Developing Multinational Enterprises - Analytical Piece

Developing Multinational Enterprises: “If You Can’t Beat ‘Em, Join ‘Em” A decade ago, many employees of Multinational Enterprises (MNE’s) would have laughed at the prospect of being outdone by developing companies and the economies they represent. Today, any such employee is acutely aware of the increasing power of Developing Multinational Enterprises (DMNE’s). The following is a brief analysis the growth of DMNE’s (and, in turn, the increasing influence of their national economies) and the forces driving this growth. The aim is to examine how developed economies should perceive, cope with, and respond to this global shift; that is, how MNE’s can remain competitive.

The Extent of their Global Presence There is no question that the emerging economies of nations such as India and China, as well as Brazil, Russia, Mexico, and Egypt, all have an increasing influence on global commerce. China’s GDP per capita has tripled over one generation, bringing 300 million out of poverty. An example of its increasing global presence is Huawei Technologies, the world leader in voice-over-IP service, which secured a $19 billion contract to transform Britain’s telecom network,i undercutting rivals’ prices by 20–50 percent. India is a target for state-of-the-art Hi-Tech R&D, as MNE’s such as Cisco, Motorola, HP, Google, GM, and Boeing are offshoring innovation to DMNE’s such as Infosys, Tata Consultancy, and Wipro. By 2010 this type of outsourcing will quadruple to $56 billion a year. Mahindra & Mahindra Ltd. makes an inexpensive, more powerful tractor than John Deere, which led to its increased US market share after Katrina1. Also, Ranbaxy Labs sells generic drugs at an average $0.63 for 10 pills, compared with $51 for the same generic drugs in the US. Eighty percent of its revenues now come from overseas operations. DMNE’s worldwide are becoming bigger and more sophisticated, while maintaining inexpensive production, leading to higher margins. Brazilian, North African, and Indian cellular companies, such as Egyptian Orascom offer service as low as $0.02 per minute, yet have margins of up to 49 percent. Mexico’s América Móvil has over 100 million subscribers, while its Cemex is the world leader in concrete production. Brazil’s Embraer, now the world’s third largest aircraft maker, is revolutionizing the industry by creating cost-efficient, mid-sized jets with the leg room and overhead capacity of larger aircraft. Russia’s Lukoil has gas stations throughout the Northeast US. Even the US beer industry is no longer invulnerable, as South Africa’s SAB-Miller PLC seeks to surpass AnheuserBusch’s US dominance. The one hundred best-performing DMNE’s have a combined $715B in revenue, $145B profits, and $500B in assets (2005), and have grown 24 percent annually since 2001. 1

Mahindra’s pretax profits rose 81 percent in 2005

© October 2006, Jesse Kedy www.jessekedy.net

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Driving Factors behind their Growth Several factors are driving this balance-of-power shift, the most obvious being access to vast amounts of low-cost (increasingly sophisticated) labor, land, and natural resources. Also, developing economies have increasingly positioned themselves to control many strategic resources, historically exclusive to the West. These include cutting-edge technology, abundant capital, and managerial talent. There are two main driving forces leading to this. First is the ease with which information can be transmitted across borders; second is the foreign direct investment (FDI) made by MNE’s operating within developing economies. Cisco’s CEO puts it well: “We came…for the cost, we stayed for the quality, and we're now investing for the innovation.”ii Another driver is education and a focus on the future. Each year sixty thousand scientists and engineers graduate in the United States, while five hundred thousand graduate in China and India, as second-tier institutes – such as India’s Manipal Institute of Technology – try to meet the immense demand in their growing economies. DMNE’s are now providing course materials and training for professors, helping to cut training time for new hires: “We've brought down our training program to 52 days today from 76 days three years ago” (S. Ramadorai, CEO of India’s Tata Consultancy).iii Chinese institutions – such as Shantou Universityiv – are focusing on the future by using the more effective method of responsibility for one’s education and independent thinking, as opposed to the listen and regurgitate model. This also creates conditions conducive to the development of industry clusters, which foster collaboration and resource sharing. Another interesting and commonly overlooked source of DMNE strength is the meager upbringing of many developing economies. India’s, for example, has developed with very scarce means. Until recently, its FDI inflows were scant, as were its fuel resources (unlike China’s). India’s companies could not afford to waste resources. India’s British-based legal institutions have also afforded it more capital-efficiency2. Less protective economies (unlike China’s) forced local firms to survive while competing with domestic and multinational rivals. These firms were also producing mainly for a low-income population (unlike MNE’s which usually exported to the West), using limited capital and “hand-me-down” technologies, while dealing with corruption and ambiguous regulations, as well as derisory infrastructure. This type of environment forced DMNE’s to become dynamic and flexible; quickly responding to global trends, demands, and technologies and moving from conception to production faster than MNE’s. It is clear that this phenomenon is not a temporary localized phase; it is a permanent global shift. 2

The average Indian company posted a 16.7% return on capital in 2004.

© October 2006, Jesse Kedy www.jessekedy.net

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Determining Friend from Foe How Western nations and firms view this phenomenon depends on their internal focus. I would recommend a strategy of “if you can’t beat ‘em, join ‘em”, though I would certainly try. To the extent possible, MNE’s should focus on increasing control of, and leveraging, the competencies developed by DMNE’s, as well as examine the above-mentioned factors driving DMNE competitiveness. The Beat-Em Strategy Duplicating or acquiring such processes would require a new perspective on the part of MNE’s. This is a topic for another analysis, but bringing in DMNE managerial talent would be worth looking into. Acquisition of a DMNE (or of a section), with relative operational independence, can help overcome a growing preference for local firms. The Join-Em Strategy If local firms are too large to acquire, if local regulations prohibit acquisition, or if MNE risk tolerance does not permit acquisition3, firms must focus on collaboration. Motorola has leveraged local competencies by designing and assembling hardware in China, while developing forty percent of its software in India. Also, in China’s Zhangjiang Hi-Tech Park (home to thirty four local and multinational drugmakers), biotech research facilities are popping up and American and Chinese scientists have been collaborating on the development of cancer treatments.v Bharti, India’s largest and the world’s most capital-efficient mobile operator, is also the most innovative. It recently outsourced its call center and entire cellular network to Ericsson, Nokia, and Siemens. Free to focus on marketing and customer service, Bharti managed to add six million subscribers in one year.vi Clearly, innovative DMNE’s and their economies are open to change and to collaboration with the West.

Whether change will occur is no longer debatable. The relevant issue is how Western MNE’s will remain competitive in this new, evolving world.

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MNE’s are, by definition, in the business of international business. So, if risk aversion alone keeps an MNE from acquiring a worthy DMNE, a change in business culture and strategic thinking should be a top priority.

© October 2006, Jesse Kedy www.jessekedy.net

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References i

Engardio Pete; Arndt, Michael; Smith, Geri (2006), “Emerging Giants”, Business Week, 3995, p. 40

ii

Engardio Pete (2005), “A New World Economy”, Business Week, 3948, p. 52

iii

Puliyenthuruthel, Josey (2005), “The Other MIT”, Business Week, 3948, p. 98

iv

Einhorn, Bruce (2005), “A Whole New School Of Thought”, Business Week, 1948, 3948, p. 106

v

Einhorn, Bruce; Carey, John; Gross, Neil (2005), “A New Lab Partner For The U.S.?”, Business Week, 3948,

p. 116 vi

Engardio Pete (2005), “Crouching Tigers, Hidden Dragons”, Business Week, 3948, p. 60

© October 2006, Jesse Kedy www.jessekedy.net

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