Got Growth? Growing Business in a Changing World

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© 2014 Blue Canyon Partners, Inc. DAVID G. HARTMAN, PRINCIPAL | MARCH 26, 2014 SAMA Webinar Got Growth? Growing Business in a Changing World

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Decelerating growth, a more insular economic strategy, rising costs and new regulations are changing China's business dynamics, leading to a host of new challenges and opportunities in Asia's largest market. Meanwhile, an uneven economic recovery looms over Europe while the debate as to whether Frontier markets are faring better than Emerging markets continues. Growth strategist David Hartman looks forward to where global growth is coming from and how changing country dynamics will impact strategic account management.

Transcript of Got Growth? Growing Business in a Changing World

Page 1: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

DAVID G. HARTMAN, PRINCIPAL | MARCH 26, 2014

SAMA Webinar

Got Growth? Growing Business

in a Changing World

Page 2: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

1. Dissecting the Daily Headlines about China’s Economy,

and a Look at a New Set of Growth Markets. How

Significant Will They Be?

2. Where China Has Been as a Market and as a Global

Competitor, and Where It is Headed

3. What Have We Learned That is Useful in Looking at

Frontier Markets

Agenda

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Page 3: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

We Have Witnessed a Sea Change in the Sources

of Global Growth in Recent Years

As recently as 2002, North America and Europe were the growth drivers of the world market, accounting for 70% of global market growth.

As recently as 1992, Asian developing countries (bars with black outline) accounted for less of global market growth than Japan alone.

The past 5 years have seen developing Asia account for a remarkable 60% of all the market growth in the world, nearly 40% of it in China alone.

Regions not shown in the chart now account for about 30% of global growth, three times as high as in the 90’s and higher even than during the oil crises of the 70’s.

Sources: World Bank, WDI, Blue Canyon analysis

Percentage of 5-Year Global GDP Growth

Accounted for by Selected Regions

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Page 4: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

While Asian Emerging Markets Still Lead,

Frontier Markets in Other Regions Have Emerged

With some exceptions such as Argentina and Vietnam, the Frontier markets are outside the mainstream of prior rapid growth: Asia and Latin America.

With global growth faltering over the past 5 years, the Middle East and Africa were home to some substantial growth. The old adage of the developing world getting pneumonia when the US and Europe catch cold seems quite outdated now.

The reasons can be debated, but the demands on the world’s resources created by explosive growth by China are a factor.

Even with a substantial slowdown in China from this level of growth, China will still outweigh the importance of all the Frontier group for some time to come. But positioning for the future requires attention.

Sources: World Bank, WDI, Blue Canyon analysis

Percentage of 5-Year Global GDP Growth

Accounted for by Selected Regions

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© 2014 Blue Canyon Partners, Inc.

Still, China Looms So Large That Its Growth

Slowdown Makes for Shocking Headlines

Global concern over China’s economic slowdown is probably overdone

China’s policymakers are determined to build a more balanced economy:

▫ Services vs manufacturing

▫ Personal consumer choice vs government spending

▫ Interior regions vs coastal

▫ Environment vs growth

“Slowdown” scenarios to below 8% must be seen in context of less than 2.5% growth in the US and Europe (solid blue line)

Sources: World Bank, WDI, Blue Canyon analysis

China’s Real Annual GDP Growth

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© 2014 Blue Canyon Partners, Inc.

Government Spending Has Given China a Vast Modern

Infrastructure, Such as a Highway System, Built Largely in

15 Years

China’s growth was maintained during the great global recession by government stimulus spending, largely on infrastructure projects.

Expressways have been a large part of the construction boom in China, taking China from few “interstate highways to the size of the US’s system.

China has been pushing the highway network west, allowing for delivery to ports and major cities of products produced outside the most developed coastal rim.

The same building boom has similarly expanded rail and air infrastructure.

