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Decelerating growth, a more insular economic strategy, rising costs and new regulations are changing China's business dynamics, leading to a host of new challenges and opportunities in Asia's largest market. Meanwhile, an uneven economic recovery looms over Europe while the debate as to whether Frontier markets are faring better than Emerging markets continues. Growth strategist David Hartman looks forward to where global growth is coming from and how changing country dynamics will impact strategic account management.
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© 2014 Blue Canyon Partners, Inc.
DAVID G. HARTMAN, PRINCIPAL | MARCH 26, 2014
SAMA Webinar
Got Growth? Growing Business
in a Changing World
© 2014 Blue Canyon Partners, Inc.
1. Dissecting the Daily Headlines about China’s Economy,
and a Look at a New Set of Growth Markets. How
Significant Will They Be?
2. Where China Has Been as a Market and as a Global
Competitor, and Where It is Headed
3. What Have We Learned That is Useful in Looking at
Frontier Markets
Agenda
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© 2014 Blue Canyon Partners, Inc.
We Have Witnessed a Sea Change in the Sources
of Global Growth in Recent Years
As recently as 2002, North America and Europe were the growth drivers of the world market, accounting for 70% of global market growth.
As recently as 1992, Asian developing countries (bars with black outline) accounted for less of global market growth than Japan alone.
The past 5 years have seen developing Asia account for a remarkable 60% of all the market growth in the world, nearly 40% of it in China alone.
Regions not shown in the chart now account for about 30% of global growth, three times as high as in the 90’s and higher even than during the oil crises of the 70’s.
Sources: World Bank, WDI, Blue Canyon analysis
Percentage of 5-Year Global GDP Growth
Accounted for by Selected Regions
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© 2014 Blue Canyon Partners, Inc.
While Asian Emerging Markets Still Lead,
Frontier Markets in Other Regions Have Emerged
With some exceptions such as Argentina and Vietnam, the Frontier markets are outside the mainstream of prior rapid growth: Asia and Latin America.
With global growth faltering over the past 5 years, the Middle East and Africa were home to some substantial growth. The old adage of the developing world getting pneumonia when the US and Europe catch cold seems quite outdated now.
The reasons can be debated, but the demands on the world’s resources created by explosive growth by China are a factor.
Even with a substantial slowdown in China from this level of growth, China will still outweigh the importance of all the Frontier group for some time to come. But positioning for the future requires attention.
Sources: World Bank, WDI, Blue Canyon analysis
Percentage of 5-Year Global GDP Growth
Accounted for by Selected Regions
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© 2014 Blue Canyon Partners, Inc.
Still, China Looms So Large That Its Growth
Slowdown Makes for Shocking Headlines
Global concern over China’s economic slowdown is probably overdone
China’s policymakers are determined to build a more balanced economy:
▫ Services vs manufacturing
▫ Personal consumer choice vs government spending
▫ Interior regions vs coastal
▫ Environment vs growth
“Slowdown” scenarios to below 8% must be seen in context of less than 2.5% growth in the US and Europe (solid blue line)
Sources: World Bank, WDI, Blue Canyon analysis
China’s Real Annual GDP Growth
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© 2014 Blue Canyon Partners, Inc.
Government Spending Has Given China a Vast Modern
Infrastructure, Such as a Highway System, Built Largely in
15 Years
China’s growth was maintained during the great global recession by government stimulus spending, largely on infrastructure projects.
Expressways have been a large part of the construction boom in China, taking China from few “interstate highways to the size of the US’s system.
China has been pushing the highway network west, allowing for delivery to ports and major cities of products produced outside the most developed coastal rim.
The same building boom has similarly expanded rail and air infrastructure.
Sources: National Bureau of Statistics of China,
Wikipedia user ASDFGH for Map translation/presentation
China’s Expressway Development
China’s Expressways:
Operational (Blue) and Planned (Red)
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© 2014 Blue Canyon Partners, Inc.
