the new global challengers

The New Global Challengers

How 100 Top Compan ies f rom Rap id ly Deve lop ing EconomiesAre Chang ing the Wor ld

BCG REPORT

Since its founding in 1963, The Boston Consulting Group has focusedon helping clients achieve competitive advantage. Our firm believes thatbest practices or benchmarks are rarely enough to create lasting valueand that positive change requires new insight into economics, markets,and organizational dynamics. We consider every assignment a unique setof opportunities and constraints for which no standard solution will beadequate. BCG has 61 offices in 36 countries and serves companies inall industries and markets. For further information, please visit our Website at www.bcg.com.


How 100 Top Compan ies f rom Rap id ly Deve lop ing EconomiesAre Chang ing the Wor ld

MARCOS AGUIAR

ARINDAM BHATTACHARYA

THOMAS BRADTKE

PASCAL COTTE

STEPHAN DERTNIG

MICHAEL MEYER

DAVID C. MICHAEL

HAROLD L. SIRKIN

M A Y 2 0 0 6

www.bcg.com

© The Boston Consulting Group, Inc. 2006. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 973 1339, attention BCG/PermissionsMail: BCG/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109USA

2 BCG REPORT

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Table of Contents

A Word from the Authors 4

The New Global Challenge 5

Many Companies on the Move 5

RDEs as Platforms for New Types of Global Competitors 6

The RDE 100 Emerging Global Challengers 7

Where They Come From 8

The Industries They Represent 9

Why They Are Going Global 9

Their Huge Economic Muscle 10

The Shareholder Value They Create 11

How Global They Are Today 11

How the RDE 100 Are Going Global 13

Their Six Strategic Models for Globalization 13

How They Are Growing: Buying and Building 16

Where They Are Growing: Next Door and Around the World 18

The Competitive Strengths and Weaknesses of Emerging Global Challengers 20

Low-Cost Resources 20

Home-Market Environments 21

Operations 21

Innovation 22

Supply Chain Management 22

Going to Market 22

Management Talent 23

Rigorous Strategy and Road Maps 23

Looking Ahead 24

Implications for Challengers 24

Implications for Incumbents 25

Closing Thoughts 26


In our discussions with executives at the world’s largest companies, globalization and its challenges are oftenat the top of the agenda. Invariably, one key question comes up: Which are the new companies based inChina, India, and other rapidly developing economies that I need to know about? Executives recognize thata new class of company is arising in the world today—a group of emerging challengers that are becomingimportant players in both developing and developed markets around the globe.

Indeed, many companies based in RDEs are going global fast. As this report highlights, a sample of 100 lead-ing RDE-based companies already have combined annual revenue of $715 billion—and are growing at anaverage rate of 24 percent per year. Companies in this sample are gaining global market share, making majoracquisitions, and emerging as important customers, business partners, and competitors for the world’slargest companies.

The Boston Consulting Group recently assessed the activities and strategies of these newly globalizing com-panies. We identified and profiled 100 of them, focusing on those with large businesses, significant globalactivity, an evident commitment to further globalization, and solid prospects for continued success. A globalteam of senior BCG consultants, based principally in Beijing, Moscow, Mumbai, and São Paulo but also span-ning other RDEs, contributed to this effort. We would like to acknowledge particularly valuable contribu-tions to the research and analysis by our colleagues Evgeni Agronik, Jean Chen, Rahul Guha, Vladimir Kim,Xin Liu, and Fernando Machado. We would also like to acknowledge the editorial and production assistanceof Barry Adler, Gary Callahan, Kim Friedman, Gina Goldstein, and Kathleen Lancaster.

Our analysis of this sample of 100 companies has yielded important insights into the broader trend of RDE-based companies that are expanding globally. This trend is only beginning. Ultimately, its implications willaffect every industry and market. We hope that you will find this report interesting and useful. As always, wewould be pleased to talk with you about our observations and conclusions.

A Word from the Authors

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Marcos AguiarVice President and DirectorSão [email protected]

Arindam BhattacharyaVice President and DirectorNew [email protected]

Thomas [email protected]

Pascal CotteSenior Vice President and [email protected]

Stephan DertnigSenior Vice President and Director [email protected]

Michael [email protected]

David C. Michael Senior Vice President and [email protected]

Harold L. SirkinSenior Vice President and [email protected]

The New Global Challenge

5

A revolution in global business is under way.Companies based in rapidly developing economies(RDEs) such as Brazil, China, India, and Russia,armed with ambitious leaders, low costs, appealingproducts or services, and modern facilities and sys-tems, are expanding overseas and will radicallytransform industries and markets around theworld. As this movement unfolds, establishedincumbent companieswill meet the new RDE-based challengers inmany arenas: in the com-petition for supplies, inthe search for talent, inthe quest for innovation,on the acquisition front, and in markets at homeand abroad. Each of these encounters will posethreats but will also offer opportunities for part-nering and cooperation. So it will be vital for allcompanies, regardless of their home location, tounderstand these developments and take actionahead of them, lest their competitive positionsdeteriorate.

Many Companies on the Move

The handful of RDE-based companies that haverecently captured media attention—prominentexamples include the Chinese manufacturers HaierCompany and Lenovo Group and the Indian soft-ware houses Infosys Technologies and Wipro—rep-resent only a small fraction of a much larger phe-nomenon. The number of RDE-based companiesthat are actively expanding beyond their home mar-kets, or planning to, approaches several thousand.

Already, RDE-based companies have started assum-ing leadership positions in lucrative developed mar-kets and have established beachheads in otherRDEs. Here are just 15 examples:

• Bharat Forge (India) is now the world’s second-largest forging company

• BYD Company (China) is the world’s largest man-ufacturer of nickel-cadmium batteries and has a23 percent share of the market for mobile-hand-set batteries

• Cemex (Mexico) has developed into one of theworld’s largest cement producers

• China International Marine Containers GroupCompany (China) has a 50 percent share of the marine container market, supplying the topten shipping companies globally

• Chunlan Group Corporation (China) has a 25percent share of theItalian air-conditionermarket

• Embraco (Brazil) is theworld leader in com-pressors, with a 25 per-cent share

• Embraer (Brazil) has surpassed Bombardier asthe market leader in regional jets

• Galanz Group Company (China) commands a 45percent share of the microwave market in Europeand a 25 percent share in the United States

• Hisense (China) is the number-one seller of flat-panel TVs in France

• Johnson Electric (China) is the world’s leadingmanufacturer of small electric motors

• Nemak (Mexico) is one of the world’s premiersuppliers of cylinder head and block castings forthe automotive industry

• Pearl River Piano Group (China) is the global vol-ume leader in piano manufacturing

• Ranbaxy Pharmaceuticals (India) is among thetop ten generic-pharmaceutical players in theworld

• Techtronic Industries Company (China) is nowthe number-one supplier of power tools to HomeDepot in the United States

• Wipro (India) has become the world’s largestthird-party engineering-services company

To be sure, not all challengers will be successful.Some may meet the same fate as D’Long Group, aChinese investment company that acquired


Established incumbent companies will meet the new

RDE-based challengers in many arenas.

Fairchild Dornier, a German aircraft manufacturer,with great fanfare in 2003, only to seek bankruptcyprotection a year later. But many others will breakthrough to become established global players. Justas many companies based in South Korea and Japanare now firmly global, so too will today’s RDEs pro-duce future global leaders. Indeed, the RDEs them-selves possess characteristics that constitute particu-larly powerful platforms for the creation anddevelopment of future global companies.

RDEs as Platforms for New Types of Global Competitors

Why are we now seeing the emergence of globalchallengers from RDEs? A variety of fast-movingglobalization forces are spurring this trend. Theseinclude the Internet, the World Trade Organization,the dramatic surge in low-cost communications tech-nologies, and economic reforms in key RDEs. Inaddition, the development of RDE markets them-selves is a strong enabler for the creation and growthof globally ambitious companies. Once those mar-kets begin developing, many companies realize thatthey need to move beyond their home markets inorder to grow further, create value, and sustain long-term competitiveness. We briefly explore the role ofRDE countries as platforms for new global chal-lengers below; later in the report we address thecompanies’ own motives for globalization.

RDEs have rapidly growing markets, some of whichare very large. Markets such as China, India, andRussia are sufficiently large and fast growing to sup-port large domestic companies. For example,China’s Huawei Technologies Company, a telecomequipment maker, has achieved domestic sales ofmore than $3 billion. The rapid growth of RDEmarkets in general over the past decade means thatdomestic companies have an opportunity tobecome quite large on their home turf.

RDEs have low-cost resources. All RDEs have anabundance of low-cost basic labor, and most offerother resources at low cost. Domestic companiesin these markets are often better than foreigncompanies at exploiting these low-cost resources.We discuss this issue extensively later in thereport.

Difficult operating environments in RDEs producesome highly capable companies. The challenges ofoperating in RDEs include selling profitably tolow-income customers, dealing with immaturelogistics and distribution environments, navigat-ing ambiguous legal environments, handling rapidexternal change, and managing despite shortagesof management talent. A company that hasaddressed these issues in its home market will havean advantage when seeking to grow in similar mar-kets abroad. Such companies may also have devel-oped the ability to innovate quickly and to makevery rapid decisions—skills that are essential tocapturing fast-moving opportunities.

