies often position their prod- ucts as good-value-for-the-money alternatives to established brands. That positioning now encom- passes a sizable and rapidly growing segment, pro- pelled by large discount retailers such as Wal-Mart.

The 28 RDE 100 companies pursuing this strategy deal primarily in consumer electronics and house- hold appliances, as well as automotive equipment, specialty foods, and beverages. These companies had $138 billion in combined 2004 revenue, of which 19 percent, or $26 billion, came from abroad. Their average annual growth rate from 2000 through 2004 was 24 percent. A particularly large number of play- ers in this categor y (18) are in China.

Model 2: Turning RDE Engineering into Global Innovation. Twenty-two of the RDE 100 companies are growing internationally by marketing innovative technology-based solutions that leverage their strengths in engineering and research. A representa-

tive example is Wipro, the Indian IT-ser vices group. Wipro has expanded rapidly by providing software- coding support. As offshored IT ser vices and busi- ness process outsourcing have flourished, the company has grown quickly, from $545 million in revenue in 2000 to $1.8 billion in 2004. Whereas Wipro’s value proposition at first focused mainly on cost, the company now creates much of its value by completely redesigning its clients’ business processes, a task requiring comprehensive process- innovation capabilities.

Furthermore, Wipro is tak- ing innovation to the next level by building extensive engineering capabilities, thus making R&D ser vices the next battleground. The company already claims to be the world’s largest third-party provider of R&D ser vices. Its 12,000-strong Product Engineering Ser vices (PES) group offers a complete range of R&D ser vices—from product strategy to hardware design to quality consulting—to clients that sell electronics-based products. With more than 120 active clients in industries such as semiconduc- tors, automotive products, platforms and peripher- als, consumer electronics, and medical devices, PES has seen its revenue grow at a rate of 36 percent per year from 2003 through 2005. The group already accounts for 36 percent of Wipro’s total revenue.

Innovation-based globalization will require RDE- based players to mobilize engineering and science talent in areas in which they can create sizable and sustainable advantage over their counterparts in developed markets. In many domains, the RDE tal- ent pool is deep and growing quickly, and RDE play- ers are at an advantage when it comes to monetizing that pool relative to MNCs that are setting up RDE- based R&D centers. In a ranking by university stu- dents in China, for example, China’s Huawei Technologies Company was rated as a more attrac- tive employer than any of its MNC competitors.

The 22 RDE 100 companies that are pursuing inno- vation-based globalization strategies are active in telecommunications equipment, aerospace, automo- tive equipment, pharmaceuticals, and technology ser vices. They had $56 billion in combined 2004 rev- enue, of which they earned 39 percent, or $22 bil- lion, abroad. Average annual growth from 2000

through 2004 was 33 percent. A large number of players in this categor y—11—are based in India.

Model 3: Assuming Global Category Leadership. Twelve of the RDE 100 are growing internationally by establishing themselves as specialists and global leaders in one specific, relatively narrow product cat- egor y. For example, Hong Kong’s Johnson Electric had $1.1 billion in revenue in 2004 (67 percent from outside Asia) and is the global market leader in small electric motors for automotive, consumer, and vari- ous commercial applications. The company can pro-

duce 3 million motors daily in its superscale operations in China alone. These operations are complemented by sev- eral other manufacturing sites in Latin America, the

United States, and Western Europe, and by R&D centers in Israel, Italy, Japan, and the United States.

While Johnson Electric puts a strong emphasis on aggressive organic growth, it has also pursued multi- ple acquisitions in the United States to absorb the in- house production of tier one suppliers that it can handle more efficiently. Such acquisitions have included some of the electric-motor assets of Ar vinMeritor, Kautex Textron, and Lear. In parallel, the company is using acquisitions to broaden its capability base and move into more specialized prod- uct lines, such as precision piezoceramic motors (through the purchase of Israel’s Nanomotion) and digital-camera motors (through the purchase of Japan’s Nihon Mini Motor).

Johnson Electric makes broad use of China’s advan- tages, leveraging superscale manufacturing and material sourcing to achieve an extremely high degree of specialization, ver y high volumes, and ver y low global unit costs. The company also employs sophisticated global supply-chain management to meet the standards of automotive OEMs and leading commercial brands worldwide. The company’s quest for scale is helped by global OEMs’ trend toward out- sourced motor production—and by global compa- nies’ enthusiasm for China as a preferred source of manufactured products. Johnson Electric also lever- ages highly specialized and customercentric R&D in China and throughout the world, allowing it to become a motion subsystems innovator as well as a leading motor supplier.

14 BCG REPORT

In many domains, the RDE talent pool

is deep and growing quickly.

Companies in this categor y have in common a rela- tively well-defined target market for their products; considerable depth in their chosen niches (which in some instances amounts to global categor y leader- ship); superscale manufacturing; highly focused R&D; and global logistics, which they have down to a science. Their specialization allows them to be best in class, ahead of the competition on cost, innova- tion, and the understanding of next-generation cus- tomer needs. It also provides them with a scalable platform from which to drive global industr y consol- idation—and also to add on new, related niches.

