The acquisition of IBM’s PC business by China’s Lenovo was no red herring. The emerging markets have, at long last, emerged.
It looks, at first, like just another bubble in emerging equities. Following the acquisition of IBM’s PC business by China’s Lenovo, Chinese businesses are in the headlines. The usual suspects are up – Brazil, Russia, Turkey. Americans who once feared a rising Japan now talk of a rising India. All of which usually means, sooner or later, another emerging market meltdown. But there is an important difference.
That difference is Nigeria. Or, more specifically, the fact that Nigeria became, in 2004, the third largest global market for Guinness breweries – trailing only Ireland and Britain in Guinness’s global sales and edging out the United States. So odd a fact cannot be dismissed as a fluke. There are no speculative bubbles in beer consumption.
Nigeria’s unlikely rise is, in fact, the harbinger of a trend that is changing the global business landscape. That trend is not a simple expansion of wealth. Since the early 1990s emerging markets enthusiasts have made much of the fact that the combined output of the developing economies is, by some measures, roughly on par with that of the rich world. But this sizeable economic output does not make the emerging markets relevant to global business – any more than the Warsaw Pact economies were relevant to global business during the days of the USSR.
To be relevant, economies must be integrated. Until recently the emerging markets were cordoned off by barriers of politics, policy, culture, and sheer economic difference. These barriers were as real as any iron curtain. Trade flows between countries with different languages, political systems, and average incomes have long been dramatically lower than standard economic models would predict.
A famous illustration of this is the case of Whirlpool India. In the late 1980’s, Whirlpool invested heavily in India, lured by talk of a middle class some 200-million strong. But impenetrable differences of culture and consumer income separated Whirlpool from its intended market. Labor-saving devices made little sense in a country with a labor surplus. Electronic appliances caused more problems than they solved for customers who suffered frequent power cuts. By the mid-1990’s, Whirlpool India was losing over $10 million a year. Such all-too-common stories led many Western executives to conclude that emerging market consumers were little more than a mirage.
But this is changing. When Guinness went to Nigeria, no doubt with low expectations, it stumbled into the ideal market for its product. Guinness, originally brewed to withstand long sea voyages, was well-matched to the refrigeration breakdowns and road delays that plague Nigeria’s distribution system. This was coupled with good strategy. During Nigeria’s frequent economic crises, Guinness counterintuitively but cleverly increased its investment in the country, acquiring assets and taking market share from floundering competitors on the cheap. To this add low-cost local production and a well-honed marketing campaign, and you have a formula for outsize success.
Thus Guinness tapped into a market that, prior to its efforts, was so far from the mind of global businesspeople that it might as well have been on Mars. There are 130 million Nigerians, and though they remain poor, their combined spending power exceeds that of all of Ireland. In the struggle between brewers like Diageo, which owns Guinness, and Anheuser-Busch, Heineken and others, the Nigerian market suddenly matters.
Countries that once served only as the setting for resource extraction ventures are now integrating via offshoring, outsourcing, and as consumer markets. Thailand is now the world’s second-largest producer of pickup trucks; Indonesia the fifth-largest market for cigarettes; and US insurer AIG derives about half of its operating profits in its core life insurance business from Asia.
This means a fundamental shift in the competitive landscape for global business. One telling indicator of this is the degree to which emerging market firms are no longer just acquisition targets, but are strong competitors in their own right. India’s Tata Group bought the telecoms arm of US-based Tyco, Mexican cement giant Cemex acquired Britain’s RMC, and Chinese firms have been eyeing targets worldwide. Home-grown emerging market firms have exploited their countries’ hidden wealth to attain global scale.
To be sure, emerging market equities may fall just as quickly as they have risen. Bubbles and busts are not things of the past. But the trends of economic integration are deep and not easily reversed. China has been the world’s most favored destination for foreign direct investment for three years running, in A.T. Kearney’s rankings. India, riding its outsourcing boom, has now moved up to second place, displacing the United States. And then there is the rise of Nigeria in the ranks of beer consuming nations. Though unheralded, this is no less a signal to the globe’s captains of industry – at long last, the emerging markets have emerged.
This article was originally published on Countryrisk.com, before I sold the website to Roubini Global Economics.