How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
At the end of 2012, Apple announced that it would start producing a few existing lines of Macs in the United States, which would bring some jobs back home. In parallel, Jeffrey Immelt, the CEO of GE, declared outsourcing “outdated as a business model.” And the title of a recent Boston Consulting Group report, “Made in America, Again,” which examined “economic trends that point to a U.S. manufacturing renaissance,” seemed to sum it up.
So is this the end of globalization? No. In fact, the U.S. economy was never truly globalized in the first place. That was always a myth -- one spawned by the very real facts of information traveling at the speed of light, business executives traveling at the speed of a Boeing 747, and fast food flying out of McDonald’s outlets in 122 countries.
Globalization has two parts. One involves relocation of manufacturing or IT services to lower-cost countries. The United States feels this kind of globalization viscerally. It leads to lost jobs, decayed industrial towns, and news reports of factory disasters in unregulated countries in which costs are low. The other part involves the extent to which national companies ply their wares abroad. On this second front of globalization, American industry barely ever made a start. According to the IMF World Economic Outlook, the top twenty fastest-growing economies are all outside the Western hemisphere -- exactly the places the United States has not tapped. Therein lies the real opportunity.
In 2010, emerging markets represented 36 percent of global GDP, the majority of global oil and steel consumption, 46 percent of world retail sales, 52 percent of all motor vehicle purchases, and 82 percent of mobile phone subscriptions. According to the IMF, the emerging markets’ share of GDP will rise to 55 percent by 2018. The U.S. National Intelligence Council singled out the growth of a global middle class from these markets as a “tectonic shift,” valued at a $30 trillion market opportunity by McKinsey.
Yet according to a 2011 HSBC study, U.S. companies derived as little as seven percent of their overall revenues from emerging markets. These low figures are despite huge outliers such as Yum! Brands (which has two restaurants per million people in the top 10 emerging markets and made 42 percent of its profits in 2012 from China alone) and Coca-Cola (25 percent of sales in emerging markets). Overall, U.S. consumer staples companies, a category that includes such stalwarts as Kraft Foods, Hershey, and Proctor & Gamble, derive under five percent of their sales from emerging markets. According to McKinsey, the average across the 100 largest developed-world companies was 17 percent. In other words, U.S. industry lags in both absolute potential and in comparison to its peers.
There are several broad reasons for the sluggishness. Some are intrinsic to emerging markets; others are unique to the United States.
Emerging markets present five hurdles to any outside player. First, reliable infrastructure, supply chains, and distribution networks, which are essential for doing business, tend to be lacking there. Recent disasters in Bangladeshi garment factories, the scandal over antibiotic-laden chicken supplies in China, and the fragmented retail systems in India and across Africa all illustrate this challenge. Second, emerging markets’ paucity of institutionalized lenders and the absence of fair lending practices squelch entrepreneurship and potential customers. Third, there is no reliable pipeline of talent at various levels -- from employee to managerial. That has to do both with brain drains and with the uneven quality of educational institutions in emerging markets. Fourth, an emerging “market” is typically a collective of distinct sub-markets: think São Paulo state in Brazil, which has a GDP larger than that of Argentina, or Shanghai’s urban cluster, which has a GDP equivalent to that of Switzerland. The variety makes a typical single-country management approach nearly impossible. Finally, poor governance, lax enforcement of contracts and property rights, and pervasive corruption are deterrent. On the World Bank’s Ease of Doing Business index, for example, the BRICs are ranked 130, 112, 132, and 91, respectively, out of a total of 185 countries.
On the U.S. side, there are additional challenges. First, unlike most Western powers, the United States is not a former colonizer. It thus lacks the bonds with developing nations forged through colonial relationships. In comparison, the British imperium helped HSBC and Standard Chartered gain footholds in Asia. Second, there has been a lack of coordination between U.S. foreign and commercial policy. U.S. policy toward developing regions is diffuse and reactive. It stands in stark contrast to that of China, where, in recent years, policymakers and leaders of state-owned enterprises have cultivated relationships that help secure crucial resources as well as markets for Chinese-made products in the world’s fastest-growing areas. Third, the United States is, itself, the world’s pre-eminent consumer economy. The combination of favorable demographics, expansive credit, and a robust economy meant that the domestic market was the primary focus for U.S. companies until the 2008 financial meltdown. In addition, U.S. geography itself makes the country more inwardly focused. And that insularity was only reinforced by 9/11 and the financial crisis.
FILL ME IN
Despite the systemic challenges of doing so, it is possible to narrow the globalization gap. Both the private and public sectors have roles to play.
