A television ad running these days in India shows a mother lapsing into a daydream: Her young daughter is in a beauty contest dressed as Snow White, dancing on a stage. Her flowing gown is an immaculate white. The garments of other contestants, who dance in the background, are a tad gray. Snow White, no surprise, wins the blue ribbon. The mother awakes to the laughter of her adoring family--and glances proudly at her Whirlpool White Magic washing machine.
The TV spot is the product of 14 months of research by Whirlpool Corp. (WHR) into the psyche of the Indian consumer. Among other things, the Benton Harbor (Mich.) company learned Indian homemakers prize hygiene and purity, which they associate with white. The trouble is, white garments often get discolored after frequent machine washing in local water. Besides appealing to this love of purity in its ads, Whirlpool custom-designed machines that are especially good with white fabrics.
Whirlpool hasn't stopped there. It uses generous incentives to get thousands of Indian retailers to stock its goods. To reach every cranny of the vast nation, it uses local contractors conversant in India's 18 languages to collect payments in cash and deliver appliances by truck, bicycles, even oxcart. Since 1996, Whirlpool's sales in India have leapt 80%--and should hit $200 million this year. Whirlpool now is the leading brand in India's fast-growing market for fully automatic washing machines.
Whirlpool's success story stands out in a time when Corporate America doesn't talk much about emerging markets. Things were different a decade ago. That's when Western economies had stalled, so expanding operations into the fast-growing, heavily populated lands of Asia, Latin America, and the old Soviet bloc was a top priority. The approach to globalization then was brutally simple: get in fast, strike megadeals with top officials, and watch the profits roll in. Multinationals figured local consumers would snap up their products at a premium. Thus AT&T (T) promised some 20 ventures in China, from state-of-the-art telecom factories to research labs. Enron Corp. (ENE) negotiated giant power plants and pipeline projects in India, Indonesia, and Bolivia. General Motors Corp. (GM) envisioned an Asiawide network of car plants, led by its $1.2 billion facility in Shanghai.
SENSE AND SENSIBILITY. Many of these bets fizzled or disappointed. Enron's $4 billion Indian power plant is a debacle. Other multinationals saw that local competitors can catch up fast--and beat them in price and marketing. Tumbling trade barriers are making local production less essential. Meanwhile, a globalization backlash has forced companies to view their activities in poor nations in a different light. Exxon Mobil (XOM), Cargill, Freeport-McMoRan (FCX), and Royal Dutch/Shell (RD) became targets of local uprisings over oil, mining, and other projects in Indonesia, India, and Nigeria. McDonald's (MCD), KFC (YUM), and Philip Morris (MO) have endured withering criticism at home and abroad for aggressively pushing inappropriate products and ignoring local sensibilities.
The financial crises that ravaged nations like Mexico, Thailand, Russia, Brazil, and Turkey didn't help. Suddenly, "emerging markets" connoted excessive risk. Indeed, compared to the booming U.S. of the late '90s and a unifying Western Europe, emerging markets looked irrelevant to many execs. After explosive growth in the early 1990s, foreign direct investment by U.S. companies in East Asia, excluding Japan, plunged by 74% to $1.33 billion from 1997 to 2000, estimates the U.S. Commerce Dept. The drops have been nearly as dramatic in Latin America and Eastern Europe.
But as Whirlpool and other savvy U.S. companies such as Kodak (EK), Citigroup (C), and Hewlett-Packard (HWP) are proving, investing time and energy to understand societies in developing nations can pay rich returns. Rather than swinging for the fences with megaprojects or costly takeovers, the smarter approach is to methodically build a presence from the ground up. Some of the best investments are the most economical--small corner kiosks instead of full-blown stores or bank branches, say, or a tie-up with a savvy local player who owns a factory. Says Bain & Co. global strategist Chris Zook: "Companies are trying to figure out how to build on their strengths, as opposed to throwing a bunch of Hail Mary passes in the hope they connect."