RDEs are training grounds for competing withglobal incumbents. Increasingly, RDEs are key mar-kets for multinational companies (MNCs) that arethe incumbent leaders in developed-country mar-kets. RDE-based companies have the opportunity tolearn from these competitors in their midst.Consumer electronics companies such as Hisenseand TCL Corporation in China, for example, com-pete aggressively in their home markets againstglobal incumbents Matsushita, Philips, Samsung,and Sony.

Despite providing all these advantages, RDE mar-kets in themselves do not allow companies to attainglobal scale, no matter how big or fast growing theyare. Ultimately, many RDE-based companies findthat they must seek opportunities abroad. We willdiscuss this point further.

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7

The RDE 100 Emerging Global Challengers

To better assess the globalization strategies of RDE-based companies, we have identified 100 large RDE-based companies that, in our opinion, are at theleading edge of globalizing their businesses. Havingidentified this group of companies, we then looked

at their similarities, differences, and globalizationpatterns and derived some interesting implicationsfrom this analysis. Our list of 100 emerging globalchallengers comprises a diverse group of companiesbased in ten RDE countries. (See Exhibit 1.) We


Industry yrtnuoCynapmoCNonferrous metals

Telecommunications servicesAutomotive equipmentAutomotive equipmentComputers and IT componentsPetrochemicalsConsumer electronicsBuilding materialsFood and beveragesAerospaceAutomotive equipmentFossil fuelsShipping

Nonferrous metalsTelecommunications services

Automotive equipment

Telecommunications services

Fossil fuels

ShippingHome appliancesPharmaceuticalsFossil fuelsMiningShippingTextilesEngineered productsAutomotive equipmentPharmaceuticalsEngineered productsAerospaceTextilesFood and beveragesComputers and IT componentsHome appliancesFossil fuelsSteelHome appliancesFood and beveragesFood and beveragesHome appliancesNonferrous metalsConsumer electronicsTelecommunications equipmentFood and beveragesIT services/business process outsourcingEngineered productsHome appliancesConsumer electronicsEngineering servicesComputers and IT componentsTextiles

Aluminum Corporation of China (Chalco)

América MóvilBajaj AutoBharat ForgeBOE Technology Group CompanyBraskemBYD CompanyCemexCharoen Pokphand FoodsChina Aviation CorporationChina FAW Group CorporationChina HuaNeng GroupChina International Marine

Containers Group Company (CIMC)China Minmetals CorporationChina Mobile

Communications CorporationChina National Heavy Duty Truck

Group Corporation (CNHTC)China Netcom Group

Corporation (CNC)China Petroleum & Chemical

Corporation (Sinopec)China Shipping GroupChunlan Group CorporationCiplaCNOOCCompanhia Vale do Rio Doce (CVRD)COSCO GroupCoteminasCrompton GreavesDongfeng Motor CompanyDr. Reddy’s LaboratoriesEmbracoEmbraerErdos GroupFemsaFounder GroupGalanz Group CompanyGazpromGerdau SteelGree Electric AppliancesGrumaGrupo ModeloHaier CompanyHindalco IndustriesHisenseHuawei Technologies CompanyIndofood Sukses MakmurInfosys Technologies

Johnson ElectricKoç HoldingKonka Group CompanyLarsen & ToubroLenovo GroupLi & Fung Group

China

MexicoIndiaIndiaChinaBrazilChinaMexicoThailandChinaChinaChinaChina

ChinaChina

China

China

China

ChinaChinaIndiaChinaBrazilChinaBrazilIndiaChinaIndiaBrazilBrazilChinaMexicoChinaChinaRussiaBrazilChinaMexicoMexicoChinaIndiaChinaChinaIndonesiaIndia

China (Hong Kong)TurkeyChinaIndiaChinaChina (Hong Kong)

Industry yrtnuoCynapmoCFossil fuelsAutomotive equipmentShipping

Home appliancesNonferrous metalsTelecommunications servicesAutomotive equipment

CosmeticsAutomotive equipmentFossil fuels

Telecommunications servicesMusical instrumentsFood and beveragesFossil fuelsFossil fuelsFossil fuelsPharmaceuticalsChemicalsNonferrous metalsChemicalsFood and beveragesIT services/business process outsourcingSteelAutomotive equipment

Steel

SteelChemicalsBuilding materialsConsumer electronics

AerospaceConsumer electronicsIT services/business process outsourcingAutomotive equipmentSteelFood and beveragesConsumer electronicsEngineered productsFood and beveragesFood and beveragesAutomotive equipmentTelecommunications equipmentConsumer electronicsConsumer electronicsTelecommunications servicesProcess industriesAutomotive equipmentEngineered productsIT services/business process outsourcingTelecommunications equipment

LukoilMahindra & MahindraMalaysia International Shipping Company (MISC)Midea Holding CompanyMMC Norilsk Nickel GroupMobile TeleSystems (MTS)Nanjing Automobile Group Corporation (NAC)NaturaNemakOil and Natural Gas Corporation (ONGC)Orascom Telecom HoldingPearl River Piano GroupPerdigãoPetroChina CompanyPetrobrásPetronasRanbaxy PharmaceuticalsReliance GroupRusalSabanci HoldingSadiaSatyam Computer Services

SeverstalShanghai Automotive Industry Corporation Group (SAIC)Shanghai Baosteel Group CorporationShougang GroupSinochem CorporationSisecamSkyworth Multimedia International CompanySukhoi CompanySVA Group CompanyTata Consultancy Services (TCS)

Tata MotorsTata SteelTata TeaTCL CorporationTechtronic Industries CompanyThai Union Frozen ProductsTsingtao BreweryTVS Motor CompanyUTStarcomVestel GroupVideocon IndustriesVidesh Sanchar Nigam (VSNL)Votorantim GroupWanxiang Group CorporationWEGWipro

ZTE Corporation

RussiaIndiaMalaysia

ChinaRussiaRussiaChina

BrazilMexicoIndia

EgyptChinaBrazilChinaBrazilMalaysiaIndiaIndiaRussiaTurkeyBrazilIndia

RussiaChina

China

ChinaChinaTurkeyChina

RussiaChinaIndia

IndiaIndiaIndiaChinaChina (Hong Kong)ThailandChinaIndiaChinaTurkeyIndiaIndiaBrazilChinaBrazilIndia

China

E X H I B I T 1

THE RDE 100 SPAN MULTIPLE INDUSTRIES AND COUNTRIES

SOURCES: BCG RDE Challengers Database; BCG analysis.

The RDE 100 list was generated through a detailedscreening process. We began with more than 3,000companies based in 12 major RDEs, which we hadselected on the basis of the size of their economies(GDP), the value of their exports, and the amount oftheir foreign direct investments. Our list of RDEs com-prised Brazil, China, the Czech Republic, Hungary,India, Indonesia, Malaysia, Mexico, Poland, Russia,Thailand, and Turkey. The initial master list of candi-date companies was compiled on the basis of rank-ings of the largest companies in each of the selectedcountries, such as the top 500 companies in Indiaselected by Businessworld, the leading Indian busi-ness magazine, and the top 500 companies in Brazilselected by Exame, the leading Brazilian businessmagazine.

An international BCG research team consisting ofbusiness analysts and economists from Brazil, China,India, Mexico, and Russia, and a panel of senior BCGexperts in Asia, Europe, and the United States thenconducted a rigorous four-step triage. In step one, weensured that only truly RDE-based companies wereselected, omitting foreign joint ventures and RDE sub-sidiaries of multinational corporations. In step two, wehomed in on those players with annual revenue of atleast $1 billion (as of 2004), a threshold we believeis necessary to drive a serious globalization campaign.In step three, we eliminated players whose currentinternational business presence amounted to less than10 percent of revenue (we made an exception for

M E T H O D O L O G Y F O R S E L E C T I N G T H E R D E 1 0 0

companies that were close to 10 percent and whoseinternational business activity had grown swiftly in therecent past).

In step four, we scored the major globalization cre-dentials of those companies that had passed all threeprevious thresholds. The scoring was based on fivecriteria: the international presence of the company asindicated by its owned and operated subsidiaries,sales networks, manufacturing facilities, and R&Dcenters; the major international investments it hadpursued in the past five years, including mergers andacquisitions (M&A); its access to capital for financinginternational expansion, whether through free cashflows, stock markets, or other sources; the breadthand depth of its technologies and its intellectual-prop-erty portfolio; and the international appeal of its exist-ing offerings and value propositions.

This analytically rigorous approach generated a list of80 companies that fully met our criteria. Twenty com-panies that did not pass the $1 billion minimum-rev-enue hurdle are nonetheless included among our RDE100 because they have created unique globalizationcapabilities or business models. From the original listof 12 countries, no companies from the Czech Repub-lic, Hungary, or Poland made it through the screening,primarily because the larger globalizing companies inthese countries are actually subsidiaries of foreignmultinationals. We also included a company fromEgypt in the final list, although Egypt was not amongthe markets in our initial screening.

8 BCG REPORT

identified these companies from a pool of more than3,000 candidates by screening primarily for size,extent of overseas revenue, and prospects for furtherexpansion. (For details, see the sidebar below.)Although these companies employ different strate-gies and are at different stages of globalization, theyshare a strong ambition to grow globally. They alsoshare a set of compelling competitive advantagesthat they are leveraging in various ways to pursueglobal growth.