The 12 of our RDE 100 companies pursuing cate- gor y leadership are involved mainly in discretely manufactured industrial products: motors (such as Johnson Electric), compressors (such as Brazil’s Embraco), power tools (such as China’s Techtronic), and shipping containers (such as China International Marine Containers Group Company). These companies had $36 billion in combined 2004 revenue, of which they earned 61 percent, or $22 bil- lion, abroad. Their average annual growth from 2000 through 2004 was 23 percent. A particularly large number of RDE players in this categor y are based in Brazil and China.

Model 4: Monetizing RDE Natural Resources. Thirteen of the RDE 100 are growing internation- ally by marketing products that leverage their home countries’ natural-resource advantages. Prime examples are the Brazilian food processors Sadia and Perdigão, with annual revenue of $2.2 billion and $1.8 billion, respectively, of which nearly half comes from exports to more than 100 countries. Both companies hold 30 to 50 percent shares of the Brazilian market in their main product lines. Both operate along the entire value chain, from farming to marketing chilled and frozen foods and high- value-added products such as ready-to-eat meals. Sadia does business with 12,500 soy and corn pro- ducers and 10,200 integrated farmers. The com- pany has 9 industrial units and 8 distribution cen- ters in Brazil, and 11 sales offices around the world. Perdigão has 16 industrial units and 16 distribution centers in Brazil, as well as 7 sales offices in Europe, the Middle East, and the Far East.

Both companies’ expansion models focus on growing their domestic production capacity while investing in overseas supply-chain-management capabilities. Perdigão’s Rio Verde Agro industrial complex is now

Latin America’s largest slaughterhouse, and the com- pany’s total exports average 60,000 tons per month. Sadia’s total exports reached 1 million tons in 2005, an increase of more than 16 percent over 2004. In 2005 both companies expanded their export-focused facilities: Perdigão opened a 400-ton-per-month proc- essing facility in Brasilia, while Sadia opened a large distribution center in Ponta Grossa and bought Sofrango, a major poultry producer in Brasilia.

The two companies’ key competitive advantage lies in abundant production resources for pork, poul- tr y, and grain, which are complemented by ideal growing conditions for animal feed and by low labor costs. Both have hatcheries that are among the most productive in the world, achieving low production costs and high yields with the highest quality standards. And both pride themselves on their state-of-the-art global distribution and supply- chain-management systems.

Companies in this categor y build their global expan- sion on natural resources that are low cost by inter- national standards, with no compromise in quality. This advantage stems from an abundance of energy, minerals, agricultural feedstock, or a combination of those resources. The companies in our selection that take this approach are active in fossil fuels, mining and metals, and agricultural products. Brazil’s Companhia Vale do Rio Doce (CVRD), for example, builds its global advantage and growth on rich, low- cost iron-ore reser ves. In addition to leveraging abundant natural resources, players in this group have generally developed superior operating models for their industries.

The 13 companies pursuing this model had $110 bil- lion in combined 2004 revenue, of which they earned 66 percent, or $73 billion, abroad. Their average annual growth from 2000 through 2004 was 26 percent. Almost all the companies in this categor y are based in Brazil or Russia.

Model 5: Rolling Out New Business Models to Multiple Markets. Thirteen of our RDE 100 are building regional or global portfolios in their respec- tive industries by rolling out business models that they have generally pioneered in their home mar- kets. These companies had $93 billion in combined 2004 revenue, including 29 percent, or $27 billion, earned abroad. Their average annual growth from 2000 through 2004 was 28 percent.

15The New Global Challengers

Representative of this strategy is Cemex, the $15.3 bil- lion Mexican cement conglomerate. One of the largest ready-mix-concrete companies in the world, Cemex is vertically integrated, with more than 50,000 employees in more than 50 countries. Cemex generates $12.1 billion, or 79 percent, of its revenue abroad. It has built a truly global presence through acquisitions in the Americas (Colombia, Dominica, Panama, Puerto Rico and other parts of the United States, and Venezuela), Asia-Pacific (Bangladesh, Indonesia, the Philippines, and Thailand), the Mid- dle East (Egypt), and Europe, topped off by the 2005 purchase of the U.K.-based cement giant RMC Group.

The key to Cemex’s suc- cess lies in its rigorous approach to integrating and running acquisitions, part of the “Cemex way.” This formula is based on a global capability platform that covers ever y aspect of the business, including plant management, sup- ply chain management, distributor management, and end-customer ser vice. Integral to the approach is a seasoned M&A and postmerger-integration team that can execute serial acquisitions.

A number of companies in this categor y are still in the early stages of globalization. Contenders repre- sent a variety of industries besides cement, including chemicals, food products, and telecommunications ser vices. These companies tend to expand in one of three ways. Like Cemex, they may have a compre- hensive formula for acquisitions, markets, and oper- ational excellence. Or they may operate in a manner that creates superiority along a critical dimension, such as the way that Thailand’s Charoen Pokphand Foods approaches operational efficiency in agricul- tural production through technology and scale. Finally, they may exploit advantages such as cultural similarities, shared language, or political ties that provide privileged access to a market—as, for exam- ple, Orascom Telecom does, using its Egyptian home base to expand into the neighboring region.