This Transportation Infrastructure Supports the
Ongoing Westward Shift in Centers of Growth
Long China’s laggards, the interior regions
of China have per capital incomes a
fraction of the most developed provinces
along the coast.
The much-discussed wage increases faced
by foreign and Chinese manufacturers are
far less burdensome in the poorer regions
where new development is taking place.
And now the former leaders - Beijing,
Shanghai, and Guangdong - have fallen to
the bottom of the growth chart.
Those companies looking for new “frontier
markets” should look at the low-income
regions of China as well as outside.
Sources: China National Bureau of Statistics, Blue Canyon analysis
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© 2014 Blue Canyon Partners, Inc.
What Do All These China Dynamics Mean for
Succeeding With Strategic Accounts?
Trend What It Means
China’s overall growth rate slows
Still-growing demand for your products and your strategic
accounts’ products, but growing more slowly than some had
anticipated
Consumer demand replaces government infrastructure
spending
Manufacturing for some of the most fashion-conscious consumers
in the world presents great opportunities but different
opportunities from supporting construction. Service providers
could also see opportunity
A significant population moves from subsistence agriculture
to new cities
As peasants become city-dwellers, dependencies on products
from the market increase dramatically
Industry moves from the Coastal areas to regions farther
and farther West
Instead of moving (migrant) workers from the West to factories in
the East, B2B customers will move goods from factories in the
West to markets, often in the East but also in the West. Logistics
reemerges as a key challenge/differentiator.
Domestic demand and higher-value exports replace exports
of low-priced labor-intensive goods
Changes in pattern of goods movement within China is coupled
with an increase in demand for imported products. Export
volumes fall over time. Key accounts that are in China for low
cost manufacturing will be challenged by basic economics.
Consumer concerns such as Food safety are a daily topic
of conversation and shapes people’s dining habits
Foreign brand name products and inputs gain acceptance; more
reliable and well-monitored supply chains, as well as inspections
at source, can start to calm fears.
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© 2014 Blue Canyon Partners, Inc.
Chinese Companies as
Strategic Accounts and
as Competitors
Taking stock of Where China has
Been and Where China is Headed
as a Global Competitor
1. Remarkable change in not much
more than 20 years: command and
control to largely market-driven
2. Now a “must-win” market for most
global manufacturers who intend to
achieve growth and continue being
global leaders, needing partners
to support them
3. Having created a formidable set of
Chinese competitors who are
large, well-funded and tend to follow
a different business model, creating
challenges across the globe
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© 2014 Blue Canyon Partners, Inc.
Value Creation for Chinese Key Accounts Is Defined
by the Market in Which Second Mice Have Prospered
Incomes have soared, but most of China
is still a poor country
▫ Labor is still relatively cheap
▫ Consumer products are sold in volume in the
middle market where price is critical
Most Chinese companies know of only
one way to compete: “Almost as good as
____ (Motorola, Nike, Ericsson, Apple,
Siemens) at a fraction of the price.”
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© 2014 Blue Canyon Partners, Inc.
How the Second Mice Succeed in That Market
Manufacturing and sourcing capabilities, including ones learned from western firms
“China economics”
▫ Substituting labor for supplies and equipment
▫ Moving to lower-cost geographies
▫ Redefining relationships with customers around service
Fast learner and fast follower competencies
▫ Copying what works elsewhere
▫ Thinking “outside the stadium”
▫ Moving at “China speed” to be Second
▫ Using close customer relationships to engineer features out
A focus on China’s “middle market” – where the products of western companies are too expensive
Source: George F. Brown, Jr. and David G. Hartman, Are You Ready to Take
on China’s Next Generation Competitors?, Chief Executive, September 2011.
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© 2014 Blue Canyon Partners, Inc.
Coming to a Market Near You:
The “Going Out” Strategy
Before China joined WTO in 2001, most Chinese
“exporters” had little idea what happened to
their products after they left the factory.