Where They Come From

Asia is home to the large majority—70—of our RDE100 companies, followed by Latin America with 18.Another 12 are based in Egypt, Russia, and Turkey.

China is by far the dominant home-base country,with 44 of the RDE 100, followed by India with 21and Brazil with 12. (See Exhibit 2.)

Relative to the current size of their nationaleconomies, China and India are disproportionatelyrepresented on the list. China’s share of the totalGDP of the 100 RDE countries is 29 percent, butChinese companies account for 44 percent of thecompanies on our list; for India, the numbers are 13 percent and 21 percent, respectively. At theother extreme, Russia and Indonesia are greatlyunderrepresented.

Among the RDEs studied, China and India in par-ticular have already produced an impressive set of

companies with strong global ambitions. Where theglobalizing Chinese companies differ dramaticallyfrom the globalizing Indian companies is in theirownership structures. More than two-thirds of theChinese companies among the RDE 100 are stateowned or state controlled, often with publiclytraded subsidiaries or with minority stakes in thehands of strategic investors (both domestic and for-eign). Of the remaining companies, some have amixed-ownership structure but only four Chinesecompanies on the list are privately owned (andthese include one company actually domiciled inHong Kong).

The shares of Indian companies are usually dividedamong private owners, strategic investors, and the

9The New Global Challengers

general public, with no single investor possessing amajority stake. All the Indian companies on our listare publicly traded and all have foreign strategicinvestors as stockholders. Only one Indian com-pany on the list is state controlled. Companies fromother countries display a wide range of ownershippatterns. In some countries, such as Mexico, strate-gic investors play an important role while in others,such as Turkey, the families of the founders stillexert control.

The Industries They Represent

The RDE 100 are active in a wide range of indus-tries. The largest is industrial goods, which includes32 companies active in the automotive equipmentsector, basic materials, and various engineeredproducts. The second-largest group is consumerdurables, comprising 18 companies involved mainlyin household appliances and consumer electronics.Resource extraction is the third-largest cluster, with15 players. Food-and-beverage and cosmetics com-panies come in fourth, with 11 players, and tech-nology equipment companies fall into fifth place,with 6. The remaining 18 companies represent abroad spectrum of industries ranging from phar-maceuticals and mobile-communications servicesto shipping and infrastructure.

When we view the industry distribution of the RDE100 together with their geographic distribution,certain clusters of regional capabilities emerge.(See Exhibit 3, page 10.) China possesses the mostdiverse set of emerging global challengers. Chinesecompanies are well represented in consumer elec-tronics, household appliances, telecommunicationsand IT equipment, and automotive equipmentmanufacturing. India is well represented in auto-motive equipment manufacturing, IT services, andpharmaceuticals, especially generic drugs. Mostother countries have large domestic players in onlyone or two clusters, as well as perhaps a few indi-vidual challengers in other sectors. Examplesinclude raw-material extraction in Russia, house-hold appliances in Turkey, and food processing inThailand.

Why They Are Going Global

For RDE-based companies, the decision to globalizeis ultimately driven by the need to create sustain-

RDE 100 by industryRDE 100 by geography

India (21)

China (44)

Other (10)1

Mexico (6)

Russia (7)

Brazil (12)

Consumerdurables (18)

Industrialgoods (32)

Other (18)

Technology equipment (6)

Food andcosmetics (11)

Resource extraction (15)

Including• Telecommunications services (6)• IT services/business process outsourcing (4)

Including• Fossil fuels (9)• Nonferrous metals (5)

Including• Home appliances (6)• Consumer electronics (8)

Including• Automotive equipment (12)• Steel (5)• Engineered products (5)

E X H I B I T 2

THE RDE 100 REPRESENT A VARIETY OF COUNTRIES AND INDUSTRIES


1These companies are located in Egypt, Indonesia, Malaysia, Thailand, and

Turkey.

able advantage and shareholder value. Inter-national opportunities can provide a strong plat-form for shareholder value creation. Our researchindicates that for 88 of the RDE 100 companies, thekey motive for globalization is gaining access to newprofit pools. Overseas markets may bring RDE-based companies higher margins and revenue, aswell as higher volumes (which contribute to scaleeconomies) and opportunities for growth-enhanc-ing acquisitions.

For the remaining 12 of our RDE 100 companies,such as China’s CNOOC (fossil fuels), globalizationis driven by the need to secure long-term access toraw materials. The underlying motives may be bothnationalistic and related to shareholder value.These companies are less likely to compete foroverseas customers and instead will challengedeveloped-market companies for access to supplyand for M&A opportunities.

Their Huge Economic Muscle

In aggregate, the RDE 100 accounted for $715 bil-lion in revenue in 2004—similar to the 2004 GDP ofthe entire national economies of Mexico and Russia.Already, 28 percent of the group’s collective rev-enue, or $200 billion, comes from internationalsales. Among other impressive statistics:

• The RDE 100 grew at a rate of 24 percent per yearfrom 2000 through 2004, ten times as fast as theGDP of the United States, 24 times that of Japan,and 34 times that of Germany. They earned $145 billion in operating profits, equivalent to amargin of 20 percent over sales, compared with 16 percent for the United States’ S&P 500 compa-nies, 10 percent for Japan’s Nikkei companies, and9 percent for Germany’s DAX companies.

• In 2004 their collective portfolio contained $520 billion in net fixed assets, which is morethan those of the world’s top 20 automobile man-ufacturers combined. That year the RDE 100invested around $110 billion. They employed 4.6 million people and had a collective payroll ofapproximately $20 billion. And they purchasedan estimated $190 billion to $200 billion in rawmaterials and energy, $50 billion to $60 billion inparts and components, and $40 billion to $50 bil-lion in services such as third-party IT and engi-neering, shipping, and logistics.

• The RDE 100 spent $9 billion on R&D in 2004,equivalent to 1.3 percent of sales, to support thework of their 250,000 to 300,000 engineers andscientists.

• On the acquisition front, the RDE 100 completed200 publicly announced international transac-

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Russia• Fossil fuels (2)• Steel and nonferrous metals (3)

Mexico• Food and beverages (3)

Brazil• Food and beverages (2)• Engineered products (2)

Turkey• Home appliances (2)

Southeast Asia• Food and beverages (3)

India• Automotive equipment (5)• IT services/business process outsourcing (4)• Pharmaceuticals (3)

China• Consumer electronics (6)• Home appliances (5)• Automotive equipment (6)• Telecommunications equipment (3)• Computers and IT components (3)

E X H I B I T 3

MANY OF THE RDE 100 FALL INTO REGIONAL COMPETENCE CLUSTERS


tions between 2001 and 2005. That number doesnot take into consideration the sizable number ofacquisitions in individual companies’ domesticmarkets, which further strengthened these com-panies’ platforms for launching global growth.

The Shareholder Value They Create

Sixty of BCG’s RDE 100 are public companies orhave subsidiaries that are publicly traded in majorinternational capital markets. The total market cap-italization of these entities is $680 billion (as ofMarch 2006). These companies’ collective stockperformance has been impressive. From January2000 to March 2006, their total shareholder return(TSR) increased by more than 150 percent, whilethe TSR of companies listed in Morgan Stanley’sEmerging Market Index rose by 100 percent andthat of the S&P 500 companies declined slightly.(See Exhibit 4.)

How Global They Are Today

As a group, the companies in the RDE 100 alreadyrepresent a formidable force in the global econ-

omy. Given their growth rates, most will continue togain strength in the coming years. The picturebecomes more complicated, however, when we lookat individual companies. Whereas some of the RDE100 players have established themselves firmly inthe global marketplace, others are rapidly doing sonow, and others are still in the early experimenta-tion phase.

In terms of the maturity of their globalizationdrive, our RDE 100 can be divided into threegroups: the early movers, the fast followers, andthe up-and-comers.

The Early Movers. At the top is a relatively smallgroup of ten players that started to globalize earlyand have gained global leadership positions intheir industries. Mexico’s Cemex, for example, hasgrown through a series of international acquisitionsto become one of the largest cement producers inthe world. The company has consistently generatedsuperior returns compared with its internationalcompetitors and has developed unique capabilitiesin the form of a highly scalable operating model, aserial acquisitions approach, and a global logistics


TSR index (December 31, 1999=100)

December 31, 1999 March 8, 2006

50

100

150

200

250

300

RDEchallengers 252.5 152.5

Emergingmarkets 200.1 100.1

S&P 500 93.0 (7.0)(7.0)

TSR indexas of

March 8, 2006

Change since December 31,1999

(%)

E X H I B I T 4

THE RDE 100 CREATE SHAREHOLDER VALUETotal shareholder return index, December 31, 1999, to March 8, 2006

SOURCES: Datastream; BCG analysis.

NOTE: The TSR index of RDE challengers is based on the TSR of 60 RDE companies or their subsidiaries listed in Hong Kong, London, Mumbai, New Delhi, and New York;

the TSR of emerging markets is based on Morgan Stanley’s Emerging Market Index.

system. Other companies in this category include$1.1 billion Johnson Electric, the world leader insmall electric motors, with more than 40 percentmarket share. Headquartered in Hong Kong, thiscompany is building its advantage with a strongChinese operating base. Also well established glob-ally is Brazil’s Embraco, the $800 million worldleader in compressors, with a 25 percent globalmarket share.