Model 6: Acquiring Natural Resources. In contrast to most emerging challengers, 12 of our RDE 100 com- panies are expanding overseas not to tap new profit pools but to acquire vital raw materials for their home markets. A good example is Shanghai Baosteel Group Corporation, China’s biggest steel maker, which had revenue of $19.5 billion in 2004. Founded

in 1978 and still state owned, Baosteel has a produc- tion capacity of approximately 20 million tons of crude steel a year, half as much as Luxembourg’s Arcelor and about 20 percent more than Germany’s ThyssenKrupp.

Baosteel’s combination of state-of-the-art technol- ogy, the lowest cost base in Asia, and strong opera- tional capabilities has translated into operating profit margins well above the industr y average. More than 98 percent of its revenue comes from China, the world’s fastest-growing steel market. Baosteel is

well positioned to capital- ize on this growth, given its domestic market share of about 50 percent in the automotive and house- hold appliances segments. To date, Baosteel’s inter-

national expansion has aimed at securing stable iron-ore supplies. To that end, it acquired a 50 per- cent interest in CVRD’s Água Limpa iron-mining complex in Brazil in 2001 and one year later invested in a joint venture with Hamersley Iron, an Australian subsidiar y of Rio Tinto Group. The joint venture will supply Baosteel with more than 20 million tons of iron ore annually.

The companies in this categor y are active in either fossil fuels or metal and mining products. Nine of the 12 are based in China, which consumes far more oil, gas, and iron ore than it produces. Irrespective of their countries of origin, these companies typi- cally enjoy solid government backing for their attempts to acquire assets abroad. Following the buildup of overcapacity in some sectors (steel in China, for one) and a further upgrade in their oper- ational capabilities, some of these companies will likely compete in global product markets. The com- panies pursuing this model had $282 billion in com- bined 2004 revenue, including only $30 billion, or a little more than 10 percent, earned abroad. Their average annual growth from 2000 through 2004 was 25 percent.

How They Are Growing: Buying and Building

Although much public attention focuses on the multibillion-dollar acquisitions of a handful of RDE-based companies, these transactions account for less than 20 percent of the international

16 BCG REPORT

The key to Cemex’s success lies in its rigorous

approach to integrating and running acquisitions.

growth of the RDE 100. These companies have achieved more than 80 percent of their growth organically, either by exporting from their home- countr y bases or by establishing international operations, in some cases through joint ventures. Only 24 of the companies on our list conducted more than three M&A deals between 1988 and 2005, while 27 companies conducted no deals at all. That being said, we need to make two impor- tant qualifications.

First, acquisitions form an integral part of inter- national expansion in some globalization models. For instance, they are ver y important for compa- nies rolling out their business models to other regions. América Móvil, a Mexican provider of telecommunications ser vices, spent more than $5 billion to conduct 15 acquisitions, from 2001 through 2005, intended to build up its presence across Latin America. Raw-material companies have employed similar strategies, particularly to secure access to vital supplies. At the other

extreme, companies taking their home-market brands global have seldom pursued M&A. (See Exhibit 5.)

Second, the M&A activities of the RDE 100 are on the rise. Whereas in 2000 they recorded only 15 acquisitions, in 2004 the number rose to 40, and in 2005 to 59. (See Exhibit 6, page 18.)

Most of these deals are small, with specific objec- tives. They usually help an RDE-based company establish a commercial beachhead through exist- ing brands, distribution channels, and local man- agement. In addition, many RDE-based compa- nies, such as India’s Bharat Forge (automotive equipment), have used M&A activities to obtain immediate access to vital technologies. Some RDE players have bought underperforming incumbents or dormant brands with the aim of turning them around. An example is Techtronic’s formation of a strong power-tool portfolio combining brands such as AEG, Atlas Copco, Dirt Devil, and Ryobi

17The New Global Challengers

Percentage of companies pursuing each approach to growth, by globalization model

M&A

Primary approach to global expansion

Partnerships Organic growth

75 64

23 25

69 75

100

Taking brands global

Turning engineering into innovation

Assuming category leadership

Monetizing natural resources

Rolling out new business models

Acquiring natural resources

Globalization models

E X H I B I T 5

R D E C O M P A N I E S ’ A P P R O A C H T O E X P A N S I O N I S R E L A T E D T O T H E G L O B A L I Z A T I O N M O D E L U S E D

SOURCES: BCG RDE Challengers Database; BCG analysis.

with superscale, low-cost Chinese manufacturing and leading-edge R&D capabilities. The company is now the categor y leader at Home Depot, the world’s largest do-it-yourself chain, and it has won several awards for product quality and innovation.

Looking ahead, we expect acquisitions to play a more important role. The desire of RDE players to grow will likely exceed their ability to develop the necessar y capabilities in-house, spurring them to acquire other companies. They will get better at identifying and integrating targets. Meanwhile, incumbent companies in mature markets may become increasingly open to M&A transactions with RDE peers. Banks and private equity firms will increasingly act as matchmakers.1

Where They Are Growing: Next Door and Around the World

Looking at the markets that our RDE 100 are tar- geting for expansion, we found that the decision whether to test the waters in other emerging mar- kets first or to go directly for the large developed markets is closely related to industr y and business model. (See Exhibit 7.)

