Global Marketing Report: Emerging Markets - Essay Example

Global Marketing Report: Emerging Markets Executive Summary The financial systems of the emerging economies have become large and diverse. Emerging economies such as BRICS have contributed greatly to the growth of the global economy. Some key characteristics of the emerging markets are particularly relevant for financial stability. The world is becoming increasingly multipolar with the emergence of China, Russia, India, Brazil, and South Africa forming BRICS. As Renard (2014, p. 3) observes, the American unipolar moment has ended. US global influence is fading because it contrasts with the rise of the rest. Countries are rising first and they are challenging the United States in its position as the dominant power. BRICS is contributing to the defining of the global economy with China playing the greatest role. China is expected to challenge the US in the coming years. India follows the footsteps of China although its emergence is much slower and less impressive. Brazil, Russia, and South Africa are probably the least emergent among the BRICS countries, but this does not mean that they are not emerging. The emergence of these countries offers opportunities to global companies operating in them. In addition, there are challenges and risks that global managers will have to overcome in order to drive their organisations to success. This study examines the economic and political challenges and difficulties that are faced by managers of multinational companies in the Chinese market. The study also examines the economic and political opportunities and benefits that accrue to these managers as they manage their companies in ChinaThis study discusses the opportunities and challenges faced by the managers of the British American Tobacco in their operation in the most successful BRICS countries – China. Close monitoring of political and economic challenges will be the key to their success.. Introduction “Today’s peril is not of the Chinese behind the gun; rather it is that one of the Chinese as the manufacturers of guns” (Jain 2010, p. 155). This statement displays how newspapers’ writers view China as a threat to the developed economies in terms of economic expansion. China, with its cheap labour and keen aptitude for imitation, is competing with the West. The above quote is extracted from Wagel’s (1980) book, which was originally published in 1914 and reprinted in 1980. Therefore, the debate about China becoming more developed than other countries has been going on for more than 90 years. The rapidest growth has been witnessed in the past three decades. The Chinese economy even managed to come out of the Asian financial crises unscratched (Jain 2010, p. 155). Jim ONeil (2001) coined the acronym BRIC, and it refers to the emerging market countries Brazil, Russia, India and China. Though O’Neil coined this economic vogue expression as an acronym to describe a shift in the world market, these countries formed a political association of emerging national economies. China is one of the countries that form BRICS. Over the last few years, there are many unprecedented opportunities that have been created for international organisations by globalisation. China population is estimated to be over 1.3 billion, and this has made it a very valuable land for foreign international companies. China is witnessing a rapid economic growth and political transformation, and this has presented organisations operating there with numerous opportunities as well as challenges. Many international firms have established China as their centre of control and coordination. As organisations increase their presence in China, concerns are increasing in regard to the implementation of successful management practices and strategies. This study examines the economic and political challenges and difficulties that are faced by managers of multinational companies in the Chinese market. The study also examines the economic and political opportunities and benefits that accrue to these managers as they manage their companies in China. Brief Overview of Key Issues At the acronym BRICS was coined in 2001, nobody ever imagined that these countries would turn the acronym into a real political forum one day. International managers are faced with the prospects of rising rates of uncertainties. Prior to this formation, the world revolved around the United States. Today, the situation has changed. China, being one of the emerging economies presents both opportunities and challenges to the managers of BAT. Economic and political opportunities are ideal for the survival of the company in China whereas the challenges and risks may be detrimental to the company. Emerging Markets: Issues and Debates The term ‘emerging markets’ was introduced in 1981 by Antoine van Agtmael and he defined the emerging market as an economy with low to middle per capita income according to the World Bank classification system (Schmusch 2001, p. 3). The emerging markets constitute approximately 80 percent of the global population, but