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Emerging markets are the cradle of tomorrow’s largest companies


By Sabine Vollmer

Do you know where your next large competitor is lurking? Very likely in a developing country, a study by the McKinsey Global Institute suggests.

The same factors that have lured North American and European companies to emerging markets – low labour costs, rising consumer populations, rapid economic growth – are also nurturing home-grown enterprises, especially in China, according to the McKinsey study.

McKinsey researchers project that 45% of companies listed among the Fortune Global 500 in 2025 will be based in an emerging market, up from 17% that were based there in 2010 and 5% in 1990.

An increase in the number of companies generating $1 billion or more in annual revenue is driving the shift of corporate power from developed to developing countries. The number of large companies worldwide is projected to nearly double to 15,000 by 2025, from about 8,000 in 2010. About 5,000 of the new companies are expected to come up in emerging markets, and nearly 40% will probably be based in China.

Large companies, whether publicly traded, privately owned or state controlled, have a profound impact on their home economies. They create jobs; generate higher incomes; boost productivity, innovation and standard setting; and spread skills and technology.

Such companies “could disrupt entire industries by designing superior products at lower cost, by bringing them to market faster, and by streamlining business processes,” the study’s authors wrote. “Many of these businesses, having been nurtured in difficult operating environments, are not only more agile than their counterparts from advanced economies but also prepared to invest for the long term, even if this cuts earnings in the next few quarters.”

New players already emerging as global competitors include telecommunications networking giant Huawei, based in the Southern Chinese city of Shenzhen; Brazilian aircraft manufacturer Embraer, based in São José dos Campos, about 50 miles from São Paulo; and India’s industrial conglomerate Aditya Birla Group, based in Mumbai, according to the McKinsey study.

“By 2025, some of the global leaders in many industries may be companies we have not yet heard of, and many are likely to be based in cities that we could not point to on a map,” the study’s authors wrote.

But business leaders can prepare for the up-and-coming competitive wave and maybe even take advantage of new opportunities should they present themselves.

Optimise sales networks. Multinationals doing business with the rapidly rising number of large companies in developing countries will have to deal with an increasingly diverse and dispersed customer base. To serve them, suppliers may have to reassess locations for sales offices and establish a more mobile sales force.

Today, 80% of the about 2,200 large companies in developing markets are spread across nearly 100 cities. By 2025, 80% of about 7,000 large companies are projected to be spread across nearly 160 cities, and about 280 up-and-coming cities could be home to a large company for the first time.

Understand how customers and competitors are evolving. Companies in developing markets are growing faster than their competitors in developed markets, and it’s only a matter of time before the most successful ones are looking to expand internationally.

The number of companies in developing countries that are ranked in the Fortune Global 500 is projected to nearly triple to 230 by 2025, from 85 in 2010.

McKinsey researchers suggest that business leaders in developed countries track emerging business hot spots in developing countries, where diverse business models may be evolving, and watch for innovation and potentially disruptive changes to prepare for the up-and-coming competition for talent, capital and resources.

Reconsider the headquarters configuration and the location of other core activities. Multinational companies are already realising that the traditional single-headquarters model is outdated and are beginning to share corporate decision-making, production, R&D and service leadership among two or more corporate centers. Some have established a second headquarters.

In emerging countries, business activity tends to cluster in hubs. In China, Beijing is already home to 116 large companies. Clusters have also developed in Shenzhen and the Hangzhou metropolitan area, about 100 miles southwest of Shanghai.

Leading business hubs in other emerging markets include Mumbai, Singapore, Johannesburg, Mexico City and São Paulo.
 
Related CGMA Magazine content:

How Corporate Expansion Strategies Can Target Emerging-Growth Powerhouses”: Rather than zeroing in on specific countries as they devise a strategy, companies should focus on cities – in particular the 440 cities in emerging markets projected to grow at double the global economic growth rate by 2025.

Top Five Emerging Markets Capture Foreign Investors’ Attention”: Western Europe and North America are still attractive to foreign investors, but not as attractive as the top five emerging market hot spots. Even lesser-known emerging economies are gaining ground.

Study Finds Early Warning Signs for a Looming Global Talent Imbalance”: Companies are overhauling their business strategies to adjust to the rise of emerging markets, new research shows. But demographic trends will add new challenges over the next five to ten years, specifically in talent management.

Is Your Company Prepared for the Rise of the Asian Consumer?”: Companies that do business overseas are about to feel the rapidly rising influence of the Asian consumer. Is your company prepared for this economic shift?

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.