18 BCG REPORT

2 1 0 1 2

6 4 4

5 5

13 15

40 40

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Number of deals

E X H I B I T 6

O U T B O U N D M & A A C T I V I T I E S O F T H E R D E 1 0 0 A R E G R O W I N G

SOURCE: BCG RDE Challengers Database.

Mass markets in developed countries

Niche markets in developed countries

Telecom- munications

services

Consumer electronics

Food and beverages

Home appliances

Engineered products

Other emerging markets

100

Percentage of industry expansion into each type of market

Initial target for expansion

Selected examples

E X H I B I T 7

T A R G E T R E G I O N S F O R E X P A N S I O N A R E R E L A T E D T O I N D U S T R Y

SOURCES: BCG RDE Challengers Database; BCG analysis.1. See China’s Global Challengers: The Strategic Implications of Chinese Outbound M&A, BCG report, May 2006.

As mentioned above, providers of telecommunica- tions ser vices, such as Egypt’s Orascom Telecom and Russia’s Mobile TeleSystems (MTS), tend to expand into neighboring regions with close ties to their home markets. This strategy is also typical of branded Chinese consumer-electronics manufac- turers such as Skyworth Multimedia International Company, which penetrated smaller RDEs in Asia and the Middle East before launching a broader rollout.

Companies in the food and beverage industr y and in household appliances take two basic approaches. Companies pushing their own brands, such as Mexico’s Grupo Modelo (beer) and China’s Haier (household appliances), start with other RDEs or niche markets, whereas OEM suppliers such as Turkey’s Koç (household appliances) go directly to

mature mass markets (in this case, Western Europe). In contrast, RDE-based players specializing in engi- neered products, such as Johnson Electric, are pur- suing global scale and therefore target large indus- trial customers in multiple countries.

The RDE 100 aim their M&A activity both at com- panies based in mature markets (57 percent of transactions) and at companies based in other developing countries (43 percent of transactions). The Chinese and Indian companies on our list have been directing their efforts at competitors in the developed world, whereas challengers based in other RDEs have been focusing on assets in emerg- ing markets. (See Exhibit 8.) Among the latter com- panies, most have targeted regions immediately adjacent to their home countries rather than more distant locations.

19The New Global Challengers

Acquisitions in mature markets 57

Share of total (%)

Acquisitions in other RDEs 43

Share of total acquisitions made by RDE 100 companies based in each country (%)

Share of acquisitions in mature versus emerging markets (%)

100

China (32)

India (18)

Mexico (14)

Russia (14)

Brazil (11)

Others (8)

Turkey (3)

Target regions for 258 acquisitions by the RDE 100, 1985 to 2005

E X H I B I T 8

T H E R D E 1 0 0 T A R G E T D I F F E R E N T R E G I O N S F O R M & A A C T I V I T Y

SOURCES: Thomson Financial Securities Global Mergers and Acquisitions Database; BCG RDE Challengers Database.

might, in principle, have access to similarly low-cost resources, our experience indicates that RDE-based players typically retain an overall cost advantage. In addition, for many MNCs, RDE-based operations represent a relatively small part of their global activ- ities, whereas it is the reverse for RDE-based play- ers. The RDE cost advantage pertains primarily to labor, property and equipment, raw materials, and capital.

Low-Cost Labor. RDE-based labor typically costs 10 to 20 times less than labor in highly developed mar- kets. This advantage alone translates into a net sav- ings of 20 to 40 percent in the cost of many end products and ser vices landed into most target mar- kets. Fully loaded RDE labor rates for manufacturing workers run anywhere from about $1 per hour (the average rate in China) to $4 to $5 per hour (the typ- ical rate in Eastern Europe)—a fraction of the aver- age rate of $20 to $25 per hour in North America, Western Europe, and Japan. (See Exhibit 9.) Similar

The Competitive Strengths and Weaknesses of Emerging Global Challengers

20 BCG REPORT

The global success of RDE-based players will depend on the competitive advantages they develop and maintain in the international marketplace. Clearly, one core advantage is access to low-cost resources. Other advantages that many share include products that appeal to price-conscious customers, relatively modern and efficient plants and equipment, and access to huge talent pools. Potential constraints on global success for some of these companies include a lack of deep relationships with overseas customers, a slow rate of innovation, a lack of strong brands and customer franchises, a dearth of in-house intellec- tual property, a lack of access to effective distribution channels, and limited experience managing interna- tional business portfolios.

Low-Cost Resources

The major source of advantage for RDE-based com- panies is low-cost access to key resources. While established multinationals that migrate to RDEs

Annual growth in industrial production, 1999–2004 (%)

Average hourly industrial-manufacturing compensation, 2004 ($)

= Industrial GDP of $500 billion1

–5

0 5 10 15 20 25

China

Russia

Brazil Mexico

India Canada

Western Europe

Indonesia

South Korea

United States

Czech Republic

Thailand

Malaysia

Hungary

Poland

Japan

E X H I B I T 9

L A B O R C O S T A D V A N T A G E S I N R D E s A R E S I G N I F I C A N T

SOURCES: Economist Intelligence Unit; BCG analysis.