Above all, smart globalization requires extensive homework. Companies are starting to work closely with bureaucrats, entrepreneurs, and social groups at the grass roots. Not only is it easier to head off a local political backlash by cooperating with local players early; multinationals are also finding they can save enormous resources--and develop products local consumers really need.
Whirlpool has learned many of these lessons. Eight years after launching its global blitz in 1989, it took a $294 million writedown to shed two of the four appliance plants it built in China. "What we absolutely missed was how fast these markets would become saturated," concedes CEO David R. Whitwam. "We could build plants around the world, but where you fail is in the marketplace."
Now, Whitwam believes Whirlpool is on track. Besides its sophisticated marketing and inroads with local distributors, the company reorganized its global factory network. For all appliances, it devises basic models that use about 70% of the same parts. Then it modifies its machines for local tastes. Whirlpool has an incentive to get it right: Through 2009, it expects demand for big appliances in the U.S. to remain flat, while it projects demand overseas will grow 17%, to 293 million units.
Similar dynamics are pushing other companies to renew their global focus. Developing nations are still likely to grow much faster than the industrial West for at least a decade (chart). What's more, most multinationals today target mainly the richest 10% of the global population. They've yet to reach the 4 billion who earn the equivalent of $1,500 or less annually. Few can afford a PC, car, or mortgage now. But many experts argue they will be the greatest source of future global growth. That's why Hewlett-Packard Co. has launched a drive to help stimulate computer use in villages from Central America to Africa. The HP program also is politically shrewd: It promotes the beneficial aspect of globalization to the neediest.
Citibank's (C) new campaign to broaden its traditional base of rich clients exemplifies the new approach to emerging markets. In Bangalore, India, it launched a program called Suvidha--Hindi for "ease." It persuaded midsized companies to set up retail bank accounts for their entire staffs, from janitors to top managers. To open accounts, customers need just $22. They get a card they can use to get cash, take out loans, pay bills at local ATMs, and buy groceries. In three years, Citi has gained 200,000 retail clients, doubling its base in India, for about $10 million.
In corporate banking, Citi is targeting companies with revenues of $50 million or less. India's trucking business has been one priority. By opening offices in 23 cities offering credit, savings, and checking accounts, Citi now finances 10,000 truckers--most with fewer than 30 vehicles. It also is gearing up in Poland, Brazil, and the Philippines. Since 1997, small-business clients in emerging markets have risen sixfold, to 8.7 million. "The lower segments of these markets is where the growth is," says Citibank CEO Victor J. Menezes. Such markets earned Citigroup $2.7 billion in net profits last year.
Other U.S. companies are finding they can get ahead working with small entrepreneurs eager for new ways to make money. That's one reason emerging markets are a bright spot for Eastman Kodak Co. While Kodak has struggled in the U.S., in Asia, sales were up 9% last year. Much of this is because of Kodak Express photo supply and development shops, often owned by entrepreneurs such as Qiu Xing, 28. The Shanghai native, who says he had "always been a photography buff," invested $48,000 to open his shop in January. In a deal with a Chinese bank, Kodak lets Qiu use his developing equipment as loan collateral even though he hasn't fully paid for it. Kodak also supplies monthly staff training. Qiu takes in $5,000 a month and makes a 25% profit.
Kodak has 6,000 Expresses across China and expects 10,000 by yearend. Its market share in China has doubled since 1995, to 60%. "We moved so fast, our competitors didn't have time to act," boasts John Tseng, a Kodak general manager for Asia.
In these turbulent times, when political and currency crises rock governments from Jakarta to Buenos Aires, it's hard to tell when emerging markets will be the predictable lands of opportunity CEOs once foresaw. But that was always an illusion--and it's time Corporate America figures out what really works. "The next round of global expansion is as much about imagination as about resources," says University of Michigan management guru C.K. Prahalad: "Putting a billion dollars down does not involve imagination." With the mistakes of the '90s behind them, the winners will approach the world in a smarter way. By Pete Engardio
With Manjeet Kripalani in Bombay and Alysha Webb in Shanghai