A pretty extraordinary statement in here, which would be racist and xenophobic if turned around and stated as fact about the U.S. or any Western nation. Since they claim there is little difference in cost for the workers, they are now pursuing overseas workers because , although they cost about the same, they are better , smarter, faster ....
Being willing to match India’s low-cost model was essential, but Mr Cannon-Brookes insists that IBM’s enthusiasm for emerging markets is no longer mainly about cheap labour. Jeff Joerres, the chief executive of Manpower, an employment-services firm, also thinks the opportunities for savings are dwindling. “When you see Chinese companies moving in a big way into Vietnam, you think there is not much labour arbitrage left.”
Perhaps a bigger attraction now, according to IBM, are the highly skilled people it can find in emerging markets. “Ten years, even five years ago, we saw emerging markets as pools of low-priced, low-value labour. Now we see them as high-skills, high-value,” says Mr Cannon-Brookes. As for every big multinational, winning the “war for talent” is one of the most pressing issues, especially as hot labour markets in emerging markets are causing extremely high turnover rates.
The empire strikes back
Sep 18th 2008
From The Economist print edition
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Why rich-world multinationals think they can stay ahead of the newcomers “YOU get very different thinking if you sit in Shanghai or São Paulo or Dubai than if you sit in New York,” says Michael Cannon-Brookes, just off the plane from Bangalore to Shanghai. “When you want to create a climate and culture of hyper-growth, you really need to live and breathe emerging markets.” Mr Cannon-Brookes is the head of strategy in IBM’s newly created “growth markets” organisation, which brings together all of Big Blue’s operations outside North America and western Europe. “This is the first line business in 97 years of our history to be run outside the US,” he says excitedly, noting that “Latin America now reports to Shanghai.”
IBM’s thinking about emerging markets, and indeed about what it means to be a truly global company, has changed radically in the past few years. In 2006 Sam Palmisano, the company’s chief executive, gave a speech at INSEAD, a business school in France, describing his vision for the “globally integrated enterprise”. The modern multinational company, he said, had passed through three phases. First came the 19th-century “international model”, with firms based in their home country and selling goods through overseas sales offices. This was followed by the classic multinational firm in which the parent company created smaller versions of itself in countries around the world. IBM worked liked that when he joined it in 1973.
The IBM he is now building aims to replace that model with a single integrated global entity in which the firm will move people and jobs anywhere in the world, “based on the right cost, the right skills and the right business environment. And it integrates those operations horizontally and globally.” This way, “work flows to the places where it will be done best.” The forces behind this had become irresistible, said Mr Palmisano.
This ambitious strategy was a response to fierce competition from the emerging markets. In the end, selling the personal-computer business to Lenovo was relatively painless: the business had become commoditised. But the assault on its services business led by a trio of Indian outsourcing upstarts, Tata Consulting Services, Infosys and Wipro, threatened to do serious damage to what Mr Palmisano expected to be one of his main sources of growth.
So in 2004 IBM bought Daksh, an Indian firm that was a smaller version of the big three, and has built it into a large business able to compete on cost and quality with its Indian rivals. Indeed, IBM believes that all in all it now has a significant edge over its Indian competitors.
Being willing to match India’s low-cost model was essential, but Mr Cannon-Brookes insists that IBM’s enthusiasm for emerging markets is no longer mainly about cheap labour. Jeff Joerres, the chief executive of Manpower, an employment-services firm, also thinks the opportunities for savings are dwindling. “When you see Chinese companies moving in a big way into Vietnam, you think there is not much labour arbitrage left.”
Perhaps a bigger attraction now, according to IBM, are the highly skilled people it can find in emerging markets. “Ten years, even five years ago, we saw emerging markets as pools of low-priced, low-value labour. Now we see them as high-skills, high-value,” says Mr Cannon-Brookes. As for every big multinational, winning the “war for talent” is one of the most pressing issues, especially as hot labour markets in emerging markets are causing extremely high turnover rates. In Bangalore, for example, even the biggest firms may lose 25% of their staff each year. IBM reckons that its global reach gives it an edge in recruitment and retention over local rivals.