1Industrial GDP excludes agriculture and services.

differences apply to labor rates for many ser vice functions, such as software programming, call center operations, and basic engineering ser vices.

Low-Cost Property and Equipment. In many RDEs, setting up a manufacturing site complete with grounds, buildings, roads, power, and water lines can cost 60 percent of the price tag for a compara- ble facility in a developed countr y. Savings come not only from substantially less costly construction labor, engineering, and architectural ser vices but also from less expensive construction materials. Another area of savings is machiner y and equip- ment, which often cost 20 to 60 percent less than items of comparable qual- ity in developed markets. This advantage will grow as more locally made state-of-the-art equipment becomes available over the next few years. In addi- tion, local communities within RDEs compete fiercely for investment and often make land avail- able on favorable terms.

Low-Cost Raw Materials. Depending on the coun- tr y, raw materials and energy can be abundant or quite limited. Of the 12 countries we screened in depth, only Brazil and Russia are building a major part of their global advantage on the basis of low- cost natural resources. Brazilian companies share privileged access to low-cost hydroelectric power. Brazil also has a broad resource base, ranging from rich and low-cost iron ore (the major source of global advantage for domestic mining companies such as CVRD) to low-cost agricultural feedstock (which underpins a thriving food-processing indus- tr y). Russia, meanwhile, markets its rich energy resources either through direct exports of energy such as natural gas (Gazprom) or indirectly through exports of aluminum (Rusal).

Low-Cost Capital. Financing options for RDE-based companies var y widely. Some, such as those in the raw-material sector, generate significant cash flows that they can reinvest. Many have access to rela- tively generous debt markets (although approval standards are becoming more rigorous in all RDEs). No fewer than 60 of our RDE 100 have access to equity markets in Hong Kong, London, Mumbai, New Delhi, and New York. In addition, some companies are championed by governments

eager to promote the international growth of key industries; an example is China’s telecommunica- tions-equipment industr y. In combination, these factors should put most RDE challengers on at least an equal footing with their Western competitors.

Home-Market Environments

The operating environment in many RDEs is diffi- cult, a fact that can arguably provide real advan- tages for indigenous companies. Local markets are often ver y large and among the fastest-growing in

the world. In China, for instance, steel consump- tion is 2.3 times that of the United States; car sales are currently an impressive 29 percent of U.S. levels and are grow-

ing at 10 to 12 percent per year. The markets in Brazil, India, and Russia, although much smaller than China’s, are also significant.

These large home markets, with hard-to-please, price-sensitive customers, provide a strong founda- tion for creating export businesses in the future. In addition, many key sectors, such as China’s aero- space, telecommunications-equipment, and automo- tive-equipment industries, get substantial help from the government. Many RDE markets also give their indigenous players the opportunity to compete directly with foreign incumbents on their home turf, helping to prepare them for expansion abroad.

Operations

Many RDE-based companies have surprisingly strong operating platforms. Their assets are often much younger than those of established multina- tional players. A sur vey by the U.S.-based Manufacturing Performance Institute found that the average age of the assets of the sur veyed Chinese companies was 7.2 years, compared with 16.9 years for those of their U.S. counterparts. Similarly, RDE-based production systems tend to be more flexible than those in highly developed coun- tries because RDE-based players often use labor instead of machiner y in their plants. For example, rather than installing automated packing lines, they use human workers to do the packaging. And they tend to buy their machiner y from domestic manu-

21The New Global Challengers

RDEs’ local markets are often very large and

among the fastest-growing in the world.

facturers, whose products are 20 to 60 percent less expensive than comparable Western equipment.

In addition, RDE-based companies often achieve higher capital productivity through a longer work- week and fewer fixed assets than are typical of their Western counterparts. These factors may also pro- vide more flexibility to cope with demand swings, speed new-product launches, and permit smaller orders.

Innovation

Only a handful of RDE- based companies operate at the cutting edge of innovation. Their general weakness in intellectual property is reflected in the small number of patents they hold. From 1999 through 2003, all the companies based in the five largest RDEs obtained only 3,900 U.S. patents, whereas companies based in Japan and Germany obtained 166,000 and 54,000, respectively.

However, other factors are beginning to offset this apparent weakness. First, RDEs are fast developing R&D talent. For example, in 2010 China is expected to graduate 800,000 engineers, mathe- maticians, technicians, and scientists, while India will graduate 600,000. Together, this pool of gradu- ates is 12 times the output of the U.S. university sys- tem in the same disciplines.

In addition, R&D resources are far less expensive in RDEs than in highly developed countries. With approximately one-fifth the development costs of its Western competitors, a company such as India’s Ranbaxy Pharmaceuticals can achieve much with its $87 million R&D budget. Little wonder, then, that MNCs are already rushing to RDEs to establish R&D centers.2 RDE-based companies, however, may well have an advantage when it comes to leveraging local talent effectively. For example, China’s Haier claims to develop two new household appliances ever y day. While few current RDE-based innovations are cut- ting edge, the most successful RDE-based companies will become true innovators over time.