The Fast Followers. The next group of companies,46 of the 100, are currently making rapid progressin their globalization, building on significant ini-tial experiences. Companies in this group includeChina’s Haier Company (household appliances);India’s Infosys Technologies (IT services and busi-ness process outsourcing); India’s Bharat Forge(automotive equipment); and Turkey’s KoçHolding (household appliances). These compa-nies have ambitious globalization plans and a crit-ical mass of international business in their portfo-lios. They have already signaled their globalambitions to the investment community. Otherplayers in this group include the large RDEresource conglomerates seeking either access tonew raw-material sources, such as China’sCNOOC, or access to downstream markets, such asRussia’s Lukoil, which demonstrated its intentions

by acquiring parts of the Getty gas-station networkin the United States.

While these companies have already received sig-nificant public attention, others have so far kept arelatively low international profile. These less well-known players include, for example, China’s PearlRiver (pianos), China’s Hisense (consumer elec-tronics), Mexico’s Nemak (automotive equipment),and Turkey’s Vestel Group (consumer electronics).

The Up-and-Comers. The last group consists of 44companies. These are players that are at an earlystage of globalization or whose ambitions have,until recently, been more regional than global.Companies in this category include India’s TataMotors (automobiles), Egypt’s Orascom TelecomHolding (telecommunications services), Turkey’sSisecam (glass), and Brazil’s Braskem (petrochem-icals). Spanning a wide range of industries andhome countries, this group includes many compa-nies that merit careful watching in the future.

Regardless of where in the globalization processeach of our 100 companies stands, all of them sharethe ambition to become truly global players. In pur-suit of this goal, they are devising and deploying avariety of strategic models.

12 BCG REPORT

How the RDE 100 Are Going Global


The companies on our RDE 100 list are pursuingglobalization in their own unique ways. They arealso truly operating all over the map. But certainpatterns are discernible in their actions to date.

Their Six Strategic Models for Globalization

Each company’s overall approach tends to followone of six primary globalization strategies:

• Model 1: Taking RDE brands global

• Model 2: Turning RDE engineering into globalinnovation

• Model 3: Assuming global category leadership

• Model 4: Monetizing RDE natural resources

• Model 5: Rolling out new business models to mul-tiple markets

• Model 6: Acquiring natural resources

We should note that these six strategies, while dis-tinct, often overlap in practice. Moreover, they havecertain aspects in common. All of them build on lowcost positions—a key competitive advantage ofRDEs. And virtually all the companies are voraciouswhen it comes to learning and adapting. This skillgives them the advantage of being able to learn fromother, more established companies, as well as fromtheir own bold, entrepreneurial experience and will-ingness to adapt to changing market conditions. Wediscuss the six globalization models below.

Model 1: Taking RDE Brands Global. Twenty-eightof our RDE 100 are growing internationally by takingtheir established home-market product lines andbrands to global markets. A representative companyemploying this strategy is China’s Hisense, a $3.3 bil-lion consumer-electronics group. The company isone of China’s premier manufacturers of TV sets (ithas an 11 percent share of the domestic market), airconditioners, PCs, and telecom equipment. In addi-tion to manufacturing in China, Hisense has pro-duction sites in Algeria, Hungary, Iran, Pakistan, andSouth Africa. The company has expanded mainlythrough organic growth and is now selling 10 million

TV sets and 3 million air conditioners each year inmore than 40 countries. International sales accountfor $490 million, or 15 percent, of total revenue.Hisense has the best-selling brand of flat-panel TVsets in France, where its products are being distrib-uted through major retail chains such as Carrefour.

Hisense’s success to date is based on its stylish con-sumer products, which provide very good value foran affordable price. The company brings to theinternational marketplace a continuous stream ofnew products developed by its world-class R&D cen-ter, which is located in one of the world’s fastest-mov-ing and most demanding consumer-electronics mar-kets—China itself. The domestic market also givesHisense a superscale, low-cost manufacturing base,allowing it to leverage a network of low-cost compo-nent suppliers and specialized assembly crews. Inaddition, Hisense is getting a jump-start by buildingon experience gained through joint ventures andalliances with global players such as Hewlett-Packard, IBM, and Panasonic.

Companies in this category build internationalmomentum on the basis of home-market productsthat have broad global appeal or are easy to cus-tomize for new markets. In developed-country targetmarkets, these companies often position their prod-ucts as good-value-for-the-money alternatives toestablished brands. That positioning now encom-passes a sizable and rapidly growing segment, pro-pelled by large discount retailers such as Wal-Mart.

The 28 RDE 100 companies pursuing this strategydeal primarily in consumer electronics and house-hold appliances, as well as automotive equipment,specialty foods, and beverages. These companies had$138 billion in combined 2004 revenue, of which 19percent, or $26 billion, came from abroad. Theiraverage annual growth rate from 2000 through 2004was 24 percent. A particularly large number of play-ers in this category (18) are in China.

Model 2: Turning RDE Engineering into GlobalInnovation. Twenty-two of the RDE 100 companiesare growing internationally by marketing innovativetechnology-based solutions that leverage theirstrengths in engineering and research. A representa-

tive example is Wipro, the Indian IT-services group.Wipro has expanded rapidly by providing software-coding support. As offshored IT services and busi-ness process outsourcing have flourished, thecompany has grown quickly, from $545 million inrevenue in 2000 to $1.8 billion in 2004. WhereasWipro’s value proposition at first focused mainly oncost, the company now creates much of its value bycompletely redesigning its clients’ businessprocesses, a task requiring comprehensive process-innovation capabilities.

Furthermore, Wipro is tak-ing innovation to the nextlevel by building extensiveengineering capabilities,thus making R&D servicesthe next battleground.The company alreadyclaims to be the world’s largest third-party providerof R&D services. Its 12,000-strong ProductEngineering Services (PES) group offers a completerange of R&D services—from product strategy tohardware design to quality consulting—to clientsthat sell electronics-based products. With more than120 active clients in industries such as semiconduc-tors, automotive products, platforms and peripher-als, consumer electronics, and medical devices, PEShas seen its revenue grow at a rate of 36 percent peryear from 2003 through 2005. The group alreadyaccounts for 36 percent of Wipro’s total revenue.

Innovation-based globalization will require RDE-based players to mobilize engineering and sciencetalent in areas in which they can create sizable andsustainable advantage over their counterparts indeveloped markets. In many domains, the RDE tal-ent pool is deep and growing quickly, and RDE play-ers are at an advantage when it comes to monetizingthat pool relative to MNCs that are setting up RDE-based R&D centers. In a ranking by university stu-dents in China, for example, China’s HuaweiTechnologies Company was rated as a more attrac-tive employer than any of its MNC competitors.

The 22 RDE 100 companies that are pursuing inno-vation-based globalization strategies are active intelecommunications equipment, aerospace, automo-tive equipment, pharmaceuticals, and technologyservices. They had $56 billion in combined 2004 rev-enue, of which they earned 39 percent, or $22 bil-lion, abroad. Average annual growth from 2000

through 2004 was 33 percent. A large number ofplayers in this category—11—are based in India.

Model 3: Assuming Global Category Leadership.Twelve of the RDE 100 are growing internationallyby establishing themselves as specialists and globalleaders in one specific, relatively narrow product cat-egory. For example, Hong Kong’s Johnson Electrichad $1.1 billion in revenue in 2004 (67 percent fromoutside Asia) and is the global market leader in smallelectric motors for automotive, consumer, and vari-ous commercial applications. The company can pro-

duce 3 million motorsdaily in its superscaleoperations in Chinaalone. These operationsare complemented by sev-eral other manufacturingsites in Latin America, the

United States, and Western Europe, and by R&Dcenters in Israel, Italy, Japan, and the United States.

While Johnson Electric puts a strong emphasis onaggressive organic growth, it has also pursued multi-ple acquisitions in the United States to absorb the in-house production of tier one suppliers that it canhandle more efficiently. Such acquisitions haveincluded some of the electric-motor assets ofArvinMeritor, Kautex Textron, and Lear. In parallel,the company is using acquisitions to broaden itscapability base and move into more specialized prod-uct lines, such as precision piezoceramic motors(through the purchase of Israel’s Nanomotion) anddigital-camera motors (through the purchase ofJapan’s Nihon Mini Motor).

Johnson Electric makes broad use of China’s advan-tages, leveraging superscale manufacturing andmaterial sourcing to achieve an extremely highdegree of specialization, very high volumes, and verylow global unit costs. The company also employssophisticated global supply-chain management tomeet the standards of automotive OEMs and leadingcommercial brands worldwide. The company’s questfor scale is helped by global OEMs’ trend toward out-sourced motor production—and by global compa-nies’ enthusiasm for China as a preferred source ofmanufactured products. Johnson Electric also lever-ages highly specialized and customercentric R&D inChina and throughout the world, allowing it tobecome a motion subsystems innovator as well as aleading motor supplier.

14 BCG REPORT

In many domains,the RDE talent pool

is deep andgrowing quickly.

Companies in this category have in common a rela-tively well-defined target market for their products;considerable depth in their chosen niches (which insome instances amounts to global category leader-ship); superscale manufacturing; highly focusedR&D; and global logistics, which they have down to ascience. Their specialization allows them to be bestin class, ahead of the competition on cost, innova-tion, and the understanding of next-generation cus-tomer needs. It also provides them with a scalableplatform from which to drive global industry consol-idation—and also to add on new, related niches.