currently represent only about 20 percent of the total world economy. These markets are considered to be transitioning from closed to an open market economy. There is increasing integration of emerging markets into the pool of global capital. Schmusch (2001, p. 3) observes that since 1990s, the net private capital flows to emerging markets have increased by a factor of ten where they stood at approximately $502 billion in 2006. This data shows the growing dependency of foreign capital flows in emerging market economies. It also shows the increasing importance of these economies in the financial community. Agtmeal (2007) observed that one out of ten 500 global corporations in the Fortune magazines came from emerging markets in the year 2007. Therefore, it can be held that what constitutes and what does not constitute an emerging market is dependent on the maturity of its institutions and the size of the economy or per capita income. International companies face numerous political and economic risks. These risks are broadly defined as the impacts of economics and politics on markets. Political risks are very common in the emerging markets. For example, BAT managers face numerous political challenges in their operations in BRICS countries. In the most recent Framework Convention on Tobacco Control (FCTC) negotiations, Brazil used its diplomatic approach to providing leadership in negotiations about domestic tobacco control. Political risk is influenced by the foibles of political leaders, passage and review of laws, and the rise of popular movements. All these factors politically stabilise or destabilise a country. The Harvard Business Review (2008) discusses the issues that are related to economic and political situations in the emerging markets. The paper argues that strategists evaluating emerging markets should be especially vigilant arguing that politics in these countries matter as much as economics. Political risk analysis of emerging markets is more subjective compared to economic risk analysis. The political risk analysis should incorporate both the observable trends as well as the nuances of the entire society. This study holds that the emerging countries have not yet emerged. In these countries, most people live shorter lives, earn less, and live uncomfortably. These reasons make emerging countries continue generating important business opportunities in the future. There is a long way to go before these markets reach the level of saturation seen in the developed countries. However, some countries are exceptional to the above proposition. One of these countries is China. China has witnessed rapid economic growth to the extent where it has posed a threat to most developed countries such as United States. Ciravegna et al. (2013, p. 3) observes that though the emerging markets have not solved all their structural problems, their general condition has been improving at a remarkable rate. This rapid improvement has unsettled a long established assumption about the status of emerging markets. Millions of people in BRICS countries have experienced some improvements in their living conditions. As a result, multinational companies have ventured into these markets because they have identified growth opportunities. These multinationals continue to expand their operations in order to reach this segment. Schuler (2009, p. 7) discusses why Brazil, Russia, India, China, and South Africa have been chosen to be a part of the famous acronym BRICS while there are many other fast-developing emerging countries from all over the world. He argues that, in order for these countries to be considered in BRICS, they had to fulfill the conditions of growth. There are four pillar that BRICS is built, and they include macroeconomic stability, efficient institutions, openness to trade and FDI, and growth rates of per capita GDP (p. 7). South Africa was incorporated into BRICS because of inviting China to join the political club (Cornway-Smith 2011). South Africa is the China’s most valuable trading partner in Africa. Laverty claims that this is an opportunity for South Africa to improve its global trade connections and receive FDI from the BRICS. BRICS characteristics The rising status of BRICS countries can be attributed to their demographic and economic growth. Together, BRICS countries account for approximately 40% of the total world population and also represent 40% of the global GDP (Lee, Chagas and Novotny 2010). Total Capital Inflows to Emerging Markets $billion: net non-resident capital flows to the 30 EM economies covered by the IIF Figure 1 Total Capital Inflows to Emerging Markets. Source: IIF, IMF, National Sources Characteristics of Emerging Markets i.Low per capita incomes but rapid pace of economic development Per capita incomes continue to be much lower in the emerging markets compared to those in developed countries. Nevertheless, the incomes in most of the emerging economies continue to surge rapidly. According to Sachs (2008), the global middle-class constitutes of people with annual incomes ranging from $6,000 