Supply Chain Management

Effectively connecting RDE sources with remote markets remains a challenge. The Asia-U.S. supply chain, for example, takes an average of 60 to 90 days from order entr y to arrival at the point of sale and adds 10 to 30 percent to manufacturing costs, eliminating up to half the manufacturing cost sav- ings afforded by the RDE.3 Our experience indi- cates that 20 to 60 percent of these supply-chain costs are caused by stockouts, emergency ship- ments, and permanent backups built into the sys-

tem. Optimizing the total performance of a long- distance supply chain requires considerable skill, top-notch proc- esses, and organizational discipline. A few RDE-

based companies, such as China’s Li & Fung Group (textiles), have mastered this art and turned it into their main business. For many RDE- based players, however, supply chain management is still a bigger challenge than it is for established multinationals, which have well-developed supply- chain functions.

One way to address the supply chain issue is by establishing production beachheads inside the tar- get markets. Of our RDE 100, 39 companies have already done this. The strategy is particularly ben- eficial when products have high transportation costs relative to their value, when products are exposed to extreme demand volatility or short lead times, when trade barriers are significant, or when being “local” still provides a strong selling proposition.

Going to Market

Getting traction in a new market, particularly a highly developed one, is still tough for most RDE- based companies. The hurdles are manifold: becoming intimate with customers and channels, understanding their needs, designing the right products, and building competitive distribution capabilities. Although many RDE-based compa-

22 BCG REPORT

Optimizing a long-distance supply chain requires considerable skill and

organizational discipline.

2. See A Game Plan for China: Rising to the Productivity Challenge in Biopharma R&D, BCG Focus, December 2005, and Harnessing the Power of India: Rising to the Productivity Challenge in Biopharma R&D, BCG Focus, May 2006.

3. See The China Rip Tide: Threat or Opportunity? BCG white paper, Januar y 2006.

nies have adjusted well to new requirements in their home countries, playing this game abroad usually means joining a different league of com- petitors.

The most successful RDE-based players are aware of this issue and are employing one or more of the fol- lowing approaches in order to improve their ability to go to market abroad:

• Making acquisitions intended to gain access to the market and to the required commercial capa- bilities (for example, the acquisition by Dr. Reddy’s Laboratories, an Indian pharmaceutical company, of Germany’s betapharm Arzneimittel in 2006)

• Building deep relationships with a limited num- ber of large retailers (for example, sales of air conditioners by China’s Midea Holding Company through Home Depot and Wal-Mart)

• Targeting high-volume sales to a relatively small number of large industrial and OEM buyers (for example, sales of mobile-phone batteries by China’s BYD to Motorola, Nokia, and Sony Ericsson)

• Concentrating on developed markets that are a lower priority for incumbents (for example, sales by China’s Konka Group Company in Australia, where it ranks number two in the TV market)

• Ser ving other RDE markets that have characteris- tics similar to the home market before moving into highly developed markets (for example, the development by China’s Skyworth of a strong position in consumer electronics in Malaysia, Mexico, and Russia before it entered Western Europe)

Management Talent

In our study of the globalization patterns of the RDE 100, the quality of management emerged as an important success factor. The shortage of managers with international experience constitutes a major constraint for RDE-based companies. The need is great both for people who can develop global busi- ness strategies at the corporate level and for those who can operate effectively on the ground in the tar- get markets. Only a handful of the RDE 100 have for- eigners among their directors, and few have foreign- ers in senior management positions.

Most RDE-based companies recognize this shortage and are grooming management talent inside their organizations. Many have established international job-rotation programs for their local managers and are now hiring managers with international experi- ence, often tapping into the pool of native-born executives working abroad.

Rigorous Strategy and Road Maps

As mentioned earlier, many of the RDE 100 are still in the early stages of globalization. For these com- panies, in particular, it will be important to move beyond opportunistic steps toward globalization and develop more coherent strategies.

Vital elements for success include a well-defined, long-term globalization strategy coupled with solid financial management and a road map with con- crete milestones. For example, Brazil’s Natura (cos- metics) has a long-term globalization road map that guides the company’s international moves. Combining its operating capabilities with a planned approach to accessing new markets, the company aims to spread its value proposition and strengthen its brand recognition abroad.

23The New Global Challengers

Create internationally capable management teams. Whereas some of the RDE 100 already have global management teams, others have only begun to address this issue. For example, ver y few of the Chinese companies profiled have any foreigners in their senior-management ranks. A globally capable management team will be essential to success abroad.

Enhance overseas selling, marketing, and supply- chain capabilities. RDE-based companies need to go beyond being secondar y suppliers to global cus- tomers and become primar y suppliers. Moving up to this level will require matching or beating incum- bent suppliers in selling, marketing, and supply chain capabilities.

Go beyond low cost. As RDE-based challengers seek sustainable global positions, they will need to move beyond cost-based differentiation. Other- wise they will face incumbent competitors that are cutting their own costs while building market bar- riers based on innovation and other advantages. Just as leading Japanese and South Korean compa- nies have become true innovators, so must our current crop of RDE-based challengers innovate their way to long-term success. The abundance of affordable engineering talent in markets such as China, India, and Russia gives companies based in these locations the potential to become innova- tion powerhouses.