IBM also says it can manage the risk of intellectual-property theft—a perennial worry for multinationals in emerging markets, especially China—well enough to have cutting-edge research labs in India and China. And it is starting to “localise” its senior management, including moving its chief procurement officer and the head of its emerging-markets business to China. But as yet it has no plan to move its headquarters from Armonk, New York, whereas Halliburton, an energy-services firm, shifted its headquarters to Dubai last year. One notable success has been the company’s partnership with AirTel in the Indian mobile-phone market, which it has already extended to other Indian phone companies and is likely to take to other countries. In this partnership IBM manages much of AirTel’s back-office operations and shares the financial risk with the phone company. “We grow as they grow,” says Mr Cannon-Brookes, noting that IBM is now the largest service provider to local customers in India.
Risk-sharing has worked well for other multinationals too. Vodafone, for example, is a big shareholder in Safaricom. In June Daiichi Sankyo, a Japanese pharmaceutical giant, bought a 51% stake in India’s Ranbaxy Laboratories. Such deals increasingly involve strategic partnerships rather than the joint ventures of old. Daiichi hopes the deal will add value to its research and development expertise and provide access to Japan’s fast-growing market to Ranbaxy, which in turn brings low-cost manufacturing and an understanding of the generics market.
In many emerging markets the most attractive potential customer is the government, thanks to an infrastructure boom that promises to span everything from mobile telephone networks to roads, airports and ports, energy and water supply. IBM is not alone in pitching directly to governments for this business, relying on its established brand and on the growing pressure on emerging-country governments—even those that are not strictly democratic—to deliver high-quality, value-for-money infrastructure. Instead of trying to sell specific products, they say, these firms aim to help governments draw up plans for improving their country—plans which invariably require substantial spending with the company concerned. Both Cisco and GE have recently started establishing long-term problem-solving relationships with governments in which the firms help to design an infrastructure programme as well as build some or all of it.
Three years ago Cisco combined all its emerging-markets activities into a single unit. Since then the share of its revenues coming from emerging markets has risen from 8% to 15%, accounting for 30% of its total revenue growth. “We identify the country’s most important industries and go to them with a blueprint for a strategy to improve them using our technology to beat global benchmarks; this is about revolutionary not incremental change,” says Paul Mountford, head of Cisco’s emerging-markets business.
In 2006 GE—which since launching its Ecomagination strategy in 2003 has bet big on a boom in green technologies—signed a “memorandum of understanding” with China’s National Development and Reform Commission to work jointly to safeguard the country’s environment. It also wants to forge relations with local government in 200 second-tier Chinese cities, each of which will soon have a population of at least 1m and will need everything from a power supply to an airport.
More recently, top GE executives have got together with Vietnam’s government to discuss the huge problems facing the country in water, oil, energy, aviation, rail and finance—all areas in which GE has products to sell. At one meeting GE’s president found himself in the same room with no fewer than three Vietnamese leaders who had taken part in a leadership programme at GE’s famous training facility in Crotonville, New York, recalls John Rice, the company’s head of technology and infrastructure. This programme of inviting groups of 30-40 senior government and business leaders from a particular emerging country to Crotonville for a week was launched more than a decade ago, starting with a group from China. “We transfer a lot of learnings between us, and we end up friends for life,” says Mr Rice.
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Today’s leading multinationals “are no longer the slow-moving creatures they used to be. They are not going to be beaten up like the big American companies were by the Japanese,” says Tom Hout, a former consultant at BCG who now teaches at Hong Kong Business School. With Pankaj Ghemawat, who last year published a well-received book, “Redefining Global Strategy”, Mr Hout has analysed the emerging market in which multinationals have competed longest against local champions: China. Whether the established multinationals or their local rivals are winning “depends on the segment you’re looking at”, says Mr Hout. Established Japanese and Western multinationals dominate in the high-tech sectors of the economy; the Chinese are strong at the low end. The main battleground is in the middle. This is quite different from the conventional wisdom, which is that established multinationals are getting pushed out by local companies, he concludes.
A 2007 study by Accenture of China’s top 200 publicly traded companies found that the best businesses in China are not yet on a par with the world’s foremost ones. Although their revenue growth increased on the back of China’s continued economic growth, their ability to create value was still only half that of their global peers. “It remains to be seen whether China’s best players have built the management practices and supporting business operating models that will allow them to generate profitable growth in more mature markets over the long term,” the study went on to say.