The 12 of our RDE 100 companies pursuing cate-gory leadership are involved mainly in discretelymanufactured industrial products: motors (such asJohnson Electric), compressors (such as Brazil’sEmbraco), power tools (such as China’s Techtronic),and shipping containers (such as ChinaInternational Marine Containers Group Company).These companies had $36 billion in combined 2004revenue, of which they earned 61 percent, or $22 bil-lion, abroad. Their average annual growth from2000 through 2004 was 23 percent. A particularlylarge number of RDE players in this category arebased in Brazil and China.

Model 4: Monetizing RDE Natural Resources.Thirteen of the RDE 100 are growing internation-ally by marketing products that leverage their homecountries’ natural-resource advantages. Primeexamples are the Brazilian food processors Sadiaand Perdigão, with annual revenue of $2.2 billionand $1.8 billion, respectively, of which nearly halfcomes from exports to more than 100 countries.Both companies hold 30 to 50 percent shares of theBrazilian market in their main product lines. Bothoperate along the entire value chain, from farmingto marketing chilled and frozen foods and high-value-added products such as ready-to-eat meals.Sadia does business with 12,500 soy and corn pro-ducers and 10,200 integrated farmers. The com-pany has 9 industrial units and 8 distribution cen-ters in Brazil, and 11 sales offices around the world.Perdigão has 16 industrial units and 16 distributioncenters in Brazil, as well as 7 sales offices in Europe,the Middle East, and the Far East.

Both companies’ expansion models focus on growingtheir domestic production capacity while investing inoverseas supply-chain-management capabilities.Perdigão’s Rio Verde Agro industrial complex is now

Latin America’s largest slaughterhouse, and the com-pany’s total exports average 60,000 tons per month.Sadia’s total exports reached 1 million tons in 2005,an increase of more than 16 percent over 2004. In2005 both companies expanded their export-focusedfacilities: Perdigão opened a 400-ton-per-month proc-essing facility in Brasilia, while Sadia opened a largedistribution center in Ponta Grossa and boughtSofrango, a major poultry producer in Brasilia.

The two companies’ key competitive advantage liesin abundant production resources for pork, poul-try, and grain, which are complemented by idealgrowing conditions for animal feed and by lowlabor costs. Both have hatcheries that are amongthe most productive in the world, achieving lowproduction costs and high yields with the highestquality standards. And both pride themselves ontheir state-of-the-art global distribution and supply-chain-management systems.

Companies in this category build their global expan-sion on natural resources that are low cost by inter-national standards, with no compromise in quality.This advantage stems from an abundance of energy,minerals, agricultural feedstock, or a combination ofthose resources. The companies in our selection thattake this approach are active in fossil fuels, miningand metals, and agricultural products. Brazil’sCompanhia Vale do Rio Doce (CVRD), for example,builds its global advantage and growth on rich, low-cost iron-ore reserves. In addition to leveragingabundant natural resources, players in this grouphave generally developed superior operating modelsfor their industries.

The 13 companies pursuing this model had $110 bil-lion in combined 2004 revenue, of which theyearned 66 percent, or $73 billion, abroad. Theiraverage annual growth from 2000 through 2004 was26 percent. Almost all the companies in this categoryare based in Brazil or Russia.

Model 5: Rolling Out New Business Models toMultiple Markets. Thirteen of our RDE 100 arebuilding regional or global portfolios in their respec-tive industries by rolling out business models thatthey have generally pioneered in their home mar-kets. These companies had $93 billion in combined2004 revenue, including 29 percent, or $27 billion,earned abroad. Their average annual growth from2000 through 2004 was 28 percent.


Representative of this strategy is Cemex, the $15.3 bil-lion Mexican cement conglomerate. One of thelargest ready-mix-concrete companies in the world,Cemex is vertically integrated, with more than50,000 employees in more than 50 countries. Cemexgenerates $12.1 billion, or 79 percent, of its revenueabroad. It has built a truly global presence throughacquisitions in the Americas (Colombia, Dominica,Panama, Puerto Rico and other parts of the UnitedStates, and Venezuela), Asia-Pacific (Bangladesh,Indonesia, the Philippines, and Thailand), the Mid-dle East (Egypt), and Europe, topped off by the 2005purchase of the U.K.-basedcement giant RMC Group.

The key to Cemex’s suc-cess lies in its rigorousapproach to integratingand running acquisitions,part of the “Cemex way.” This formula is based on aglobal capability platform that covers every aspectof the business, including plant management, sup-ply chain management, distributor management,and end-customer service. Integral to the approachis a seasoned M&A and postmerger-integrationteam that can execute serial acquisitions.

A number of companies in this category are still inthe early stages of globalization. Contenders repre-sent a variety of industries besides cement, includingchemicals, food products, and telecommunicationsservices. These companies tend to expand in one ofthree ways. Like Cemex, they may have a compre-hensive formula for acquisitions, markets, and oper-ational excellence. Or they may operate in a mannerthat creates superiority along a critical dimension,such as the way that Thailand’s Charoen PokphandFoods approaches operational efficiency in agricul-tural production through technology and scale.Finally, they may exploit advantages such as culturalsimilarities, shared language, or political ties thatprovide privileged access to a market—as, for exam-ple, Orascom Telecom does, using its Egyptian homebase to expand into the neighboring region.

Model 6: Acquiring Natural Resources. In contrast tomost emerging challengers, 12 of our RDE 100 com-panies are expanding overseas not to tap new profitpools but to acquire vital raw materials for theirhome markets. A good example is Shanghai BaosteelGroup Corporation, China’s biggest steel maker,which had revenue of $19.5 billion in 2004. Founded

in 1978 and still state owned, Baosteel has a produc-tion capacity of approximately 20 million tons ofcrude steel a year, half as much as Luxembourg’sArcelor and about 20 percent more than Germany’sThyssenKrupp.

Baosteel’s combination of state-of-the-art technol-ogy, the lowest cost base in Asia, and strong opera-tional capabilities has translated into operatingprofit margins well above the industry average. Morethan 98 percent of its revenue comes from China,the world’s fastest-growing steel market. Baosteel is

well positioned to capital-ize on this growth, givenits domestic market shareof about 50 percent in theautomotive and house-hold appliances segments.To date, Baosteel’s inter-

national expansion has aimed at securing stableiron-ore supplies. To that end, it acquired a 50 per-cent interest in CVRD’s Água Limpa iron-miningcomplex in Brazil in 2001 and one year later investedin a joint venture with Hamersley Iron, an Australiansubsidiary of Rio Tinto Group. The joint venture willsupply Baosteel with more than 20 million tons ofiron ore annually.

The companies in this category are active in eitherfossil fuels or metal and mining products. Nine ofthe 12 are based in China, which consumes far moreoil, gas, and iron ore than it produces. Irrespectiveof their countries of origin, these companies typi-cally enjoy solid government backing for theirattempts to acquire assets abroad. Following thebuildup of overcapacity in some sectors (steel inChina, for one) and a further upgrade in their oper-ational capabilities, some of these companies willlikely compete in global product markets. The com-panies pursuing this model had $282 billion in com-bined 2004 revenue, including only $30 billion, or alittle more than 10 percent, earned abroad. Theiraverage annual growth from 2000 through 2004 was25 percent.

How They Are Growing: Buying and Building

Although much public attention focuses on themultibillion-dollar acquisitions of a handful ofRDE-based companies, these transactions accountfor less than 20 percent of the international

16 BCG REPORT

The key to Cemex’s successlies in its rigorous

approach to integratingand running acquisitions.

growth of the RDE 100. These companies haveachieved more than 80 percent of their growthorganically, either by exporting from their home-country bases or by establishing internationaloperations, in some cases through joint ventures.Only 24 of the companies on our list conductedmore than three M&A deals between 1988 and2005, while 27 companies conducted no deals atall. That being said, we need to make two impor-tant qualifications.

First, acquisitions form an integral part of inter-national expansion in some globalization models.For instance, they are very important for compa-nies rolling out their business models to otherregions. América Móvil, a Mexican provider oftelecommunications services, spent more than $5 billion to conduct 15 acquisitions, from 2001through 2005, intended to build up its presenceacross Latin America. Raw-material companieshave employed similar strategies, particularly tosecure access to vital supplies. At the other

extreme, companies taking their home-marketbrands global have seldom pursued M&A. (SeeExhibit 5.)

Second, the M&A activities of the RDE 100 are onthe rise. Whereas in 2000 they recorded only 15acquisitions, in 2004 the number rose to 40, andin 2005 to 59. (See Exhibit 6, page 18.)

