Are You Ready? Finding the Right Opportunities in Emerging Markets (Part 1)

Mary O'Hara-Devereaux | | Future of China and Emerging Markets

MOHD_BRIC Countries

The pace of growth in emerging markets is unprecedented in terms of speed, scale and diversity. They will contribute about 50% to global GDP between 2010 and 2020. Most executives think of the emerging markets as the BRIC nations (Brazil, Russia, India and China), but some of the fastest growing and best investment prospects include countries like Chile, Indonesia, Mexico, Czech Republic, and Morocco. Given their rapid GDP growth, which is projected to continue through 2017, these markets provide some of the best opportunities to navigate out of the Badlands as we enter the foothills to the future of 2025.

Not only are the non-BRIC countries growing fast, but the real emerging markets story, now and into the future, lies in the explosive growth of midsize cities across all regions. Few executives have considered, or even heard of, locales like Huambo, Angola, Vina Del Mar, Chile, Lusaka, Zambia, and Cali, Columbia. Over the next decade, though, cities like these will drive a significant portion of global economic growth.

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The most useful and actionable definition of an emerging market for business is business transaction readiness. What best defines an emerging market is not the country or the geography but the readiness and ease of transacting business and the degree to which buyers and sellers are able to come together. Each market will have a very different profile for readiness and risk.

All of these economies have substantial institutional voids, including the lack of hard infrastructures such as roads, railroads, airports and telecommunications. Soft infrastructure such as legal systems, regulatory bodies, and independent media are often missing as well. Market voids, such as lack of supplier networks, capital markets, and educated workers, are prevalent. These voids will provide a myriad of ongoing strategic and operational challenges to business, and identifying and responding to them is a critical entry assessment. It is a strategic imperative for every business to carefully select where they can win despite the gaps.

Drivers and Brakes of Growth in Emerging Economies

At the macro level, a useful way to think about emerging markets is to look at the big drivers and brakes that work against each other as an economy moves towards growth. When the drivers gain momentum and the brakes diminish in strength, an emerging economy can grow faster. It takes changes on both sides to create good opportunities for business.

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Drivers – A Brief Review
These drivers work both independently and together. Maturing over the last 20 years, they are now intersecting over the next decade and are the force behind the acceleration of growth in emerging markets.

Investment

Investment – foreign and domestic, government and private sector – is critical in facilitating movement from a developing to an emerging economy. Sufficient and continuous investment is necessary until an economy has grown enough to support a significant middle class and can transition to a consumption-driven economy. The BRIC countries are still investment-driven economies, although China is now ready to transition to a consumption economy over the next decade.

Demands for Resources

Demand for oil and other natural resources will steadily increase for the foreseeable future. Resource-rich emerging economies such as Mexico, Brazil, and Russia, as well as several in Africa, are fueling their growth by selling these resources to other emerging economies, as well as their traditional advanced economy customers.

Urbanization

Urbanization is accelerating growth in the emerging markets now and will be the most powerful driver over the next decade. Key to this growth are about 450 emerging market cities distributed across all regions of the globe. Most of them are not the usual megacities (i.e. cities with populations of over 10 million) we think of today as the leaders of growth. Instead, they are mostly cities with populations of less than two million, many of which develop in a cluster near a megacity. This is the most important driver to watch as it creates a vast array of new business choices and diverse opportunities. China’s urbanization strategy is well underway and illustrates the result.

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Growth of the Middle Class

An increasing middle class is a natural outgrowth of development at a certain stage of an economy. It is linked to urbanization as the development of a consuming class is primarily a city phenomenon. Wages and income increase in urban areas, creating new opportunities for buying and selling, and this allows lifestyles to diverge and consumerism to develop. Emerging markets will be home to 95% of these new middle class consumers, and the new smaller cities will account for 60% of this growth. By 2025, 600 million new middle class consumers will be added to these cities.

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Decreased Poverty

Efforts to decrease extreme poverty (those living on a $1.25 a day or less) have finally been successful. The percentage of the population who lives in extreme poverty in developing countries is about half of what it was 20 years ago. In two decades, the percentage has fallen from 43 percent to 21 percent, a reduction of almost 1 billion people. China alone has pulled some 680 million people out of extreme poverty since 1981, reducing its rate of extreme poverty from 84 percent to 10 percent of the total population. Globally, it is expected to be halved again by 2030.

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Education Opportunities

Increasing education is critical to growth. Education infrastructure and distribution is underway in every emerging economy but is a long-term, expensive investment that pays off slowly. Through education, an emerging economy can create better jobs and fill them successfully with their own people. As education systems become stronger and more effective, more of its foreign and domestic investment can be deployed to grow industry sectors successfully.

Global Connectivity

Global Connectivity is now extended to almost every village across the globe with the maturation and global distribution of wireless internet and handheld devices.

Rise of the Local Entrepreneur

Nimble local entrepreneurs are able to successfully start new businesses, leveraging global connectivity to provide them with knowledge, partners, and capital. Unlike the old industrial economy, the knowledge economy’s more level playing field makes it possible to create wealth without being a big business.

Advantages of Backwardness

Emerging economies start with a small-sized economy with slow growth rates. Thus, when they begin to take off, rapid growth and development is possible for a long time. Think of what China has done in just 20 years. The institutional voids, as troublesome as they are, provide opportunities. Building up the infrastructure and filling the gaps is always a key driver of early growth in an emerging economy because it attracts considerable investment from foreign and domestic players.

Parting Thoughts

The shift of economic power and growth from the West to the East and the north to the south constitutes one of the biggest economic transformations the world has yet experienced. It is the story of over 1 billion new consumers in emerging markets by 2025. It is the story of the rise of new cities across the global landscape. It is the story of lifting more than a billion people out of poverty. This next decade will bring a future that won’t resemble the past.

There are challenges ahead and a need to diminish and, ultimately, eliminate the brakes and anchors to this transformation. We discuss these in Part Two.

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Mary O'Hara-Devereaux

Mary O'Hara-Devereaux

Mary O’Hara-Devereaux, Ph.D, Founder and CEO of Global Foresight, is one of the world’s leading futurists, business forecasters and long term strategy advisors. She has over 25 years of global experience providing Blue Chip clients, Fortune 500 executives, senior policy makers and not for profits with reliable customized forecasts that deliver targets no one else can see. Mary is a leading expert in future trends, global business, the future of work, and the future of China and emerging markets.
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