EMERGING MARKETS:Companies in emerging markets developed a reputation for producing cheap imitations of products from the west but they are now being innovative and western companies would do well to take note, writes STEFAN WAGSTYL
PULPY MAY BE unfamiliar to us but Coca-Cola’s top-selling fruit drink is all the rage in Shanghai, Jakarta and Mexico City. Introduced in China and rolled out across Asia and Latin America, it is now set for launch in other regions, including eastern Europe.
Pulpy is Coca-Cola’s first international product to be developed in the emerging world and make a significant contribution to group-wide sales. “This is one of the most successful Coca-Cola innovations of the 21st century,” says Joanna Lu, a Coke marketing director.
The success of the drink highlights the growing importance of innovation in emerging markets. Not only do China, India, Brazil and other countries offer companies fast growth prospects; they also generate opportunities for developing new products, services, manufacturing techniques and business processes.
These innovations do not yet involve transformational technological shifts – such inventions remain the preserve of the developed world with its long-established universities and commercial laboratories. But the emerging world is spawning product improvements with commercial implications that are game-changing.
Multinationals that dismiss such innovation as localisation do so at their peril. The advantages competitors gain in emerging markets will be deployed in the rich world too. Christoph Nettesheim of Boston Consulting Group says: “The danger for many is they don’t see the emerging market innovations coming because they are not yet coming direct into their home markets. But they will.”
There is a precedent: in the 1970s, Japanese groups advancing in world markets were often dismissed as low-cost, low-quality copycats. But later they were recognised as innovators, notably in miniaturisation and just-in-time manufacturing. While Japanese companies are now under pressure from revived western groups and new Asian rivals, their innovations are imitated everywhere.
Emerging market innovation is not new. More than 20 years ago, Hindustan Lever, the Indian consumer product affiliate of the Anglo-Dutch Unilever, pioneered mini-sachets to take its soaps to poorer consumers. What is new is the increase in such innovations, the internet-boosted speed with which they capture markets, and the increasing role played in innovation by local companies, notably Chinese, Indian, Brazilian and South African.
Certainly emerging economies make plenty of shoddy products and not a few rip-off copies. But mere imitation does not sustain a business for long, given the fierce competition in the biggest economies, especially China. As Dieter May, a vice-president of Nokia, the Finnish mobile phone maker, says: “They don’t need to steal any more. That’s history.”
With China last year overtaking Japan as the world’s second largest economy, its companies are leading the charge. Huawei, a leader in switching technology, competes head on with Sweden’s Ericsson, even in Europe. Mindray, a medical equipment maker, has developed monitors priced at 10 per cent of western rivals. Haier, a white goods company, makes novel low-cost mini-fridges.
In services, Bharti Airtel has grown into India’s biggest mobile phone company by outsourcing almost everything. Dr Devi Shetty has devised mass heart surgery at his 1,000-bed hospital in Bangalore.
Some companies have transformed whole global sectors. In outsourcing, Indian groups headed by TCS and Infosys have revolutionised information management by splitting work done by expensive on-site consultants from that carried out cheaply offshore.
Emerging countries have far to go before they match developed economies in science. Only Russia has significant numbers of science Nobel prize winners. But China beats the world in turning out engineers and scientists – 2m a year, five times the US total, says Research-Works, an Asia investment company.
Many of the best leave: about 30 per cent of US science and engineering PhD graduates were born in China. Win Yinga, head of China Capital Group, says: “Our education institutions are weak. They are set up for rote learning and not for creating innovation-minded graduates.” But Western-trained Chinese academics are now returning home in growing numbers. China produces more peer-reviewed scientific papers than any country bar the US.
But scientific pre-eminence does not necessarily lead to economic success, as is demonstrated by Russia’s struggle to diversify out of commodities. Commercial innovation matters more. In dollar terms, Chinese research and development spending has already exceeded Japan’s and is set to beat that of the European Union and match the US in the next 20 years. With RD labour costs only 20-50 per cent of those in the west, the numbers employed are greater than in the US, EU or Japan.
Western multinationals complain that Chinese companies steal technology in a government-backed modernisation drive. But many blueprints were given voluntarily in co-operation deals: multinationals bet that the risks would outweigh the rewards of entering China. Now Chinese companies are entering world markets, sometimes in partnership with western rivals, for example in high-speed trains where China’s CSR works with General Electric of the US and Germany’s Siemens.
Sceptics dismiss many emerging market innovations as incremental improvements. But for business, that is beside the point, when such improvements lead to better products, services and processes. Peter Williamson, international management professor at Cambridge University, says: “The innovations may be incremental. The effects are not.”
– FT service