to $30,000 and this number is growing by 70 million per year. The bank foresees that another 2 billion people will join the group by 2030. ii. High-income inequalities According to Table 1, Gini index is a measure of the degree of income inequality in a country. A higher Gini coefficient indicates a higher income inequality. Based on the Gini coefficients in Table 1 most EM countries have much higher values for the Gini index than developed nations. iii. High youthful population The majority of people in most emerging economies are young, and the number is growing much more rapidly than in the Triad region (United States, Japan, and Western Europe). This evidence is illustrated in Table 1. Column 2 shows the population growth rate and column 3 shows the median age for BRICS countries. Most of BRICS have population growth rates exceeding 1 percent, with a median population age of between 20 and 30 years. iv. Technology is underdeveloped Technology in most emerging economies is underdeveloped. However, this situation does not seem to apply in most BRICS countries. One study established that BRICS countries appear to lead in mobile technology service breadth through innovation and the introduction of a wider variety of services than developed nations (Alina and Mahajan 2007). Another research study by Tellis et al. (2008, p. 844) also shows that consumers in emerging markets tend to be less eager to adopt new products than their counterparts in developed countries. One measure his team developed is the mean time-to-takeoff for new products, meaning the number of years for sales of the new product to start taking off. Country Population (billions) Nominal GDP Nominal GDP (PPP) FDI outstanding Brazil 2.8 1.5 2.6 6.0 Russia 2.3 1.4 2.6 1.1 India 17.1 1.7 5.9 0.4 China 20.5 4.0 13.2 2.8 Countries Population Growth (09est) (%) Median Age (09est) Per Capita GDP (PPP) (08est) (US$) GDP-Real Growth Rate (08est) (%) Gini Index Brazil 1.20 28.6 10,300 5.2 56.7 China 0.66 34.1 6,100 9.8 47 India 1.55 25.3 2,900 7.3 36.8 Russia -0.47 38.4 15,800 6.0 41.5 South Africa 0.28 24.4 10,400 3.7 65 Table 1 BRICS Salient Figures Source: Based on figures reported on https://www.cia.gov/library/publications/the-world-factbook/ Company Profile The British American Tobacco was established by James Duke in 1902 and by 1914 it had created foreign affiliates that extended into six continents including Asia. British American Tobacco is the world’s second largest international cigarette controlling about 15% of the global cigarette market (Rabinoff 2011, p. 148). British-American Tobacco (BAT) is one of the classic examples of Western-owned companies that have transitioned from personal to managerial capitalism. According to BAT 2011 annual report, the company’s subsidiaries and affiliates manufacture more than half their cigarettes in Australia, Asia, and Latin America (BAT 2007). BAT is working to significantly increase production for their global and domestic markets. Most of BAT’s growth can be attributed to organic growth and acquisitions. In 1999, BAT entered into a merger with another global cigarette company called Rothmans International. BAT’s brands are sold in sic global regions; America Pacific, Africa, Europe, Middle East and Central Asia, Latin America, and Asia Pacific. The seventh division of BAT is a global division that has its operations in more than 100 countries. BAT has over 300 cigarette brands in its portfolio. The four global brands are categorised as Dunhill, Lucky Strike, Pall Mall, and Kent. BAT leads in more than 50 countries in the 180 countries that it operates in. BAT has 85 manufacturing factories that are located in 66 countries. These factories process more than 600 million kilograms of leaves to produce around 777 billion cigarettes. BAT has more than 85,000 employees around the world. In the 1990s, BAT also diversified into the insurance industry. According to Cochran (2000, p. 44), BAT faced a dilemma when after its entry to China of whether to delegate authority to Chinese network or maintain its Western-style of the corporate hierarchy. China Situation Analysis China Profile Geography Total Area Cities Terrain Climate 9,596,961 (about 3.7 million square miles) Beijing, Shanghai, Tianjin, Shenyang, Wuhan, Guangzhou, Chengdu, Dallan, Chongqing, and Harbin Plains, hills, and deltas in the east; mountains, high plateaus, deserts in the west Tropical in south to subarctic in north People Nationality Population (July 2011) Population Growth Rate (2011) Health (2010) Ethnic Groups (2000 census) Total Labour force Chinese 1,336,718,015 0.593% Infant mortality rate (16.06 deaths/1,000 live births Life expectancy (74.68 years) Han Chinese (91.5%), others (8.5%) 780 million Government Type Constitution Political parties Governed by the Communist party 1982; amended numerous times, most lately in 2004 Chinese Communist Party has the majority of members; Other 8 small parties under Communist Party supervision. Table 2 China’s Profile There is an interesting behaviour in the economy of China where it has shifted from