[Viewpoint] Rising stars in emerging markets

Amid the global downturn major companies in emerging markets have not only survived but continue to make inroads in the world market. Today, 69 of them are on the Fortune Global 500 list, 13 more than last year and a threefold increase from the 23 in 2003.

To identify the main causes behind the high performance, Samsung Economic Research Institute (SERI) analyzed major companies in emerging markets, newly industrialized Asian countries and industrialized countries, choosing 200 from each group. Our emerging market group had 18 countries, including the so-called BRIC nations - Brazil, Russia, India and China. Korea, Taiwan, Hong Kong and Singapore comprised our newly industrialized Asian countries.

Our cross-comparison found that sales revenue and total market capitalization of the top 200 emerging market companies already are surpassing those of the top 200 companies in newly industrialized Asian nations. Total market value, in particular, was double that of the Asian counterparts. By industrial sector, 21 percent, or 42 companies among the top 200, and 12 companies among the top 20 companies, in terms of revenue were in the natural resources/energy industry. Twelve companies were in the electrical/electronics, nine in transportation equipment, and 22 in steel/metal.

Companies in industrialized nations also are being pressured. The top 200 emerging companies exceeded the industrialized as well as the newly industrialized Asian counterparts in terms of growth and profitability, according to our findings. And the enhanced capital base has enabled the emerging companies to globalize expeditiously.

The average sales growth of the top 200 emerging companies between 2005 and 2007 was 29.5 percent, which was 1.5 times the 20.1 percent of Asian counterparts and three times the 11.6 percent of industrialized counterparts. The operating profit-to-sales ratio, a measure of profitability, also overwhelmed the remaining two groups. The figure was 18 percent among emerging companies in 2005-2007, whereas the top 200 companies in newly industrialized Asian countries were 7 percent, and the developed nations’ figure was 14 percent.

Despite the current global economic downturn, emerging market companies have maintained relatively high growth in both sales and profits. Their sales growth rate in 2008 was 10.8 percent, when in the same year their Asian counterparts and companies in developed countries were with 5.5 percent and 8.7 percent. Meanwhile, operating profit to sales was in the 10 percent range, also higher than the two other groups. First-quarter data for 2009 also shows a similar trend.

In our analysis, fast globalization and domestic conditions were consistent themes in explaining the high performance of emerging companies. Their globalization has accelerated since 2000, easing the flow of trade and direct investment and the ability to raise funds and obtain technology. For resource-rich countries, the ability to raise prices has created further opportunities. As for domestic conditions, a protected local market, cheap labor, natural resources and government support have underpinned expansion. The companies also have enhanced their strategic capabilities. While globalizing through M&As with global companies, they have also enhanced technological competence by pursuing independent R&D, created niche markets, and secured overseas financing.

The companies that have expanded by elevating their capabilities rather than natural resources at hand or favorable domestic support, piqued our interest enough to choose eight for a case study. Some companies vaulted into the global power ranks with a differentiated competitive edge. They pursued a strategy of “attacking rivals’ weak points,” capturing niche markets that competitors had been ignoring. For example, Sasol, a multinational gas and oil company based in South Africa, developed a coal and gas liquefying technology, instead of drilling for oil. Brazilian aerospace conglomerate Embraer focused on small, short-flight jets instead of large passenger planes.

Other companies overtook market leaders with a sense of superiority by sealing global acquisitions, thus offsetting their weakness as latecomers. A good example is Cemex, a cement producer in Mexico. This company surprised the world by taking over two top cement companies in Spain, securing at a stroke the previously absent competitiveness in the European market.

Foresightedness to capture potential businesses and a risk-taking entrepreneurial spirit that invested boldly also propelled success. India’s Suzlon Energy has continuously looked for chances in the renewable energy market since the 1990s, including wind power, while China’s CIMC foresaw future increases in cargo carrying amid China’s rising economy, and drastically invested in the industry.

Korean companies are sandwiched by rising emerging market companies. While they try to catch up companies in developed nations, they are pressured by relentlessly advancing emerging market companies. The latter will grow faster and extend influence in the global economy, pressing even more.

Korean companies, however, should view this as an opportunity not as a threat. A win-win strategy is necessary, taking advantage of the enhanced capability of emerging market companies. A business structure that pursues a win-win partnership with emerging market companies will be crucial, such as supporting emerging market companies’ growth and nurturing competitiveness, while sharing mistakes.

*The writer is a research fellow at Samsung Economic Research Institute.

by Jung Moo-sup