The advantages of emerging market entry outweigh the risks. Over the past few centuries, the global GDP share of Europe and North America has been disproportionally high, but this historical imbalance is being corrected. To put it simply, the world is becoming more equal. In fact, your business may already be facing stiff competition from emerging markets domestically through imports, and cash rich companies from developing countries are buying western assets. Chances are that today’s “domestic” competitor will be foreign-owned tomorrow. There is no better way to get to know your future competition than joining them in their home markets today.
Innovation is also coming out of developing countries. Rather than imposing western preferences on Chinese customers, products tailored to the taste of Chinese consumers may increasingly see the light of day in western markets. For example, the functionality of Chinese e-commerce sites and social media applications puts many western counterparts to shame. A fast-rising number of Chinese patent applications should serve as an additional warning. Again, rather than being surprised tomorrow by your now unknown future rivals’ innovations, it is much smarter to follow them closely in their domestic market today.
Where You Should Go
The question is not what countries you should enter, but what region or city in one country you should conquer. This is probably the most common mistake in emerging market expansion. China and India are not countries, but continents. Few American companies would make the mistake of trying to conquer all of Europe at once. Yet, many western companies have entered China and started marketing products or opening retail outlets in dozens of cities thousands of kilometers from each other. Growth is fundamentally compromised when local consumer tastes are poorly catered to. What sells well in Finland is no guarantee for success in Portugal. Yet companies have tried to sell the same in Harbin (northeast China) and Kunming (southwest China), a five-hour flight apart, with poor and costly results. Individual cities in Indonesia, India and China – let alone provinces – offer a potential that would dwarf many European countries. Establishing a moderate market share in just a limited number of these focus regions would satisfy the growth ambitions of the most demanding shareholder. But which regions or cities? There is a reason why China, India, Indonesia and Vietnam are most often cited in emerging markets entry and growth discussions: people. These countries are the most populous in Asia. So, is the answer to go for a few of the largest cities in one large country? It’s not quite that simple. The priority must be absolute available market growth. China’s eastern megacities have attracted scores of domestic and international companies, leading to a very competitive landscape. It pays to go for a region or city with a more modest size (but still huge by international standards) and enjoy a relatively sheltered competitive climate. And it pays to be an early mover. Recently, companies interested in China have been looking at western cities like Chengdu and Chongqing. In China alone, there are dozens of cities between 1 – 5 million people that are even less competitive.
How You Should Go
A successful entry in a new country requires endurance and patience. All the obstacles that you can think of are likely to materialize, as well as many unforeseen ones. You and your shareholders need to be prepared that breaking even in the first 5 years is unlikely. In many emerging markets, for many years, entering without a local partner was legally not an option. In most industries, a joint-venture with a local – sometimes state-owned – enterprise was the only ticket to entry. Conflicts with these partners are a question of when rather than if. In more and more countries and industries, teaming up with a local shareholder is no longer an obligation, but it’s still smart to partner up. Local partners can provide knowledge of the local market landscape and local financing. These benefits are obviously more important in the initial years of your venture, and it is smart to agree upfront on the conditions under which you can buy out your local partner. The choice of a local partner is both important and difficult, but the most important qualities are commitment and trust. It’s tough to assess intangible qualities, but it is smart to study factors like the partner’s track record in other joint ventures, what’s at stake for them, and their aspirations. No one starts a venture with the aim to prematurely abort it, but it’s still clever to prepare for a possible early exit. Preparing an exit plan involves negotiating exit clauses with your key stakeholders and identifying potential parties who could be interested in buying you out.
And look elsewhere for help. International expansion only appears on a company’s agenda occasionally. Chances are that you do not have all the available resources in house, so your business likely needs some help. Start with an in-depth project plan, which list requirements as well as available internal resources. Where do you fall short most? In what functional areas and in what knowledge and skills are you lacking?
Emerging market entry is a classic example of high risk, high reward. But it’s also a topic that benefits from being tackled as early as possible. Early mover advantages rapidly evaporate. The later you enter, the costlier it will be. And it’s better to plan for an exit than to be caught unaware.
Guest article written by: Andre van Regenmortel is the Chief Marketing Officer of düber Technologies düber Technologies and has over twenty years of experience in strategy consulting and industry marketing in consumer products, business services and retail. He has occupied board positions in Vietnam and China and was responsible for businesses of up to $2billion. Previously he has worked at McKinsey & Company, Philips Electronics, Danone and METRO Group