an agrarian to an industrial base. Currently, China contributes to 13.2 percent of the total manufacturing in the world. In 2009, China manufacturing was projected to overtake that of the United States. In 2010, China manufacturing overtook that of the U.S. for the first time. In addition, China’s GDP is also expected to surpass that of the United States (Hu 2011, p. 40). However, it is not known how long it will take for this to happen. China has experienced a rapid rise in the past three decades. Its growth has surpassed the expectations of the international community as well as that of the Chinese government. In 2009, China’s GDP was estimated to be 18.6 times that of 1978 (Hu 2011, p. 1). This means that, China’s economy averaged an annual growth rate of 9.9 percent over a span of thirty-one years. Hu (2011, p. 1) employed the exchange rate method of calculating GDP and found out that China is the second-largest economic power in the world falling behind the U.S. China’s economy mainly depends on exports from manufacturing industry. The growth of China greatly influences the world economy both in good times and bad times. China is one of the countries that contributed to pulling the world out of recession through their imports (Marelli and Signorelli 2011, p. 130). The rapid growth of China economy can be attributed to the rising degree of trade openness, especially in regard to exports. China also has huge FDI inflows that have been attracted by lower labour costs. Most theories and literature studies have largely established the relationship between openness and economic growth. China’s economy has been characterised by openness. In 2007, China marked an important milestone by passing an antitrust legislation. China spent about 13 years drafting the first comprehensive competition law called the Anti-Monopoly Law (AML) (Weinreich-Zhao 2015, p. 1). This law presents the international companies operating in China with a great challenges and risk. This Law lays a legal framework that is intended to prevent and restrict monopolistic conducts that affect competition in the Chinese market. The AML is embedded in the general economic environment in China, and the political characteristics that are unique to China. Political and Economic Challenges The communist party rule has dominated China for many decades. Economic and cultural institutions fall under the communist party which exercises absolute power over them. Jayaraman (2009, p. 55) observes that China rules and regulations are not very transparent or absolute. Large multinational companies usually come under sharp regulations and bureaucracies. There is a popular social network that is promoted by China called guan xi wang (Vasli and Hansen 2009). The guan xi wang situation helps foreign business organisations to avoid red tape and bureaucracy. China’s political decisions today may dramatically affect the markets both in short-term and long-term (HBSP 2008, p. 27). International managers should not ignore China’s political decisions because they may have dramatic long-term effects on their markets. Countries that fall into this group are characterised by inappropriate banking supervision and regulations, high volatility in the exchange and growth rates, and ineffective legal systems (Schmusch 2001, p. 3). The condition in the emerging markets continues to be quite disjointed. There is no near future anticipated sustained pull-back from emerging markets. However, the managers of global companies are very sensitive to country risks. They must be prepared to encounter the challenges that the BRICS countries might pose. Political, Economic Opportunities and Strategies As the developed countries become a shrinking part of the global market, the emerging markets in BRICS can provide tremendous opportunities for many multinational companies. Thus, it is imperative for the managers operating in these countries to understand the political and economic environments in order to identify these opportunities. Companies that are based in emerging markets have become global leaders in almost every sector. Earlier, concerns were raised that emerging economies have been unable to catch up with the ‘Triad’ (the United States, Western Europe, and Japan). However, since 2009, China has witnessed rapid growth. While old industrial powers such as France and UK are becoming less and less important in the global economy, China, Brazil, India, Russia, and South Africa and other emerging markets continues to expand. The U.S. remains the largest economy in the globe; however, it has been struggling to recover from the financial crisis that was witnessed in the world in 2008. Ciravegna et al. (2013, p. 3) observe that Japan has surrendered its second position to China. While the opportunities in China are well understood, the potential in India, Russia, Brazil, and South Africa is not. China’s accelerating change has shifted the axes of the world economy, generating unprecedented business opportunities. However, changes also cause disruption. This disruption forces people to