The Back Roads To IT Growth
Thanks to actor Sacha Baron Cohen's scorching sendup of Kazakhstan in Borat, the Central Asian republic has become something of a global laughingstock. Yet if you ask Western technology giants how they regard Kazakhstan and dozens of other so-called emerging markets, you won't hear much giggling. In fact, as tech markets mature in the U.S. and Europe, outposts in all sorts of global backwaters are delivering a powerful dose of growth.
Consider this fact: Kazakh carrier JV KazakhTelecom chose networking giant Cisco Systems Inc. (CSCO ) in July to upgrade its national broadband networks. The thought of Kazakhs surfing the Net at lightning speeds may come as a surprise to some. But Cisco is banking on such deals. It expects sales in emerging markets to explode from $2.5 billion last year to $10 billion in 2010, which would be about 20% of its business, say analysts. Dozens of developing countries—many flush with oil-related cash—are snapping up everything from routers to fancy telepresence video gear. "We're not selling low-tech cheap. These countries are looking to leapfrog the West," says Paul Mountford, president of Cisco's Emerging Markets Theater.
The global outlook is bright for other Western tech giants as well. Emerging markets boosted quarterly earnings announced last week at Microsoft (MSFT ), IBM (IBM ), SAP (SAP ), and BlackBerry maker Research in Motion (RIMM ). SAP, the German software maker, said sales in the so-called BRIC countries—Brazil, Russia, India, and China—grew at 2 1/2 times its overall corporate growth rate of 10%. Meanwhile, IBM's BRIC sales increased 32%. Russia vaulted by an astounding 52%. India grew by 45%. And the company's overall BRIC growth rate is actually accelerating. Other markets in Eastern Europe, Southeast Asia, and the Middle East are adding big growth numbers for the tech giants as well. "These economies are reaching a point where they're large enough to make a difference," says Stephen Minton, an analyst for market researcher IDC.
Tech's sudden fixation on countries that were afterthoughts a decade ago is no mystery. Overall tech sales growth in the U.S. is expected to come in at just 6% this year, according to IDC. Western Europe and Japan are even more sluggish, growing at 5% and 2%, respectively. For double-digit growth, tech companies must look elsewhere. IDC expects India to grow at 25%, Russia at 17%, and China at 16%. Among the smaller markets, it pegs Turkey at 27%, Venezuela at 16%, and Saudi Arabia at 13%.
The biggest winners in the emerging markets are some of tech's most prominent blue chips, from IBM and HP to Cisco and SAP. They've been investing in these areas for years, sticking around through lean times. IBM, for example, sank $2 billion between 2004 and 2006 into developing India as a market and a global talent pool, and has pledged to spend another $6 billion over the next several years. It's also making huge investments in Latin America. "Others leave. That gives us an advantage when countries turn around," says Marc Lautenbach, general manager for IBM's Americas region. The downside: They take hits when boisterous emerging markets cool or crash. It's part of the game.
Even when markets are bubbling, some blue chips struggle. For instance, Dell Inc.'s (DELL ) preferred method of selling via phone or Internet doesn't always travel well. It's one of the reasons Dell is on the skids. But the computer giant has been learning from its mistakes. Dell now sells to consumers through stores in Mexico. And through much of the rest of Latin America, the company is hawking its gear on traveling shows. It may sound retro, or like a page from Gabriel García Márquez. But if putting on traveling shows wins business in booming developing markets, why stay home?
By Steve Hamm with Peter Burrows and Louise Lee in San Mateo, Calif., and Jessica Silver-Greenberg in New York