Why MNCs must be nimble

The recent developments at Nokia, which in the past couple of weeks has not only had its credit rating downgraded to junk status by Standard & Poor's but also lost its 14-year-long position as the world's biggest handset-maker, is a timely reminder that “emerging market economies” are far from the guarantors of success for established Western MNCs slow to adapt to the needs of specific markets — and that it's not just about pricing.

While Nokia's failure to match the smartphone success of Samsung and Apple is, without doubt, the biggest contributor to its current troubles, what certainly didn't help was its slowness in recognising and adapting to changing needs in these markets.

Take its slowness in cottoning on to demand for multi-SIM phones in India, which allow consumers to exploit the regularly-touted tariff offers from networks.

“Competitors brought this to the market nearly two years before Nokia; these companies are very quick to react and adapt,” says Mr Janardan Menon, an analyst at London-based Liberum Capital.

However, Nokia, thinking on a more global scale about solutions required for EMEs, didn't act. “It just didn't fit into Nokia's global development plan, says Mr Menon.

“They didn't realise how big the market potential would be,” says Mr Anshul Gupta of Gartner Research

Slow to respond

Problems in India and other EMEs were further compounded by Nokia's failure to respond speedily enough to the surge in cheap touch-screen phones, based on Chinese platforms that were entering the market at price points similar to its feature phones.

“By the time it put out a phone with a particular feature set, there would be a smartphone at the same price point from a local competitor,” Mr Menon said.

The company was also slow to latch on to other factors such as the growing popularity and supply of phones with long battery life, says Gartner's Mr Gupta. “It wasn't about price; these companies were giving people phones with features that they really needed and appreciated.”

The overall impact has been striking: while Nokia held a 54 per cent share of India's mobile phone sales in 2008, according to Gartner Research, it fell to 27 per cent in 2011. Samsung's, by contrast, more than doubled to 15.5 per cent from 6.5 per cent in that period in India.

Nokia may be a particularly striking case, but what it does point to is that while MNCs complain of regulatory hurdles in EMEs, a failure to spot and respond to local trends as quickly as domestic competitors can be just as lethal business-wise.

“Nokia's problems are self-inflicted. It has not been able to respond quickly to market trends,” says Mr Per Lindberg, a London-based analyst at ABG Sundal Collier.

Observers of other sectors too point to instances “past and present” where Western companies already well established in EMEs have been put to the test.

Adapt to survive

European food and beverage companies have lost market share in the past few years as a result of a failure to latch on to the fast moving trends in a way local firms were able to, says Mr Richard Withagen, a European food and beverage analyst at SNS Securities. “Often, they put too much foreign management into emerging markets.”

He cites the example of Nestle, which he argues recognised about a couple of years ago that it was losing market share to local competitors — a challenge it specifically sought to combat through more local management and niche acquisitions, such as through its 2011 purchase of a majority stake in China's Yinlu.

Others to have learnt the need to adapt, he argues, such as Diageo, which acquired a majority stake in Chinese baiju spirit maker Shui Jing Fang last year.

Dutch consumer goods producer Philips has also proved rather adept at adapting to changing local markets, says Martin Prozesky, senior capital goods analyst at Sanford Bernstein in London “through a combination of group strategy — it's Chinese CEO sits on the global board and it has shifted the headquarters of its home appliances business to Shanghai — and local acquisitions, such as that of domestic appliance maker Preethi.

Mr Luca Solca, global head of research at French equity brokerage CA Cheuvreux, argues that it is the firms targeting the mid-price market, where global status matters less and less — rather than those serving the luxury end of the market — that are proving most vulnerable.

Food retailers have been hit, he says, pointing to French supermarket giant Carrefour, which has had something of a tough time of it in China, with a number of store closures.

Some of the big sports shoe brands too are struggling in the face of local competition, from the likes of Li Ning, and Goldrooster in the Chinese domestic market, which are often quicker to gain crucial endorsements from local sports heroes and strong distribution networks.

Local competition

Just a week ago, Goldrooster announced plans to list in Frankfurt to fund future growth.

“We are seeing the local competitors go head to head with the global players, which are finding they have little product advantage,” says Mr Solca.

Mr Julian Birkinshaw, Professor of Strategy and Entrepreneurship at the London Business School, believes there are two broad factors that determine the success or failure of these MNCs in such markets.

“You have to have an alertness of what is happening around you and a responsive capacity and the crucial fact is that many big organisations have lots of the first and little of the second,” he says. The latter can prove particularly challenging.

The trouble is that you need top management that has the courage to see that the world is changing and to make the commitment to invest in the new and get rid of the old, even if it means sacrificing high margins for low margins and some uncertainty.

Given that many European firms are counting on BRICs and other fast growing markets for an increasingly large share of their revenues going forward (a Morgan Stanley study last year showed that European MNCs are now getting just under a third of sales from EMEs, nearly triple the figure in the late 1990s) these are words they'd do best to heed.

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