acquire new skills and migrate, in line with Schumpeter’s description of creative destruction. They further observe that it may soon become anachronistic to catalogue the UK, Italy, and France among the world’s economic powers. Prior to 2000, China had a smaller total GDP than Italy despite its high population which is twenty times larger than that of France. China has been said to be one of the countries where a vast disparity exists between the number of male and female smokers (ABC News 2015). For example, the 1996 data shows that 63 percent of males in China between the ages of 15 and 69 smoked. The percentage of women who smoked accounted for 4 percent of the total number of women in China. According to the American Cancer Society, China consumes approximately 1.7 trillion cigarettes a year representing 33 percent of the world’s total cigarette consumption. Summary and Conclusion Globalization means having a global vision and strategy; it means cultivating roots and individual identities. It also means reemploying communicable ideas in new geographies around the globe. The managers of international companies operating in emerging markets especially in BRICS countries must know this truth. One of the greatest challenges that BAT managers face is criticism. Most critics argue that the only reason BAT ventured in China is to lure non-smokers into smoking with their main target being the women. However, BAT spokesman David Betteridge dismissed these criticisms arguing that BAT’s strategy is to convince smokers to switch to BAT brand (ABC News 2015). To overcome the challenges that are present in China’s tobacco market, the managers of British American Tobacco are looking to have joint ventures in China with the local companies. Recommendations For BAT managers, having an emerging market strategy must be a priority. This study recommends how BAT managers can cope in the emerging markets particularly China. This study holds an assumption that emerging markets have not yet emerged. Almost all emerging countries continue to be affected by inequality, poverty, and infrastructural deficiencies. Many of them are ruled by authoritarian regimes, armed violence and endemic corruption. These factors continue to have more nefarious consequences than in developed countries. The managers of international companies operating in the emerging markets must turn to political risk analysis to measure the impact of the political situation on potential markets, minimize risks, and make most use of the available opportunities. BAT should conduct time to time political and economic risk analysis. BAT’s economic risk analysis of China is meant to tell the managers. Managing a global organisation in BRICS countries requires managers to have very special insights in terms of business practices, resources, geography, and culture. Improved management practices are important in enhancing performance and productivity. Global multinationals such as BAT can benefit greatly through joint ventures, partnerships and alliances that arise from FDI. BAT can learn, access complementary assets, capabilities and knowledge. The most successful companies are the most dynamic. This study recommends that BAT managers should collaborate with the local Chinese managers who are operating in the same field in order for them to learn and change, or adapt. According to the Advanced Institute of Management (2007, p. 6), The unexpected rise of FDI into China ($60 billion a year) has created the largest array of international mergers and acquisitions, joint ventures and partnerships ever witnessed. Managers can also fight off the challenges posed by emerging market newcomers by focusing on the high-end segments of the market. BAT can acquire one or more of the competitor companies and built it into a large business to compete on cost and quality with its Chinese competitors. BAT can use the potential identified in China to use as a pair of shoulder to stand on in order to reach further into international and regional markets in the future. The BRICS countries offer a vast opportunity for international business organisations. These emerging economies have enormous markets that are rich in resources. However, they pose significant and specific challenges and risks. Understanding these challenges can present the managers of international organisations operating in these countries a key to unlocking their potential and tap into the success of their organisations. This study reveals those opportunities and challenges directing special focus on the economic and politically related ones. To gain greater understanding of these issues, this study will examine the challenges and opportunities faced by the managers of the British American Tobacco. References ABC. 2015. China Prime Market for Tobacco Producers. Bensidoun, I., Lemoine, F. and Unal, D. 2009. The Integration of China and India into the World Economy: A Comparison. European Journal of Comparative Economics, 6(1), pp. 131-155. Chircu, A. and Mahajan, V. 2007. 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