Develop expertise in partnering, M&A, and lever- aging suppliers. In the race to compete, the most successful RDE challengers will include those that leverage other companies. Some will create this leverage through successful M&A activities. Others will do it by forming strategic partnerships or by taking advantage of the innovation of suppliers at home and abroad.

Implement an effective global organization. For long-term success, RDE-based challengers—like incumbent MNCs—must redesign their entire organizations to be truly global. This effort requires making difficult decisions regarding the composition of the management team, the central- ization or decentralization of various key functions,

Looking Ahead

24 BCG REPORT

Until recently, only a dozen or so RDE-based com- panies could have been described as emerging global challengers. Today these challengers num- ber in the hundreds. Among them, the RDE 100 will play important roles in shaping the global mar- ketplace. While some of these companies are already in positions of relative strength, many are still gearing up for major global-growth campaigns. All are hungr y for global expansion. They are increasingly cash rich. They are aware of their advantages and know how to deploy them. At the same time, they are actively working to overcome their traditional weaknesses. In this effort, many are receiving the strong support of their home governments.

We expect that by 2010 our RDE 100 will have dou- bled their international revenue. Meanwhile, the portion of revenue they derive from international operations will likely rise from the current 28 per- cent to more than 40 percent. Perhaps 20 or more of them will be among the top five companies in their categories globally, up from only a handful today. We also expect that the number of promi- nent RDE-based globalizers will expand into the hundreds in the years ahead. The implications are massive—both for emerging challengers and for incumbents.

Implications for Challengers

As noted above, many of the RDE 100 are well along on the path to globalization. In general, the more advanced companies on our list already have most of the essential capabilities in place. But other companies on the list are still in the early stages of globalization. In order to successfully advance their international growth, they will need to strengthen their positions in the following ways.

Establish clear, long-term globalization targets and road maps. All companies need to clarify why and how they are globalizing. Some of the players on our list have begun to globalize only oppor- tunistically. To succeed in the longer term, they will need a clearer vision and purpose, set from the top, and detailed road maps for their global- ization endeavors.

and the extent to which the company organizes geographically rather than by business line.

Implications for Incumbents

The impact of emerging RDE-based challengers on individual incumbents varies by industr y and also reflects a company’s current competitive position. Many incumbents are successfully riding the wave of globalization by sourcing, manufacturing, selling, and conducting R&D both at home and around the world. Others, however, have not yet adapted to the chal- lenges of globalization, and the emergence of strong RDE-based com- petitors will both raise the stakes of the game and reshape the playing field. How to respond?

Know your challengers. The first step seems obvi- ous: you need to identify and understand the RDE- based challengers in your industr y. Who are they? Where are they operating today? What are their strengths and vulnerabilities? How are they chang- ing the competitive landscape? Which steps in the value chain are affected? How big an impact do you expect? Will the impact create threats, opportuni- ties, or both? RDE-based challengers are sometimes hard to get to know. They are based far away, they may not be well covered by the business media, they may not publish financial results, and they are evolving rapidly. So you need to make an extra effort simply to understand them.

Take a hard look ahead. Envision your global prior- ities in an environment inhabited by successful RDE-based competitors. What are the implications for the segments and businesses you can defend? Which segments and businesses might you want to exit? What new growth opportunities and competi- tive imperatives do you see?

Design a strategy for the new reality. Answering those questions will trigger important decisions about how you will contend with the new chal- lengers. Your choices might include the following:

• Competing head-on with the challengers, erect- ing obstacles to keep them out of key markets, or attacking their home markets

• Partnering with one or more challengers in order to strengthen your global competitive position and defend that global position against other challengers

• Creating your own challenger by establishing a subsidiar y in an RDE designed explicitly to cap- ture the same kinds of advantages that RDE chal- lengers possess

• Exiting some lines of business or some value- added steps and moving those activities into a joint venture with a challenger company; for

example, you might build a new business model that would benefit from the joint venture through roy- alties and ser vice fees in one or more markets

Hone your operations and reinforce customer ties. For most incumbents, the main arena of competi- tion with RDE-based companies will be product markets. Here, in our experience, most incumbents still have considerable room for improvement in their key operations: developing new cutting-edge products, manufacturing them efficiently, getting them to market effectively, and ser vicing customers well. In their home markets, incumbents are often closer to customers than challengers are. They should take full advantage of those relationships. While incumbents focus on improving perfor- mance in their domestic operations, they should also systematically assess options to relocate production to low-cost countries.

Find ways to ride the wave. Incumbents and chal- lengers alike should also consider opportunities to create value by acquiring, investing in, or partner- ing with each other. Many are already systematically assessing and pursuing options to cooperate as a way to advance their own growth objectives. Opportunities exist in many areas. In sourcing, for example, RDE-based companies can become sup- pliers to incumbents (as exemplified in the market for automotive equipment) or partners in exploit- ing raw-material resources (as is happening in the oil industr y). Conversely, the RDE 100 challengers are already purchasing huge volumes of materials, parts and components, and ser vices, and therefore should be regarded as potential customers of incumbents.