The private sector should focus on products that it has some technological or economic advantage in providing, for which there is a real global demand, and for which it has real local partners to help with distribution. Consider the heavy-machinery sector. There is growing demand for machinery as emerging economies build infrastructure. Heavy machinery is capital-intensive, and the specialized nature of the products disadvantages competitors. In China, GE has worked all that to its advantage. Alternatively, consider large-scale services. Certain services, such as fast food, have become ubiquitous, but there are others with the potential to serve the real needs of a burgeoning middle class. These include: elder care, reliable private transportation, childcare, quality schooling, concierge medicine, and many more. U.S. companies have expertise in these areas, which they can profitably deploy.
U.S. companies must also become better at “going native.” They must do a better job of customizing consumer-oriented goods to local tastes, conditions, and usage patterns. LG’s mini refrigerators for emerging-market households (in which frequent grocery purchases and small living spaces are the norm) and Unilever’s localization of product design, sizes, pricing, and distribution are good examples to mimic. Four key principles can act as guides: appropriateness to the context, affordability, adaptability, and accessibility. This requires a departure from standardized products and business models.
As emerging economies’ middle classes grow, citizens are more concerned about the exclusion of the bottom of the pyramid. U.S. firms need to devise broader product lines that appeal to and are accessible to the vast underclass. This is necessary not only for promoting social equity and corporate social responsibility but for pragmatic reasons. In many countries, the entry of foreign players was blocked for decades by internal populist politics. If U.S. firms can take the lead role in innovating inclusive products by drawing upon American ingenuity and problem solving, the goodwill generated will pay off.
The talent shortage is a common challenge across all the emerging markets. U.S. firms have a long tradition of training -- from basic to managerial skills. U.S. universities are world leaders, and the recent growth of MOOCs and other online programs from U.S. institutions can serve as a powerful tool to extend their capabilities. Such investments can help U.S. firms ensure strong local ties and a talent pool to support future growth.
Similarly, the U.S. private sector leads the world in funding and nurturing startups and in producing innovative technologies and products. Many emerging-market entrepreneurs are inspired by American models; for example, Turkey’s Trendyol (inspired by Gilt Groupe), India’s Flipkart (inspired by Amazon.com), and the Rocket Internet spin-offs (inspired by multiple American brands). U.S. investors, such as Kleiner Perkins Caufield & Byers, Blackstone, KKR, and others, are seeking emerging market opportunities. A concerted effort to facilitate funding and transfer of technology and expertise can help overcome supply and distribution hurdles that U.S. companies normally face.
All of these private-sector initiatives should be matched by efforts in the public sector. First, the United States is in prime position to set global standards for democratic institutions, transparency, the rule of law, and human rights. It represents the pre-eminent model globally of democratic capitalism and has a good track record of businesses being governed by the rule of law. Pushing for these norms requires genuine public-private partnership. For example, the Obama administration’s strategy toward sub-Saharan Africa is based around institution-building, which the Department of Commerce has backstopped with an initiative to promote new business agreements between U.S. and African firms, which could number in the hundreds after the president’s recently concluded trip to Africa.
Some emerging economies have made deep inroads into others. Resulting trade imbalances, unfair hiring practices, and disputes over land and natural resources can cause resentment. In parts of Asia, there is already growing nervousness among the smaller economies about China’s unilateralism in commercial and military endeavors. The United States can be a counterbalance on the side of the weaker states. It has already started to do so in Asia. It should consider doing the same in other regions.
It is also important for the United States to internationalize its education system. After the Sputnik launch, President Dwight Eisenhower signed the National Defense Education Act, which increased funding for foreign language instruction and the sciences. Another Sputnik moment is at hand. Once again, coming generations of Americans must prepare to engage with countries outside the Western hemisphere, speak their languages, understand their dreams and constraints -- and develop better contextual intelligence.
BIG MAC MIRAGE
There has been much hand-wringing recently over the decline of American power. If U.S. businesses start to grow, jobs and wealth creation will follow. To do that, the U.S. private and public sectors must create the conditions for companies to compete in emerging markets.
The ubiquity of McDonald’s may have given rise to the Big Mac mirage. But all is not lost; the other big Mac maker might be pointing the way toward the future. Apple’s sales in the Asia-Pacific region (excluding Japan) grew from nine percent of total Apple sales in 2009 to 24 percent in 2012. To continue the trajectory, it must adapt to local needs and learn how to adapt to emerging competition from local players and others, such as Samsung, that more adept in emerging markets. While taking token steps toward de-globalizing on the visible front, Apple could be poised for giant leaps in globalizing on the invisible front. If the rest of American industry can follow, we might be able to declare it a Big Mac miracle.