The New Global Economy
Imagine 100 companies—many virtually unknown in developed countries—with combined 2006 revenues of $1.2 trillion and total 2006 purchases exceeding $500 billion.
Next, imagine you're sitting in corporate headquarters in London, Madrid, Paris, Rome, Frankfurt, New York, Chicago, San Francisco, Toronto, Tokyo—and you realize these companies are coming at you from everywhere: Argentina, Brazil, Chile, China, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, Turkey.
Twenty years ago we referred to many such places as Third World countries. Today the 14 countries listed above are major centers of economic growth, attracting $245 billion in foreign direct investment in 2006 and generating some 17.3% of total global gross domestic product.
The countries are increasingly home to your competition. They also are home to current or potential customers, suppliers, and partners.
Welcome to the global economy, circa 2008. Unheard-of companies from rapidly developing economies (RDEs) are challenging the biggest and best in the world. If you require confirmation, just ask employees of Canadian mining company Vale Inco, which was purchased in 2006 by Brazil's Companhia Vale do Rio Doce for $17.8 billion. Or ask employees of Anglo-Dutch steelmaker Corus, acquired in early 2007 by India's Tata Steel for $12 billion. Or ask the employees of Ford's (F) Jaguar and Land Rover divisions, which may soon become subsidiaries of India's Tata Motors.
Companies from RDEs are on the hunt for new markets, advanced technology, raw materials, and world-class brands. And many of them have access to plenty of cash. Last year alone, 100 of the top RDE companies, which Boston Consulting Group (BCG) partners and analysts recently identified from more than 3,000 candidate companies worldwide, enjoyed operating margins of 17%.
This was above the 14% average of the S&P 500, and more than double the 8% achieved by companies listed on Japan's Nikkei index and the 7% achieved by companies on Germany's DAX index.
In addition to their impressive profits, these companies—we'll call them the "BCG 100 New Global Challengers"—have been generating impressive growth, with total revenues increasing from 2004 to 2006 at a compound annual rate of 29%.
Their purchasing power is also rising fast. When the final 2007 numbers are in, we estimate the BCG 100 will have spent from $310 billion to $330 billion on raw materials and energy, $80 billion to $100 billion on parts and components, and $65 billion to $80 billion on services.
And it's not just goods and services they're buying. In 2006 the BCG 100 completed 72 major mergers and acquisitions involving foreign companies, paying an average of $981 million for each. Seven of those deals, including the two mentioned earlier, topped $1 billion.
Call to Action
So where does that leave developed-country executives? Obviously it leaves them with major challenges on their hands. No company can afford to ignore these challenges. No company is immune. And no company has any reason to be surprised.
While some BCG-100 companies are already prominent, and even dominant, on the global economic stage, others are just now emerging from the shadows. Consider a few of the relative unknowns: Brazil's Marcopolo, the world's third-largest manufacturer of bodywork and components for buses and vans, with $820 million in 2006 revenues, including 46% from abroad; China's Nine Dragons Paper (Holdings), one of the largest paperboard-packaging manufacturers in the world, with $1 billion in revenues in 2006; PKN Orlen, the Polish oil and gas company, with $17 billion in 2006 sales; and India's Suzlon Energy, one of the world's leading wind-energy companies, with manufacturing facilities in China, Europe, India, and the U.S., and 2006 revenues of $1.8 billion.
Beyond the companies named above, the BCG 100 New Global Challengers report identifies 93 more. Of the 100 total, 41 are from China and 20 from India. The Chinese companies averaged $14.5 billion in 2006 revenues, operating profit margins of 14%, and compound annual growth rates from 2004 to 2006 of 26%. The Indian companies averaged $3.9 billion in revenues, had profit margins of 16%, and 2004-06 growth rates of 31%.
The BCG 100 all have one thing in common: Like many of the 14 countries in which they are headquartered, they are growing at warp speed.
Developed-country executives need to mobilize for action. Their worst possible response would be to hope that the challenges posed by the RDE-based upstarts will not affect their markets.
Follow GE's Lead
In fact, the opposite is likely: The challenge will intensify. Extrapolating from the BCG 100's 29% compound annual growth rate from 2004 to 2006, we project that their combined revenues will reach $3.4 trillion by 2010 and $11.8 trillion by 2015.
Meanwhile, hundreds of other RDE-based companies will also attain the size and capabilities to rival incumbent multinationals.
Bucking this trend won't be easy. Our advice to developed-country executives is to start thinking more like challengers themselves and less like global leaders. Incumbents might consider several effective strategies: attack the challengers on their home turf, acquire fast-growing RDE companies, or turn challengers into partners and customers.
Many would be wise to follow the lead of General Electric's (GE) Jeff Immelt, who, according to a major U.S. business magazine, instructed his leadership team last year to identify those BCG 100 challengers GE could sell to and buy from, and those it would have to compete with. "Our goal for this group is to have lots of customers, lots of suppliers—and no competitors," he reportedly said.