25The New Global Challengers

Strong RDE-based competitors will both raise the stakes of the game and reshape the playing field.

Similarly, partnerships between incumbents and challengers figure prominently in the globalization of R&D (for example, in the pharmaceutical indus- tr y, where global giants are starting to conduct joint research programs with companies in India and China). In operations, subcontracting and out- sourcing are now common in almost ever y industr y. Indeed, the business models of some challengers are built entirely on ser ving multinational players in this way (for example, in the technology equip- ment, household appliance, and IT ser vices and business-process-outsourcing industries). Many incumbents also enter into joint ventures or distri- bution partnerships with RDE-based companies to tap into their growing home markets (for example, in the Chinese automotive-equipment and con- sumer-electronics industries).

RDE-based companies can also be partners in incumbents’ exit strategies. When an incumbent’s management team decides to retreat from a seg- ment of a mature market, partnerships with RDE- based players can help stage the exit. In the case of an outright sale, an RDE-based company might be willing to pay more for a business than a domestic competitor would because the purchase might pro- vide exactly the sort of assets the company needs to offset its current weaknesses (for example, in intel- lectual property, brands, or distribution channels in mature markets). In other cases, a temporar y partnership with an RDE-based acquirer might cre- ate more value than an outright sale. Incumbents have recently pursued this model in M&A deals with Chinese companies, generally in the form of joint ventures.

From the incumbent’s perspective, partnerships make sense for at least three reasons. First, some- times the assets of the acquisition target need to be car ved out of the seller’s operations, so it is not pos- sible to complete an immediate sale. Second, the incumbent may want to retain some of the most attractive assets—such as intellectual property, including brands and patents, or jointly used oper- ations such as sales channels—and provide them to the acquirer for a fee. Finally, the acquirer may be

an attractive partner for the seller in penetrating an RDE market or may even ser ve as a client.

Ultimately, incumbent companies in global indus- tries must quickly become comfortable with a world full of RDE-based challengers. It will be critically important to know these challengers well and to use that knowledge in making key business deci- sions. Decisions made without such insights cer- tainly risk failure.

Closing Thoughts

We are fast entering a new era in which RDE-based challengers populate the world’s largest industries. These challengers will be major players, reshaping many markets and forcing incumbent companies to respond.

The rise of these challengers takes place amidst the rise of RDE economies generally—and of China and India in particular. By 2050 China and India will be two of the world’s three largest national economies. At that point, any truly global company must, by definition, be a major player in China, India, or both, as well as in North America, Europe, or Japan. And by then, many global companies will indeed be based in China, India, and other coun- tries that are today’s RDEs.

Our list of 100 companies represents just a small sample of the RDE-based challengers that will ulti- mately emerge on the world stage. Of course, not all will sur vive. Success will require correct strategic decisions and the building of capable, competitive organizations.

Sur vival for today’s incumbent companies is not guaranteed either. Clearly, one success factor will be the ability to identify the new wave of RDE-based challengers and understand the rich array of threats and opportunities they present. These com- panies are no longer poised on some far horizon; they are globalizing fast and are determined to stay the course. The leaders of today’s global companies must be prepared to meet their challenge.

26 BCG REPORT

27The New Global Challengers

28 BCG REPORT

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China’s Global Challengers: The Strategic Implications

of Chinese Outbound M&A

A report by The Boston Consulting Group, May 2006

Harnessing the Power of India: Rising to the Productivity Challenge

in Biopharma R&D

A Focus by The Boston Consulting Group, May 2006

Organizing for Global Advantage in China, India, and Other Rapidly

Developing Economies

A report by The Boston Consulting Group, March 2006

The China Rip Tide: Threat or Opportunity?

A white paper by The Boston Consulting Group, January 2006

A Game Plan for China: Rising to the Productivity Challenge

in Biopharma R&D

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“Spurring Innovation Productivity”

Opportunities for Action in Industrial Goods, November 2005

“The New Economics of Global Advantage: Not Just Lower Costs

but Higher Returns on Capital”

Opportunities for Action in Operations, July 2005

“Winning in Today’s Chinese Automotive Market”

Opportunities for Action in the Automotive Industry, June 2005

“Globalizing R&D: Building a Pathway to Profits”

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“Globalizing R&D: Knocking Down the Barriers”

Opportunities for Action in Operations, May 2005

“Avoiding Supply Chain Shipwrecks: Navigating Outsourcing’s Rocky Shoals”

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The Central and Eastern European Opportunity: Creating Global Advantage

in Serving Western Europe

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Navigating the Five Currents of Globalization: How Leading Companies

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Capturing Global Advantage: How Leading Industrial Companies

Are Transforming Their Industries by Sourcing and Selling in China,

India, and Other Low-Cost Countries

A report by The Boston Consulting Group, April 2004

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

The Boston Consulting Group publishes other reports and articles on the topic of capturing global

advantage that may be of interest to senior executives. Recent examples include:

www.bcg.com

BCG

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