BRICs: the sub-plot thickens

The dominant story that jumps out when you examine global trade data for the past decade, or even two, is the one everybody knows about: the almost vertical rise of China as an export and import powerhouse.

But there is a sub-plot that gets less attention: the rise of BRIC to BRIC trade. This is the fastest growing part of global trade. It challenges many of the assumptions on which multinationals’ emerging markets strategy has been built, identifies a new set of competitors, and presents new opportunities that will require new business models.

I have been working on a project with Ivey doctoral candidate Charan Bagga with the goal of highlighting this sub-plot in 21^st century global trade, and thinking through its strategic implications.*

The story everyone has heard of is that trade between the BRIC nations and the developed economies of North America, Europe and Japan has grown by almost 300% over the past ten years, from $525 billion in 2000 to just over $2 trillion in 2010. But the sub-plot of BRIC to BRIC trade is even more intriguing: trade between the BRIC nations increased by 1000% during the same period! Admittedly, this was from a much lower base, and, at about $319 billion, intra-BRIC trade still only accounts for one-seventh the trade between the BRICs and the developed economies. Even so, at those growth rates, this sub-plot is the opportunity to watch: if current trends continue, by the end of the current decade intra-BRIC trade may begin to rival BRIC to developed economy trade in absolute size.

Data source: Analysis based on data from Trade competitiveness map, International Trade Center

 

 

So what does this mean for multinational companies? Over the past year, I have presented data from our project to several audiences, including executives from Japanese multinationals in Tokyo, a group of Canadian CEOs, and a global management team at a French multinational headquartered in Paris. On each continent, the data startled the audience: in the frenzy of the top-line story, the sub-plot of intra-BRIC trade had somehow been missed. The immediate questions focused on whether the sub-plot represents a threat or an opportunity.

Multinational companies from the developed economies of North America, Europe and Japan have, over the past two decades, shaped their global strategy on the assumption that they can source inexpensively manufactured Chinese and Asian products, and sell them to developed market consumers at prices that cover high R&D, design, and branding overhead. A pair of shoes sourced for $3 in China or Indonesia, is sold for $100, providing a healthy shareholder return, even after covering all those overheads.

But this model is coming under strain for a couple of reasons. Sourcing is no longer as inexpensive as it used to be, as the Chinese currency appreciates, and inflation in Asia outpaces inflation in the developed markets. But the model is also under strain because it does not fit the biggest opportunity for growth in the coming decades: the emerging market consumer. This consumer is simply unwilling to pay the heavy multinational overhead.

But it is not just new consumers that multinationals need to watch for. It is also new competitors from emerging markets. If the multinational companies cannot adapt their business model to serve the emerging market middle class, fast-growing companies from the other emerging markets will fill the gap.

A number of factors make intra-BRIC trade the sub-plot to watch over the coming decade:

-          Currently, a lot of the intra-BRIC trade is accounted for by raw materials and other B2B products feeding the production lines of other BRIC countries. But this is changing; Chinese toys, phones, and textiles are fast capturing consumer share in the other BRIC countries;

-          The low-overhead business models of companies from the BRICS are well suited to the frugal consumers in other BRIC countries. They compete favorably against the high-overhead business models of multinational companies from the developed countries; Will they be able to capitalize on this advantage?

-          Intra-BRIC trade is showing the way for trade between other emerging markets: Vietnam, South Africa, Turkey, Mexico, and Indonesia all represent natural trading partners for each other and for the BRIC countries; Expect to see more Emerging Market to Emerging Market (EM2EM) trade.

-          The size of the BRICS (together they account for half the world’s population) means that companies that achieve scale in these markets will be incisively competitive in the rest of the world – and conversely, those that do not will have to contend with competitors that have the advantage of scale in the BRICs.

In the year 2020 will cricket players in India be wearing Nike or Li Ning? Will their uniforms be sporting the Pepsi or the Wahaha logo? In the FIFA World Cup in Brazil, will the billboards be advertising Huawei, Gazprom, Haier, and Tata Motors’ brands? Will Chinese banks be buying their enterprise software from IBM or from Infosys? Answers to these questions have profound implications for the strategies of many traditional Western and Japanese multinational companies that have built their business models on assumptions about who their principal customers are, and where they source manufactured products.

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* Dawar, Niraj and Charan Bagga (2011) “Is your Business Model Ready to Drill into the Core of the Diamond?” Working Paper – a version of this will appear as a chapter in the book Global Strategies for Emerging Asia, edited by Srinivasa Rangan, Toshiro Wakayama, and Anil Gupta.