From India Telecom News on June 18, 2009
There are real opportunities for participating in emerging markets, but things are changing fast. So let’s begin with a look at recent history. In the 1980s and 90s, the US economy – with around 30% of GDP – was the dominant world economy and the main investment arena. By the early 2000s there was talk of emerging BRIC economies, Brazil, Russia, India, and China – not so much displacing the US as adding new dynamism to the global economy.
Among those benefitting from this growth was the broader base of so-called ”emerging markets”. By 2008 some of these emerging markets were growing at 6% to 11%, while the mature, developed markets were growing rather more slowly. Then came the economic crash, and a lot suddenly changed. Some economies, such as India and China, continued to grow at significant, but single figure, rates on the strength of their domestic demand as much as their global presence. Others in the developed world began to contract – notably Singapore for example.
What the forecasters are expecting now is continuing growth in emerging markets – reaching 50% of the world total by 2030. In the more immediate future, growth is expected to creep back next year, but note how the emerging markets dominate the picture for 2010.
No wonder there was so much interest in the opening keynote at NetEvents 2009 APAC Press Summit in Singapore – given by Sunil Joshi, President, Tata Communications Enterprise Business, Emerging Markets, and entitled “The Potential Opportunity of Emerging Markets.”
Sunil Joshi compared emerging markets with a first visit to the gym: you look at all the equipment and potential exercises in some confusion and wonder where to begin. The first thing is to have a clear objective – to grow personally or physically, to tone the body, to get fit , lose weight or whatever. The second thing – and this is vital – is to stick with it. As he put it: ”The potential opportunities are enormous in the emerging markets. But staying in there is equally important.”
he explained that it is vital to understand what makes the emerging markets so different. Firstly the demographics are different, meaning that models that proved successful in mature markets simply didn’t work in emerging markets. The main differentiating factors being:
• growing middle class population
• small premium segments
• local cultural and physiological nuances dictating choices
• low incomes and price sensitive markets
You will find that your local competitors have the advantage of lower cost constructs, as well as being accustomed to working in different conditions than you find in established markets. These include:
• a fragmented distribution and retail infrastructure
• stronger government influence and monopoly conditions
• local partner policies or legal requirements
• early stages of liberalization.
Seldom do you find the necessary resources for business development, such as a skilled workforce. Often expats need to be recruited at high cost.
In fact it is best to divide these market opportunities into 3 categories:
• those already developed, like Japan, Hong Kong, Singapore, where the GDP per capita is still relatively high and we expect growth to continue to be in the range of about 1% to 3% in the years ahead.
• the semi-developed like Russia, Malaysia and Thailand
• and those recently emerging like India, China, Mexico, where the GDP per capita is relatively low and the GDP growth is expected to be relatively high in the years ahead.
In terms of the growing middle class opportunity, you’ll find that the compounded annual growth rate in China, India and Indonesia from the year 2008 to 2012 is expected to show double-digit growth. If personal income is growing that fast, it will drive increased demand. Taking China as an example, you find the high to middle income groups expect to see significant growth up to 2025. The disposable income created will generate a lot more desire for goods and services locally and globally. We still find food, beverages and tobacco being the largest consumption within India, but the fastest growth from 2005 to 2025 actually lies in the communications industry.
Another difference: urbanisation in emerging markets isn’t as high as in the developed world. Between 1982 to 2017, the Indian population is expected to move dramatically from rural into urban areas. The number of large cities in India increased from 23 in ‘91 to 40 in 2001 and more have grown since.
Age distribution also plays an important role. How young a population does each nation have? Although China only has about 39% of its population aged 24 years or less, for India it is 52% aged 24 years or less – compared with the U.S. and the U.K., where the figure is around 37% and 38% of the population. Youth is a significant driver of growth in areas such as gaming, social networking and music. Retail sales become dominated by global youth brands and, of course, education is a very important growth element.
If we look at, say, India and China’s oil, gas and coal consumption, it has grown dramatically from 1965 to 2007 with China now using about 45% of the global consumption of coal. How do you leverage green initiatives to keep the economy growing, but also protect the world’s climate and the environment?
Those are the main factors distinguishing emerging markets from the established ones. So what is happening now, how is the rest of the world responding to these opportunities?
We now see a lot of investment into emerging markets. But equally important, there are also outward investments by emerging market corporates creating new business models, paradigm shifts in the industry, that allow them to compete against world class enterprises. For example, India has invested something like $22 billion over the last 10 years in various industries, and Russia and U.S. being the biggest areas of growth or investment – for example, Lenovo acquiring the IBM PC business. Toyota went into the US and gained a dominant position. There is an exciting two-way movement, both coming into emerging markets and from emerging markets reaching out.
There is a rapid take-up of technology in emerging markets, their populations are very quick to adapt to new technologies. Philippines is now the texting capital of the world and its population is doing things with text messages way beyond their counterparts in the US.
We look to India too for innovative business models. Currently, India has one of the lowest calling tariffs in the world – the mobile rate is 1 cent per minute, the domestic long distance is 1 cent per minute and international long distance is about 10 cents a minute. Compare that with some of the costs in the mature economies. While the costs are lower, the companies remain profitable and are investing heavily, with a view to further growth across emerging and global markets.
Vietnam, as the world’s gaming hub, has played a very interesting role in the growth of telecommunications as well as gaming in the APAC region. However, broadband penetration is one area that still lags in the emerging markets, and it presents a very interesting opportunity.
So how do we go about entering into these markets? There we are gazing at all the unfamiliar gym equipment and wondering where to start…
We need first to study the opportunities and develop a framework to assess which markets to go for and grow our business.
Begin by considering the three broad areas suggested earlier in relation to your strategic objectives – macroeconomic trends, telecom related issues in terms of local competition, and the regulatory aspect. For example, for the macroeconomic climate you look at political stability; for the regulatory aspect, you look at how easy licensing will be and the hurdles to entry; in telecoms, consider the demand and supply; and so on.
”At TATA looked at world emerging markets and identified about 60 countries that had the right potential. We filtered it using the above criteria down to a list of 30 priority targets. In the last year and a bit we gained presence or access to 24 out of those 30 and we’re well on our way to getting to the remaining six.” according to Sunil Joshi.
Sunil Joshi’s final point was to re-emphasise the importance of local knowledge and of having people on the ground. Whether it is investments in South Africa or India, China, or the Middle East, you need people who actually understand the nuances of the culture, government and marketplace.
”Even in this economically challenging environment, TATA has grown 20% on the top line, and our EBITDA growth was 53% year-on-year. That gives us the confidence that our strategy around emerging markets, and connecting mature or developed economies with emerging markets, is working. And we are obviously putting a lot more investments behind this strategy.” says Sunil Joshi, President, Tata Communications Enterprise Business, Emerging Markets in interview with Duncan Clark, Chairman, BDA Research at NetEvents 2009 APAC Press Summit in Singapore.