The Hindu Business Line : Global challengers

Global challengers all: (From left to right) Ratan Tata, Azim Premji, Tulsi Tanti, Anand Mahindra, Mukesh Ambani, Anil Ambani, Nandan Nilekani and Kumaramangalam Birla

It was a perfect setting for The Boston Consulting Group to release its 2008 BCG 100 new global challengers report. The India Economic Summit organised by the World Economic Forum in New Delhi early last month was crawling with CEOs and top managers of all hues from an assortment of top Indian companies. Present too were several head honchos from the very companies that found a mention in the list of feisty home-grown outfits and brands that are scaling up and going global rapidly.

On the stage, along with senior executives of the BCG, was one of the challengers whose company is listed in the report – Anand Mahindra, Vice-Chairman and Managing Director, Mahindra & Mahindra. The report – an analysis by the BCG of how 100 top companies from rapidly developing economies (RDEs) such as India, China, Russia, Mexico and Brazil, are changing the world and challenging the dominance of established multinational players across the world – was endorsed by the suave Mahindra. However, as he said, “We still need to work hard, there’s no guarantee that you will find a place automatically in the list.”

Elaborating on M&M’s own global footprint, Mahindra said, “We became an accidental tourist in the global game!” M&M, the largest small tractor maker in the world, entered the US market for its tractors not with a long-term strategic plan but as the market evolved, it found good acceptance among the US customers.

Indian tractors, he explained, are meant for heavy usage and when the American farmers experienced the hardy M&M tractors they were satisfied and enabled the company to gain a foothold.

Indian companies, he said, are striding out because most firms have strong managerial talent. The top-notch B-schools in the country were providing good strategic inputs to young managers.

“Indian companies today are agile and nimble because of the environment. We also have the lowest cost of inputs for innovation,” said Mahindra, narrating an incident where Carlos Ghosn quizzed Pawan Goenka, M&M’s President, on how the plant for the Logan was completed ahead of time and 15 per cent under budget. “How did we do it? It’s just the way we work, it’s not a formula that we can steal from a safe,” explained Mahindra.

M&M already found a place in the earlier edition of the report in 2006 but this year’s new entrant for an Indian company was Suzlon Energy, now the fifth-largest company in the world for wind energy, with sales of $1.8 billion. Altogether, 17 new companies made it to the BCG list, several from the four BRIC countries and other RDEs as well.

The BCG new global challengers list comprises 100 companies that are growing fast, globalising aggressively and reshaping global industries. With over $1.2 trillion in total revenues and more than half a trillion dollars in yearly purchases, the report says that the BCG challengers are already quite formidable.

But, their ambitions are daunting — according to the report, their combined revenues will reach $3.3 trillion by 2010 and a massive $11.8 trillion by 2015. Meanwhile, hundreds more RDE-based companies will gain critical mass and launch global expansions as well.

Arindam Bhattacharya, co-author of the report and BCG partner and Managing Director, BCG, New Delhi, present at the release of the report, pointed out that by many measures the BCG challengers are already outperforming established industry leaders. In the past five years, the challengers grew revenues faster than the S&P 500 – in fact, almost three times as fast since 2004 – earned a higher average return on sales, and created far more shareholder value. “The challengers are increasingly looking for acquisitions abroad,” said Bhattacharya. “In 2006 they completed 72 outbound acquisitions, up from 21 in 2000. The average size of these transactions grew from $156 million in 2001 to $981 million in 2006.”

Of the 100 companies on BCG’s list, 41 are from China, 20 from India, and 13 from Brazil, with the rest coming from other RDEs — 14 countries in all are home to the BCG 100. As the accompanying table on the list of Indian companies shows, all the stalwarts of the Indian corporate sector are there, with the accent on manufacturing companies, with four leaders of the software space – Infosys, Wipro, TCS and Satyam Computers.

Why are they globalising?

The report says that the desire for growth drives these companies. For the great majority of the BCG 100, access to new growth and profit pools is the overriding rationale for going global.

They have realised that being big in their home markets is not enough to ensure their long-term viability. Other motives are developing complementary skills, such as R&D expertise, acquiring intangible assets, such as brands; and experimenting with new business models.

How are they globalising?

The BCG’s 2006 report identified six globalisation models that RDE challengers adopt when seeking to expand. Those models continue to be the most widely used. All six approaches build on an underlying foundation of low costs.

Model 1. Taking RDE brands global: Twenty-nine of the challengers, including 11 from China and seven from India, have focused on this approach. Many pursue growth organically. An example, the report says, is Bajaj Auto. The company recorded 2006 revenues of $2.2 billion, up 131 per cent since 2000. Its expansion has been entirely organic. It holds a dominant position in nine countries outside India, mainly in developing markets.

Model 2. Turning RDE engineering into global innovation: Twenty challengers are pursuing this approach.

An example is aviation company Embraer which competes using a combination of low-cost labour and strong R&D.

Model 3. Assuming global category leadership: Fourteen challengers, eight of which are based in China, focus primarily on this approach.

For instance, BYD Company, China’s largest maker of rechargeable batteries, is a top performer among the list’s publicly traded challengers, providing investors with a total shareholder return of 148 per cent in 2006. BYD competes head on with Japanese players in the battery market, using a labour-intensive approach in contrast to its competitors’ capital-intensive model.

Model 4. Monetising RDE natural resources: Seventeen challengers representing a variety of industries concentrate on this model. More than half of them use mergers and acquisitions to expand globally.

An example is Hindalco Industries, which is Asia’s largest integrated primary producer of finished aluminium. Although Hindalco has traditionally grown organically, it recently made a number of acquisitions. The purchase in early 2007 of Canada’s Novelis for $6 billion is expected to boost the company’s revenues to $10 billion.

Model 5. Rolling out new business models to multiple markets: Ten challengers focus on this approach.

An example is Mexican company America Movil. This mobile network operator has effectively expanded its business into new markets while localising operations in each. For instance, it uses different brands and marketing strategies in different regions but maintains as a common element a strong emphasis on cost containment.

Model 6. Acquiring natural resources: China is home to half of the ten companies on the list that pursue this strategy. This focus reflects the high priority the Chinese government puts on securing access to resources, especially energy.

The report poses the question on what challenges the BCG 100 will encounter and what strategies and tactics they will devise to meet those challenges.

It considers how they will fare along six dimensions: competing on cost; going beyond cost-based competition, winning the M&A game, addressing the talent shortage, operating on a truly global scale and managing risks.

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