Sources: National Bureau of Statistics of China,

Wikipedia user ASDFGH for Map translation/presentation

China’s Expressway Development

China’s Expressways:

Operational (Blue) and Planned (Red)

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Page 7: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

This Transportation Infrastructure Supports the

Ongoing Westward Shift in Centers of Growth

Long China’s laggards, the interior regions

of China have per capital incomes a

fraction of the most developed provinces

along the coast.

The much-discussed wage increases faced

by foreign and Chinese manufacturers are

far less burdensome in the poorer regions

where new development is taking place.

And now the former leaders - Beijing,

Shanghai, and Guangdong - have fallen to

the bottom of the growth chart.

Those companies looking for new “frontier

markets” should look at the low-income

regions of China as well as outside.

Sources: China National Bureau of Statistics, Blue Canyon analysis

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© 2014 Blue Canyon Partners, Inc.

What Do All These China Dynamics Mean for

Succeeding With Strategic Accounts?

Trend What It Means

China’s overall growth rate slows

Still-growing demand for your products and your strategic

accounts’ products, but growing more slowly than some had

anticipated

Consumer demand replaces government infrastructure

spending

Manufacturing for some of the most fashion-conscious consumers

in the world presents great opportunities but different

opportunities from supporting construction. Service providers

could also see opportunity

A significant population moves from subsistence agriculture

to new cities

As peasants become city-dwellers, dependencies on products

from the market increase dramatically

Industry moves from the Coastal areas to regions farther

and farther West

Instead of moving (migrant) workers from the West to factories in

the East, B2B customers will move goods from factories in the

West to markets, often in the East but also in the West. Logistics

reemerges as a key challenge/differentiator.

Domestic demand and higher-value exports replace exports

of low-priced labor-intensive goods

Changes in pattern of goods movement within China is coupled

with an increase in demand for imported products. Export

volumes fall over time. Key accounts that are in China for low

cost manufacturing will be challenged by basic economics.

Consumer concerns such as Food safety are a daily topic

of conversation and shapes people’s dining habits

Foreign brand name products and inputs gain acceptance; more

reliable and well-monitored supply chains, as well as inspections

at source, can start to calm fears.

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© 2014 Blue Canyon Partners, Inc.

Chinese Companies as

Strategic Accounts and

as Competitors

Taking stock of Where China has

Been and Where China is Headed

as a Global Competitor

1. Remarkable change in not much

more than 20 years: command and

control to largely market-driven

2. Now a “must-win” market for most

global manufacturers who intend to

achieve growth and continue being

global leaders, needing partners

to support them

3. Having created a formidable set of

Chinese competitors who are

large, well-funded and tend to follow

a different business model, creating

challenges across the globe

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Page 10: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

Value Creation for Chinese Key Accounts Is Defined

by the Market in Which Second Mice Have Prospered

Incomes have soared, but most of China

is still a poor country

▫ Labor is still relatively cheap

▫ Consumer products are sold in volume in the

middle market where price is critical

Most Chinese companies know of only

one way to compete: “Almost as good as

____ (Motorola, Nike, Ericsson, Apple,

Siemens) at a fraction of the price.”

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© 2014 Blue Canyon Partners, Inc.

How the Second Mice Succeed in That Market

Manufacturing and sourcing capabilities, including ones learned from western firms

“China economics”

▫ Substituting labor for supplies and equipment

▫ Moving to lower-cost geographies

▫ Redefining relationships with customers around service

Fast learner and fast follower competencies

▫ Copying what works elsewhere

▫ Thinking “outside the stadium”

▫ Moving at “China speed” to be Second

▫ Using close customer relationships to engineer features out

A focus on China’s “middle market” – where the products of western companies are too expensive

Source: George F. Brown, Jr. and David G. Hartman, Are You Ready to Take

on China’s Next Generation Competitors?, Chief Executive, September 2011.

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Page 12: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

Coming to a Market Near You:

The “Going Out” Strategy

Before China joined WTO in 2001, most Chinese

“exporters” had little idea what happened to

their products after they left the factory.