Most of these deals are small, with specific objec-tives. They usually help an RDE-based companyestablish a commercial beachhead through exist-ing brands, distribution channels, and local man-agement. In addition, many RDE-based compa-nies, such as India’s Bharat Forge (automotiveequipment), have used M&A activities to obtainimmediate access to vital technologies. Some RDEplayers have bought underperforming incumbentsor dormant brands with the aim of turning themaround. An example is Techtronic’s formation of astrong power-tool portfolio combining brandssuch as AEG, Atlas Copco, Dirt Devil, and Ryobi


Percentage of companies pursuing each approach to growth, by globalization model

M&A

Primary approach to global expansion

Partnerships Organic growth

7564

75

31

15

23 25

6975

85

11

25

13

14

0

10

20

30

40

50

60

70

80

90

100

Takingbrands global

Turning engineering into innovation

Assuming category leadership

Monetizingnatural resources

Rolling out new business models

Acquiring natural resources

Globalization models

E X H I B I T 5

RDE COMPANIES’ APPROACH TO EXPANSION IS RELATED TO THE GLOBALIZATION MODEL USED


with superscale, low-cost Chinese manufacturingand leading-edge R&D capabilities. The companyis now the category leader at Home Depot, theworld’s largest do-it-yourself chain, and it has wonseveral awards for product quality and innovation.

Looking ahead, we expect acquisitions to play amore important role. The desire of RDE players togrow will likely exceed their ability to develop thenecessary capabilities in-house, spurring them toacquire other companies. They will get better atidentifying and integrating targets. Meanwhile,incumbent companies in mature markets maybecome increasingly open to M&A transactionswith RDE peers. Banks and private equity firms willincreasingly act as matchmakers.1

Where They Are Growing: Next Door and Around the World

Looking at the markets that our RDE 100 are tar-geting for expansion, we found that the decisionwhether to test the waters in other emerging mar-kets first or to go directly for the large developedmarkets is closely related to industry and businessmodel. (See Exhibit 7.)

18 BCG REPORT

2 1 0 1 26

4 40

5 5

1315

27

34

40 40

59

0

5

10

15

20

25

30

35

40

45

50

55

60

65

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Number of deals

E X H I B I T 6

OUTBOUND M&A ACTIVITIES OF THE RDE 100 ARE GROWING

SOURCE: BCG RDE Challengers Database.

Mass markets in developed countries

Niche markets in developed countries

Telecom-munications

services

Consumer electronics

Food and beverages

Home appliances

Engineered products

Other emerging markets

0

20

40

60

80

100

17

83

25

40

66

100

17

17

75

10

50

Percentageof industryexpansioninto eachtype ofmarket

Initial target for expansion

Selected examples

E X H I B I T 7

TARGET REGIONS FOR EXPANSION ARE RELATED TO INDUSTRY

SOURCES: BCG RDE Challengers Database; BCG analysis.1. See China’s Global Challengers: The Strategic Implications of ChineseOutbound M&A, BCG report, May 2006.

As mentioned above, providers of telecommunica-tions services, such as Egypt’s Orascom Telecomand Russia’s Mobile TeleSystems (MTS), tend toexpand into neighboring regions with close ties totheir home markets. This strategy is also typical ofbranded Chinese consumer-electronics manufac-turers such as Skyworth Multimedia InternationalCompany, which penetrated smaller RDEs in Asiaand the Middle East before launching a broaderrollout.

Companies in the food and beverage industry and inhousehold appliances take two basic approaches.Companies pushing their own brands, such asMexico’s Grupo Modelo (beer) and China’s Haier(household appliances), start with other RDEs orniche markets, whereas OEM suppliers such asTurkey’s Koç (household appliances) go directly to

mature mass markets (in this case, Western Europe).In contrast, RDE-based players specializing in engi-neered products, such as Johnson Electric, are pur-suing global scale and therefore target large indus-trial customers in multiple countries.

The RDE 100 aim their M&A activity both at com-panies based in mature markets (57 percent oftransactions) and at companies based in otherdeveloping countries (43 percent of transactions).The Chinese and Indian companies on our list havebeen directing their efforts at competitors in thedeveloped world, whereas challengers based inother RDEs have been focusing on assets in emerg-ing markets. (See Exhibit 8.) Among the latter com-panies, most have targeted regions immediatelyadjacent to their home countries rather than moredistant locations.


Acquisitions in mature markets 57

Share of total (%)

Acquisitions in other RDEs 43

Share of total acquisitions made by RDE 100 companies based in each country (%)

Share ofacquisitions in mature versus emerging markets (%)

0

20

40

60

80

100

China(32)

India(18)

Mexico(14)

Russia(14)

Brazil(11)

Others(8)

Turkey(3)

Target regions for 258 acquisitions by the RDE 100, 1985 to 2005

E X H I B I T 8

THE RDE 100 TARGET DIFFERENT REGIONS FOR M&A ACTIVITY

SOURCES: Thomson Financial Securities Global Mergers and Acquisitions Database; BCG RDE Challengers Database.

might, in principle, have access to similarly low-costresources, our experience indicates that RDE-basedplayers typically retain an overall cost advantage. Inaddition, for many MNCs, RDE-based operationsrepresent a relatively small part of their global activ-ities, whereas it is the reverse for RDE-based play-ers. The RDE cost advantage pertains primarily tolabor, property and equipment, raw materials, andcapital.

Low-Cost Labor. RDE-based labor typically costs 10to 20 times less than labor in highly developed mar-kets. This advantage alone translates into a net sav-ings of 20 to 40 percent in the cost of many endproducts and services landed into most target mar-kets. Fully loaded RDE labor rates for manufacturingworkers run anywhere from about $1 per hour (theaverage rate in China) to $4 to $5 per hour (the typ-ical rate in Eastern Europe)—a fraction of the aver-age rate of $20 to $25 per hour in North America,Western Europe, and Japan. (See Exhibit 9.) Similar

The Competitive Strengths and Weaknesses of Emerging Global Challengers

20 BCG REPORT

The global success of RDE-based players will dependon the competitive advantages they develop andmaintain in the international marketplace. Clearly,one core advantage is access to low-cost resources.Other advantages that many share include productsthat appeal to price-conscious customers, relativelymodern and efficient plants and equipment, andaccess to huge talent pools. Potential constraints onglobal success for some of these companies include alack of deep relationships with overseas customers, aslow rate of innovation, a lack of strong brands andcustomer franchises, a dearth of in-house intellec-tual property, a lack of access to effective distributionchannels, and limited experience managing interna-tional business portfolios.

Low-Cost Resources

The major source of advantage for RDE-based com-panies is low-cost access to key resources. Whileestablished multinationals that migrate to RDEs

Annualgrowth in industrial production, 1999–2004(%)

Average hourly industrial-manufacturingcompensation, 2004 ($)

= Industrial GDP of $500 billion1

–5

0

5

10

15

20

25

0 5 10 15 20 25

China

Russia

BrazilMexico

IndiaCanada

WesternEurope

Indonesia

South Korea

UnitedStates

Czech Republic

Thailand

Malaysia

Hungary

Poland

Japan

E X H I B I T 9

LABOR COST ADVANTAGES IN RDEs ARE SIGNIFICANT

SOURCES: Economist Intelligence Unit; BCG analysis.

1Industrial GDP excludes agriculture and services.

differences apply to labor rates for many servicefunctions, such as software programming, call centeroperations, and basic engineering services.

Low-Cost Property and Equipment. In many RDEs,setting up a manufacturing site complete withgrounds, buildings, roads, power, and water linescan cost 60 percent of the price tag for a compara-ble facility in a developed country. Savings comenot only from substantially less costly constructionlabor, engineering, and architectural services butalso from less expensive construction materials.Another area of savings ismachinery and equip-ment, which often cost 20to 60 percent less thanitems of comparable qual-ity in developed markets.This advantage will growas more locally made state-of-the-art equipmentbecomes available over the next few years. In addi-tion, local communities within RDEs competefiercely for investment and often make land avail-able on favorable terms.

Low-Cost Raw Materials. Depending on the coun-try, raw materials and energy can be abundant orquite limited. Of the 12 countries we screened indepth, only Brazil and Russia are building a majorpart of their global advantage on the basis of low-cost natural resources. Brazilian companies shareprivileged access to low-cost hydroelectric power.Brazil also has a broad resource base, ranging fromrich and low-cost iron ore (the major source ofglobal advantage for domestic mining companiessuch as CVRD) to low-cost agricultural feedstock(which underpins a thriving food-processing indus-try). Russia, meanwhile, markets its rich energyresources either through direct exports of energysuch as natural gas (Gazprom) or indirectlythrough exports of aluminum (Rusal).

Low-Cost Capital. Financing options for RDE-basedcompanies vary widely. Some, such as those in theraw-material sector, generate significant cash flowsthat they can reinvest. Many have access to rela-tively generous debt markets (although approvalstandards are becoming more rigorous in allRDEs). No fewer than 60 of our RDE 100 haveaccess to equity markets in Hong Kong, London,Mumbai, New Delhi, and New York. In addition,some companies are championed by governments

eager to promote the international growth of keyindustries; an example is China’s telecommunica-tions-equipment industry. In combination, thesefactors should put most RDE challengers on at leastan equal footing with their Western competitors.

Home-Market Environments

The operating environment in many RDEs is diffi-cult, a fact that can arguably provide real advan-tages for indigenous companies. Local markets areoften very large and among the fastest-growing in

the world. In China, forinstance, steel consump-tion is 2.3 times that ofthe United States; carsales are currently animpressive 29 percent ofU.S. levels and are grow-

ing at 10 to 12 percent per year. The markets inBrazil, India, and Russia, although much smallerthan China’s, are also significant.