The government began a policy of actively
supporting firms to invest abroad. There was even
a list of resources and technologies for
companies to target.
Through acquisition, Chinese companies are
becoming major players on the world stage. Not
all will succeed and not all will change the
companies they acquire, but some will do both.
Chinese resource and engineering companies are
doing projects across the world, moving large
volumes of Chinese products with them.
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© 2014 Blue Canyon Partners, Inc.
What You and Your Western Strategic
Customers Need to Do to Win Against
Chinese Competitors
To sustain global leadership, most western firms will need
to win in China’s mid-market: to bring what the Chinese do
so well into their own firm’s cultures, most likely through
acquisition and a new perspective on integration.
The task of competing with Chinese companies, in China
and at home, is monumental, but the China market
remains a “must win” for western firms aspiring to
sustained global leadership.
While ensuring reliability, the western firms must keep the
primary focus on cost in order to compete.
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© 2014 Blue Canyon Partners, Inc.
China Lessons for Frontier Markets
Lesson What it Means
Being early to China meant being the only supplier of
sophisticated products; but most western companies later
found themselves positioned in high-end niche market
segments that failed to match explosive growth in overall
market demand.
Be realistic that people waiting in line to buy your products is
a short-lived phenomenon. The phenomenon will be even
more short-lived due to the focus of China on being the
supplier to the New Frontier Markets in Africa, the Middle
East, and Latin America.
Being early to China meant dealing with high costs due to
lack of development, such as training workers, poor
infrastructure, and an immature supply base, despite the low
labor cost environment.
In frontier markets, some companies make money despite
the cost environment, others do not. Being thoughtful about
the costs and the future is critical.
Being early to China meant dealing with a business culture
that was insulated from global norms, was confusing and
risky and led to some violating their ethics and the law.
Frontier markets are frontier for a reason. Choose carefully
the regions and market segments in which you can operate
effectively.
China developed in a relatively short time from a cheap
manufacturing location to offer higher labor costs but a
compelling market.
Chasing the next low-cost manufacturing location may bring
only temporary rewards unless you position for a long-term
win in that country as a market.
China developed quickly into a manufacturing powerhouse,
with local competitors who attacked the local mid-market but
also have global ambitions
Not every frontier market will see the rise of indigenous
competitors to that degree, but it is important to anticipate
how it will evolve.
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© 2014 Blue Canyon Partners, Inc.
Questions?
David G. Hartman
Current Responsibilities
As a Principal of Blue Canyon, David Hartman works with major corporations developing growth
strategies, defining ways to capture value from Big Data, and strengthening B-to-B customer relationships.
David also serves as the Director of Blue Canyon’s China Practice and CEO of Blue Canyon & China
Associates in Beijing.
PRINCIPAL
T (847) 967-0295
Experience
David has worked across a multitude of industries, including automotive, telecommunications, construction
and many others. As a leading economist, David has directed Blue Canyon associates to create detailed
data models that forecast growth and offer insights for clients. During his 15 years at Blue Canyon, David
has worked on a broad range of projects, including:
Identifying global growth opportunities for multiple U.S. manufacturers
Recommending how clients must address new channel opportunities and strategic pricing
Advising longstanding China market participants on how to break through barriers to further growth and
strategies for succeeding against local competitors in China’s mid markets.
Prior to joining Blue Canyon, David served for 10 years on the faculty of Harvard University, was
Executive Director of the National Bureau of Economic Research, and was Managing Director of DRI
McGraw-Hill, a pioneer in the information industry.
Education and Affiliations
David earned a Ph.D. degree in economics from Harvard and B.A. and M.A. degrees from
Northwestern University in mathematics and economics.
Thought Leadership
David has spoken to numerous organizations and has been interviewed by a number of publications. He
has written more than a dozen articles and white papers on topics ranging from global expansion, market
creation in China, and the development of new data-driven business models.
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