Their legacy thinking and cost structures notwithstanding, some established multinationals are increasingly trying to take on the frugal engineers of the emerging markets head-to-head, says Mr Ghemawat. “Smarter multinationals have all given up on the idea that they can simply deliver the same old products in the developing world,” he explains. “If they just focus on pricing high in mostly urban areas, they will miss out on the mass consumer markets that are emerging. And they have to be able to compete as cost-effectively as the local firms, which can mean fundamentally re-engineering their products and business model.”
A recent report by BCG, “The Next Billion Consumers”, highlighted many innovative business models and products offered by multinationals such as Nokia— still the biggest mobile-phone producer in China, despite frequent predictions that it will fall behind a local rival—and Procter & Gamble, as well as similar efforts by emerging-market firms.
The decisive factor may turn out to be management. Although some emerging-market firms are very well managed, by and large established multinationals still seem to have the edge. Mr Hout reckons that the expatriate managers now deployed by multinationals in emerging markets are generally of a much higher quality than the “young bucks or retirement-posting types” they used to send. “They are aggressive, smart, at the heart of their careers. And they tend to be married to more worldly women than management wives used to be.”
That said, the multinationals’ management advantage is based more on training and experience of running a large business than on exposure to other countries. Indeed, leading multinationals are reducing their use of expats, and those they do send are often expected to train a local manager as their successor. There is still a striking lack of executives from emerging markets at the top of developed-country multinationals. Even at GE, which is wholeheartedly committed to emerging markets, around 180 of the top 200 managers are still Americans. “The single biggest challenge facing Western multinationals is the lack of emerging-market experience in their senior ranks,” says Mr Ghemawat.
Such companies’ boardrooms are even less globalised. According to Clarke Murphy of Russell Reynolds, a recruitment firm, American multinationals now have a “ferocious interest in attracting non-Americans to the board”, but as yet even Europeans are a rarity, let alone directors from emerging markets. The share of non-Americans on the boards of American multinationals is less than 5%.
The main problem “is attendance, especially if there is a crisis and the board needs to meet a lot at short notice”. Once again, Goldman Sachs seems to have found a clever compromise by appointing Lakshmi Mittal to its board. The Indian steel tycoon is based in London and often visits New York, where the investment bank has its headquarters.
Some European firms are doing slightly better than their American counterparts at internationalising their boards. Nokia recently appointed Lalita Gupte, an Indian banker who had just retired from ICICI bank, one of the world’s most innovative practitioners of bottom-of-the-pyramid finance. And leading British companies have lots of foreigners in their executive suites and boardrooms.
Moreover, multinationals have great trouble retaining the managers they do have in emerging markets, says Mr Hout. “Well-trained, good, honest people are scarce in emerging markets. Multinationals are better at training these people than emerging-market companies, which prefer to poach them once they are trained.”
The founders of emerging-market firms are often impressive, but such firms typically lack the depth of management talent of old multinationals, says Mr Hout. The best students he has taught on MBA courses in Hong Kong and Shanghai have typically worked for developed-country multinationals.
Part of the problem in China is that running a big company—even a giant such as China Telecom, with its 220m customers—still has a lower status than a political job such as governor of a province. And Chinese managers, being used to protected markets, often lack the skill to operate in more sophisticated markets overseas.
Anil Gupta, co-author with Haiyan Wang of a forthcoming book, “Getting China and India Right”, says that recognition of their lack of management capability may have been one reason why no Chinese steel firms joined their Indian and Brazilian peers in the bidding war for Corus, and why no Chinese carmakers entered the battle to buy Jaguar and Land Rover. “If one could create a Jack Welch index of leadership and assess companies on such a measure, the top 50 companies from India would come out way ahead of the top 50 companies from China,” says Mr Gupta, a professor of strategy at the University of Maryland.
Certainly some Indian firms are extremely well run. The senior ranks of Tata, for example, are full of professional managers. On the other hand, many Indian firms are in family ownership, and “it can be hard to find room for professional managers when you have several sons demanding jobs of similar high status,” says Mr Ghemawat.
Perhaps the best-known example of the problems of family ownership is the feud between the Ambani brothers, who after their father’s death divided the family’s huge conglomerate, Reliance, between them. The dispute still simmers on. In July a bid by Reliance Communications, run by Anil Ambani, to buy a South African mobile-phone company was thwarted by Mukesh Ambani, the boss of Reliance Industries. No wonder that the brothers, who live in the same opulent apartment building, have separate lifts to avoid chance meetings.
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Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.
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