The government began a policy of actively

supporting firms to invest abroad. There was even

a list of resources and technologies for

companies to target.

Through acquisition, Chinese companies are

becoming major players on the world stage. Not

all will succeed and not all will change the

companies they acquire, but some will do both.

Chinese resource and engineering companies are

doing projects across the world, moving large

volumes of Chinese products with them.

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Page 13: Got Growth? Growing Business in a Changing World

© 2014 Blue Canyon Partners, Inc.

What You and Your Western Strategic

Customers Need to Do to Win Against

Chinese Competitors

To sustain global leadership, most western firms will need

to win in China’s mid-market: to bring what the Chinese do

so well into their own firm’s cultures, most likely through

acquisition and a new perspective on integration.

The task of competing with Chinese companies, in China

and at home, is monumental, but the China market

remains a “must win” for western firms aspiring to

sustained global leadership.

While ensuring reliability, the western firms must keep the

primary focus on cost in order to compete.

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© 2014 Blue Canyon Partners, Inc.

China Lessons for Frontier Markets

Lesson What it Means

Being early to China meant being the only supplier of

sophisticated products; but most western companies later

found themselves positioned in high-end niche market

segments that failed to match explosive growth in overall

market demand.

Be realistic that people waiting in line to buy your products is

a short-lived phenomenon. The phenomenon will be even

more short-lived due to the focus of China on being the

supplier to the New Frontier Markets in Africa, the Middle

East, and Latin America.

Being early to China meant dealing with high costs due to

lack of development, such as training workers, poor

infrastructure, and an immature supply base, despite the low

labor cost environment.

In frontier markets, some companies make money despite

the cost environment, others do not. Being thoughtful about

the costs and the future is critical.

Being early to China meant dealing with a business culture

that was insulated from global norms, was confusing and

risky and led to some violating their ethics and the law.

Frontier markets are frontier for a reason. Choose carefully

the regions and market segments in which you can operate

effectively.

China developed in a relatively short time from a cheap

manufacturing location to offer higher labor costs but a

compelling market.

Chasing the next low-cost manufacturing location may bring

only temporary rewards unless you position for a long-term

win in that country as a market.

China developed quickly into a manufacturing powerhouse,

with local competitors who attacked the local mid-market but

also have global ambitions

Not every frontier market will see the rise of indigenous

competitors to that degree, but it is important to anticipate

how it will evolve.

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© 2014 Blue Canyon Partners, Inc.

Questions?

David G. Hartman

Current Responsibilities

As a Principal of Blue Canyon, David Hartman works with major corporations developing growth

strategies, defining ways to capture value from Big Data, and strengthening B-to-B customer relationships.

David also serves as the Director of Blue Canyon’s China Practice and CEO of Blue Canyon & China

Associates in Beijing.

PRINCIPAL

T (847) 967-0295

E [email protected]

Experience

David has worked across a multitude of industries, including automotive, telecommunications, construction

and many others. As a leading economist, David has directed Blue Canyon associates to create detailed

data models that forecast growth and offer insights for clients. During his 15 years at Blue Canyon, David

has worked on a broad range of projects, including:

Identifying global growth opportunities for multiple U.S. manufacturers

Recommending how clients must address new channel opportunities and strategic pricing

Advising longstanding China market participants on how to break through barriers to further growth and

strategies for succeeding against local competitors in China’s mid markets.

Prior to joining Blue Canyon, David served for 10 years on the faculty of Harvard University, was

Executive Director of the National Bureau of Economic Research, and was Managing Director of DRI

McGraw-Hill, a pioneer in the information industry.

Education and Affiliations

David earned a Ph.D. degree in economics from Harvard and B.A. and M.A. degrees from

Northwestern University in mathematics and economics.

Thought Leadership

David has spoken to numerous organizations and has been interviewed by a number of publications. He

has written more than a dozen articles and white papers on topics ranging from global expansion, market

creation in China, and the development of new data-driven business models.

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