These large home markets, with hard-to-please,price-sensitive customers, provide a strong founda-tion for creating export businesses in the future. Inaddition, many key sectors, such as China’s aero-space, telecommunications-equipment, and automo-tive-equipment industries, get substantial help fromthe government. Many RDE markets also give theirindigenous players the opportunity to competedirectly with foreign incumbents on their home turf,helping to prepare them for expansion abroad.

Operations

Many RDE-based companies have surprisinglystrong operating platforms. Their assets are oftenmuch younger than those of established multina-tional players. A survey by the U.S.-basedManufacturing Performance Institute found thatthe average age of the assets of the surveyedChinese companies was 7.2 years, compared with16.9 years for those of their U.S. counterparts.Similarly, RDE-based production systems tend to bemore flexible than those in highly developed coun-tries because RDE-based players often use laborinstead of machinery in their plants. For example,rather than installing automated packing lines, theyuse human workers to do the packaging. And theytend to buy their machinery from domestic manu-


RDEs’ local markets areoften very large and

among the fastest-growingin the world.

facturers, whose products are 20 to 60 percent lessexpensive than comparable Western equipment.

In addition, RDE-based companies often achievehigher capital productivity through a longer work-week and fewer fixed assets than are typical of theirWestern counterparts. These factors may also pro-vide more flexibility to cope with demand swings,speed new-product launches, and permit smallerorders.

Innovation

Only a handful of RDE-based companies operateat the cutting edge ofinnovation. Their generalweakness in intellectualproperty is reflected inthe small number of patents they hold. From 1999through 2003, all the companies based in the fivelargest RDEs obtained only 3,900 U.S. patents,whereas companies based in Japan and Germanyobtained 166,000 and 54,000, respectively.

However, other factors are beginning to offset thisapparent weakness. First, RDEs are fast developingR&D talent. For example, in 2010 China isexpected to graduate 800,000 engineers, mathe-maticians, technicians, and scientists, while Indiawill graduate 600,000. Together, this pool of gradu-ates is 12 times the output of the U.S. university sys-tem in the same disciplines.

In addition, R&D resources are far less expensive inRDEs than in highly developed countries. Withapproximately one-fifth the development costs of itsWestern competitors, a company such as India’sRanbaxy Pharmaceuticals can achieve much with its$87 million R&D budget. Little wonder, then, thatMNCs are already rushing to RDEs to establish R&Dcenters.2 RDE-based companies, however, may wellhave an advantage when it comes to leveraging localtalent effectively. For example, China’s Haier claimsto develop two new household appliances every day.While few current RDE-based innovations are cut-ting edge, the most successful RDE-based companieswill become true innovators over time.

Supply Chain Management

Effectively connecting RDE sources with remotemarkets remains a challenge. The Asia-U.S. supplychain, for example, takes an average of 60 to 90days from order entry to arrival at the point of saleand adds 10 to 30 percent to manufacturing costs,eliminating up to half the manufacturing cost sav-ings afforded by the RDE.3 Our experience indi-cates that 20 to 60 percent of these supply-chaincosts are caused by stockouts, emergency ship-ments, and permanent backups built into the sys-

tem. Optimizing the totalperformance of a long-distance supply chainrequires considerableskill, top-notch proc-esses, and organizationaldiscipline. A few RDE-

based companies, such as China’s Li & FungGroup (textiles), have mastered this art andturned it into their main business. For many RDE-based players, however, supply chain managementis still a bigger challenge than it is for establishedmultinationals, which have well-developed supply-chain functions.

One way to address the supply chain issue is byestablishing production beachheads inside the tar-get markets. Of our RDE 100, 39 companies havealready done this. The strategy is particularly ben-eficial when products have high transportationcosts relative to their value, when products areexposed to extreme demand volatility or shortlead times, when trade barriers are significant, orwhen being “local” still provides a strong sellingproposition.

Going to Market

Getting traction in a new market, particularly ahighly developed one, is still tough for most RDE-based companies. The hurdles are manifold:becoming intimate with customers and channels,understanding their needs, designing the rightproducts, and building competitive distributioncapabilities. Although many RDE-based compa-

22 BCG REPORT

Optimizing a long-distancesupply chain requiresconsiderable skill and

organizational discipline.

2. See A Game Plan for China: Rising to the Productivity Challenge in Biopharma R&D, BCG Focus, December 2005, and Harnessing the Power of India: Rising tothe Productivity Challenge in Biopharma R&D, BCG Focus, May 2006.

3. See The China Rip Tide: Threat or Opportunity? BCG white paper, January 2006.

nies have adjusted well to new requirements intheir home countries, playing this game abroadusually means joining a different league of com-petitors.

The most successful RDE-based players are aware ofthis issue and are employing one or more of the fol-lowing approaches in order to improve their abilityto go to market abroad:

• Making acquisitions intended to gain access tothe market and to the required commercial capa-bilities (for example, the acquisition by Dr.Reddy’s Laboratories, an Indian pharmaceuticalcompany, of Germany’s betapharm Arzneimittelin 2006)

• Building deep relationships with a limited num-ber of large retailers (for example, sales of airconditioners by China’s Midea Holding Companythrough Home Depot and Wal-Mart)

• Targeting high-volume sales to a relatively smallnumber of large industrial and OEM buyers (forexample, sales of mobile-phone batteries byChina’s BYD to Motorola, Nokia, and SonyEricsson)

• Concentrating on developed markets that are alower priority for incumbents (for example,sales by China’s Konka Group Company inAustralia, where it ranks number two in the TVmarket)

• Serving other RDE markets that have characteris-tics similar to the home market before movinginto highly developed markets (for example, thedevelopment by China’s Skyworth of a strongposition in consumer electronics in Malaysia,Mexico, and Russia before it entered WesternEurope)

Management Talent

In our study of the globalization patterns of the RDE100, the quality of management emerged as animportant success factor. The shortage of managerswith international experience constitutes a majorconstraint for RDE-based companies. The need isgreat both for people who can develop global busi-ness strategies at the corporate level and for thosewho can operate effectively on the ground in the tar-get markets. Only a handful of the RDE 100 have for-eigners among their directors, and few have foreign-ers in senior management positions.

Most RDE-based companies recognize this shortageand are grooming management talent inside theirorganizations. Many have established internationaljob-rotation programs for their local managers andare now hiring managers with international experi-ence, often tapping into the pool of native-bornexecutives working abroad.

Rigorous Strategy and Road Maps

As mentioned earlier, many of the RDE 100 are stillin the early stages of globalization. For these com-panies, in particular, it will be important to movebeyond opportunistic steps toward globalizationand develop more coherent strategies.

Vital elements for success include a well-defined,long-term globalization strategy coupled with solidfinancial management and a road map with con-crete milestones. For example, Brazil’s Natura (cos-metics) has a long-term globalization road map thatguides the company’s international moves.Combining its operating capabilities with a plannedapproach to accessing new markets, the companyaims to spread its value proposition and strengthenits brand recognition abroad.


Create internationally capable management teams.Whereas some of the RDE 100 already have globalmanagement teams, others have only begun toaddress this issue. For example, very few of theChinese companies profiled have any foreigners intheir senior-management ranks. A globally capablemanagement team will be essential to successabroad.

Enhance overseas selling, marketing, and supply-chain capabilities. RDE-based companies need togo beyond being secondary suppliers to global cus-tomers and become primary suppliers. Moving upto this level will require matching or beating incum-bent suppliers in selling, marketing, and supplychain capabilities.

Go beyond low cost. As RDE-based challengersseek sustainable global positions, they will need tomove beyond cost-based differentiation. Other-wise they will face incumbent competitors that arecutting their own costs while building market bar-riers based on innovation and other advantages.Just as leading Japanese and South Korean compa-nies have become true innovators, so must ourcurrent crop of RDE-based challengers innovatetheir way to long-term success. The abundance ofaffordable engineering talent in markets such asChina, India, and Russia gives companies based inthese locations the potential to become innova-tion powerhouses.

Develop expertise in partnering, M&A, and lever-aging suppliers. In the race to compete, the mostsuccessful RDE challengers will include those thatleverage other companies. Some will create thisleverage through successful M&A activities. Otherswill do it by forming strategic partnerships or bytaking advantage of the innovation of suppliers athome and abroad.

Implement an effective global organization. Forlong-term success, RDE-based challengers—likeincumbent MNCs—must redesign their entireorganizations to be truly global. This effortrequires making difficult decisions regarding thecomposition of the management team, the central-ization or decentralization of various key functions,

Looking Ahead

24 BCG REPORT

Until recently, only a dozen or so RDE-based com-panies could have been described as emergingglobal challengers. Today these challengers num-ber in the hundreds. Among them, the RDE 100will play important roles in shaping the global mar-ketplace. While some of these companies arealready in positions of relative strength, many arestill gearing up for major global-growth campaigns.All are hungry for global expansion. They areincreasingly cash rich. They are aware of theiradvantages and know how to deploy them. At thesame time, they are actively working to overcometheir traditional weaknesses. In this effort, manyare receiving the strong support of their homegovernments.

We expect that by 2010 our RDE 100 will have dou-bled their international revenue. Meanwhile, theportion of revenue they derive from internationaloperations will likely rise from the current 28 per-cent to more than 40 percent. Perhaps 20 or moreof them will be among the top five companies intheir categories globally, up from only a handfultoday. We also expect that the number of promi-nent RDE-based globalizers will expand into thehundreds in the years ahead. The implications aremassive—both for emerging challengers and forincumbents.

Implications for Challengers

As noted above, many of the RDE 100 are wellalong on the path to globalization. In general, themore advanced companies on our list already havemost of the essential capabilities in place. But othercompanies on the list are still in the early stages ofglobalization. In order to successfully advance theirinternational growth, they will need to strengthentheir positions in the following ways.

Establish clear, long-term globalization targets androad maps. All companies need to clarify why andhow they are globalizing. Some of the players on our list have begun to globalize only oppor-tunistically. To succeed in the longer term, theywill need a clearer vision and purpose, set fromthe top, and detailed road maps for their global-ization endeavors.

and the extent to which the company organizesgeographically rather than by business line.

Implications for Incumbents

The impact of emerging RDE-based challengers onindividual incumbents varies by industry and alsoreflects a company’s current competitive position.Many incumbents are successfully riding the waveof globalization by sourcing, manufacturing,selling, and conducting R&D both at home andaround the world. Others, however, have not yet adapted to the chal-lenges of globalization,and the emergence ofstrong RDE-based com-petitors will both raise thestakes of the game andreshape the playing field.How to respond?

Know your challengers. The first step seems obvi-ous: you need to identify and understand the RDE-based challengers in your industry. Who are they?Where are they operating today? What are theirstrengths and vulnerabilities? How are they chang-ing the competitive landscape? Which steps in thevalue chain are affected? How big an impact do youexpect? Will the impact create threats, opportuni-ties, or both? RDE-based challengers are sometimeshard to get to know. They are based far away, theymay not be well covered by the business media, theymay not publish financial results, and they areevolving rapidly. So you need to make an extraeffort simply to understand them.

Take a hard look ahead. Envision your global prior-ities in an environment inhabited by successfulRDE-based competitors. What are the implicationsfor the segments and businesses you can defend?Which segments and businesses might you want toexit? What new growth opportunities and competi-tive imperatives do you see?

Design a strategy for the new reality. Answeringthose questions will trigger important decisionsabout how you will contend with the new chal-lengers. Your choices might include the following:

• Competing head-on with the challengers, erect-ing obstacles to keep them out of key markets, orattacking their home markets

• Partnering with one or more challengers in orderto strengthen your global competitive positionand defend that global position against otherchallengers

• Creating your own challenger by establishing asubsidiary in an RDE designed explicitly to cap-ture the same kinds of advantages that RDE chal-lengers possess

• Exiting some lines of business or some value-added steps and moving those activities into ajoint venture with a challenger company; for

example, you might builda new business model thatwould benefit from thejoint venture through roy-alties and service fees inone or more markets

Hone your operations and reinforce customer ties.For most incumbents, the main arena of competi-tion with RDE-based companies will be productmarkets. Here, in our experience, most incumbentsstill have considerable room for improvement intheir key operations: developing new cutting-edgeproducts, manufacturing them efficiently, gettingthem to market effectively, and servicing customerswell. In their home markets, incumbents are oftencloser to customers than challengers are. Theyshould take full advantage of those relationships.While incumbents focus on improving perfor-mance in their domestic operations, they shouldalso systematically assess options to relocateproduction to low-cost countries.

Find ways to ride the wave. Incumbents and chal-lengers alike should also consider opportunities tocreate value by acquiring, investing in, or partner-ing with each other. Many are already systematicallyassessing and pursuing options to cooperate as away to advance their own growth objectives.Opportunities exist in many areas. In sourcing, forexample, RDE-based companies can become sup-pliers to incumbents (as exemplified in the marketfor automotive equipment) or partners in exploit-ing raw-material resources (as is happening in theoil industry). Conversely, the RDE 100 challengersare already purchasing huge volumes of materials,parts and components, and services, and thereforeshould be regarded as potential customers ofincumbents.


Strong RDE-basedcompetitors will both raisethe stakes of the game andreshape the playing field.

Similarly, partnerships between incumbents andchallengers figure prominently in the globalizationof R&D (for example, in the pharmaceutical indus-try, where global giants are starting to conduct jointresearch programs with companies in India andChina). In operations, subcontracting and out-sourcing are now common in almost every industry.Indeed, the business models of some challengersare built entirely on serving multinational playersin this way (for example, in the technology equip-ment, household appliance, and IT services andbusiness-process-outsourcing industries). Manyincumbents also enter into joint ventures or distri-bution partnerships with RDE-based companies totap into their growing home markets (for example,in the Chinese automotive-equipment and con-sumer-electronics industries).

RDE-based companies can also be partners inincumbents’ exit strategies. When an incumbent’smanagement team decides to retreat from a seg-ment of a mature market, partnerships with RDE-based players can help stage the exit. In the case ofan outright sale, an RDE-based company might bewilling to pay more for a business than a domesticcompetitor would because the purchase might pro-vide exactly the sort of assets the company needs tooffset its current weaknesses (for example, in intel-lectual property, brands, or distribution channelsin mature markets). In other cases, a temporarypartnership with an RDE-based acquirer might cre-ate more value than an outright sale. Incumbentshave recently pursued this model in M&A dealswith Chinese companies, generally in the form ofjoint ventures.

From the incumbent’s perspective, partnershipsmake sense for at least three reasons. First, some-times the assets of the acquisition target need to becarved out of the seller’s operations, so it is not pos-sible to complete an immediate sale. Second, theincumbent may want to retain some of the mostattractive assets—such as intellectual property,including brands and patents, or jointly used oper-ations such as sales channels—and provide them tothe acquirer for a fee. Finally, the acquirer may be

an attractive partner for the seller in penetrating anRDE market or may even serve as a client.

Ultimately, incumbent companies in global indus-tries must quickly become comfortable with a worldfull of RDE-based challengers. It will be criticallyimportant to know these challengers well and touse that knowledge in making key business deci-sions. Decisions made without such insights cer-tainly risk failure.

Closing Thoughts

We are fast entering a new era in which RDE-basedchallengers populate the world’s largest industries.These challengers will be major players, reshapingmany markets and forcing incumbent companies torespond.

The rise of these challengers takes place amidst therise of RDE economies generally—and of Chinaand India in particular. By 2050 China and Indiawill be two of the world’s three largest nationaleconomies. At that point, any truly global companymust, by definition, be a major player in China,India, or both, as well as in North America, Europe,or Japan. And by then, many global companies willindeed be based in China, India, and other coun-tries that are today’s RDEs.

Our list of 100 companies represents just a smallsample of the RDE-based challengers that will ulti-mately emerge on the world stage. Of course, notall will survive. Success will require correct strategicdecisions and the building of capable, competitiveorganizations.

Survival for today’s incumbent companies is notguaranteed either. Clearly, one success factor willbe the ability to identify the new wave of RDE-basedchallengers and understand the rich array ofthreats and opportunities they present. These com-panies are no longer poised on some far horizon;they are globalizing fast and are determined to staythe course. The leaders of today’s global companiesmust be prepared to meet their challenge.

26 BCG REPORT

28 BCG REPORT

For a complete list of BCG publications and information about how to

obtain copies, please visit our Web site at www.bcg.com.

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please visit our subscription Web site at www.bcg.com/subscribe.

China’s Global Challengers: The Strategic Implications

of Chinese Outbound M&A

A report by The Boston Consulting Group, May 2006

Harnessing the Power of India: Rising to the Productivity Challenge

in Biopharma R&D

A Focus by The Boston Consulting Group, May 2006

Organizing for Global Advantage in China, India, and Other Rapidly

Developing Economies

A report by The Boston Consulting Group, March 2006

The China Rip Tide: Threat or Opportunity?

A white paper by The Boston Consulting Group, January 2006

A Game Plan for China: Rising to the Productivity Challenge

in Biopharma R&D

A Focus by The Boston Consulting Group, December 2005

“Spurring Innovation Productivity”

Opportunities for Action in Industrial Goods, November 2005

“The New Economics of Global Advantage: Not Just Lower Costs

but Higher Returns on Capital”

Opportunities for Action in Operations, July 2005

“Winning in Today’s Chinese Automotive Market”

Opportunities for Action in the Automotive Industry, June 2005

“Globalizing R&D: Building a Pathway to Profits”

Opportunities for Action in Operations, May 2005

“Globalizing R&D: Knocking Down the Barriers”

Opportunities for Action in Operations, May 2005

“Avoiding Supply Chain Shipwrecks: Navigating Outsourcing’s Rocky Shoals”

Opportunities for Action in Operations, March 2005

The Central and Eastern European Opportunity: Creating Global Advantage

in Serving Western Europe

A Focus by The Boston Consulting Group, January 2005

Navigating the Five Currents of Globalization: How Leading Companies

Are Capturing Global Advantage

A Focus by The Boston Consulting Group, January 2005

Capturing Global Advantage: How Leading Industrial Companies

Are Transforming Their Industries by Sourcing and Selling in China,

India, and Other Low-Cost Countries

A report by The Boston Consulting Group, April 2004

“What Is Globalization Doing to Your Business?”

Opportunities for Action in Industrial Goods, February 2004

The Boston Consulting Group publishes other reports and articles on the topic of capturing global

advantage that may be of interest to senior executives. Recent examples include:

www.bcg.com

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