Six

Emerging Giants: Going Global

AFTER IDENTIFYING UNIQUE value propositions and establishing strong competitive positions in their home markets, prospective emerging giants face a new set of challenges as they try to develop into multinationals in their own right.¹ These companies aspire to be world-class competitors, but how can they develop world-class capabilities? They would like to be true global players operating in all geographies, but the range of opportunities available to them is daunting. How should these firms think about globalizing their businesses?

Just as the home country origins of developed market-based multinationals matter as they enter emerging markets, the home country origins of emerging giants matter as they globalize their businesses. It is difficult for emerging giants to compete against world-leading players, particularly in developed markets, in part because of institutional voids in their home markets that limit their access to, for example, expansion capital, sophisticated R&D capabilities, and top-quality talent. Moreover, because the unique institutional contexts of emerging markets demand custom-tailored business models, these models need to be adapted to new markets having different contextual features. This chapter focuses on how successful emerging giants manage these challenges as they move out of their home markets.

Strategies for Going Global

Why are emerging giants going global? Global markets can offer these companies new customer bases, production platforms, or innovation centers. Emerging giants can expand beyond their borders for reasons of scale—enlarging their businesses and building cash flow or brand—or stretch, learning to do new things that their local environment may not facilitate.

Many emerging market-based companies were limited in the extent to which they could globalize until regulatory constraints, such as foreign exchange and capital controls, were gradually loosened during liberalization in the 1990s. As these emerging economies and stock markets surged and their attractiveness increased in the eyes of foreign portfolio investors, more resources were available for prospective emerging giants to invest in building international businesses.²

Some business models are intrinsically global, such as those that seek to use cheaper factor inputs in one part of the world to serve a demand in another region; examples are Indian software and IT consulting firms, or Chinese manufacturers. These companies are often global from their inception. Other business models can be contained entirely within country boundaries, particularly within large markets where companies can exploit economies of scale domestically. Not every emerging market-based firm can or should build a global footprint. If a particular company’s inherent capabilities will not be rewarded outside its home market and if it lacks the resources or management bandwidth to adapt or acquire new capabilities in foreign markets, then delaying globalization— emphasizing opportunities elsewhere, including in their home markets— is often a smart approach.

For example, after a brief, unsuccessful entry into Western European markets in the 1990s, Titan—the watch and jewelry brand of India’s Tata Group—chose to maintain a largely domestic focus. The brand succeeded in the Middle East, particularly among nonresident Indian populations, and developed a small retail presence in the United States. It also globalized part of its supply chain to Hong Kong. But by 2008, it had not yet sought to challenge the world’s major watch and jewelry brands.³ “To be a global watch player, you’ve got to have a Swiss brand,” said one Tata Group executive. “Titan realizes that to become a serious watch player sometime they have to make a Swiss acquisition. Given its existing scale and given its existing resources, it says, ‘Listen, until I get the financial muscle to take the big plunge, I will primarily be a domestic player.’ So it dominates the domestic watch segment, dominates it.”⁴ Given the fast growth in these markets and the competitiveness of incoming multinationals, remaining exclusively domestic makes sense for many emerging giants. There are many world-class emerging market-based companies that are not quite as global as one might expect.⁵

Encouraged by flush balance sheets, enabled by regulatory changes, and compelled by home market overreliance and institutional voids as well as the globalization of industries, however, many emerging market-based companies have turned their attention overseas. Market selection is a critical strategic decision for these companies. Unlike many developed market-based companies that can afford to fail, companies from emerging markets with relatively limited resources and access to capital may have a one-shot opportunity to launch internationally.

Prospective emerging giants that decide to go global need to think systematically about how they should grow their businesses outside their home markets and which capabilities they need to seek out. Both of these decisions—where to go and what to acquire—should be related to these firms’ initial sources of competitive advantage. The journeys of emerging giants that move into foreign markets vary widely, but they often reflect core capabilities developed in the companies’ home markets. The origins of emerging giants in market contexts rife with institutional voids can hamper their globalization, but their ability to negotiate institutional voids can enable globalization to other markets having similar market structures. Emerging giants can also compensate for the institutional voids in their home markets through globalization by borrowing global market institutions to help build global capabilities.

Replicate Business Models in Markets with Structural Similarities

Experience operating amid institutional voids can position emerging giants to establish operations in other emerging markets having similar structural impediments—mirroring developed market-based multinationals that replicate their business models in the segments of emerging markets most similar to those in their home markets. To build scale, emerging giants can extend the models developed in their home markets into new markets. Companies whose business models focus on unique customer knowledge can expand to similar market segments in other emerging market countries.

Many companies based in emerging markets simply do not have the resources to launch a product or operational initiative in a developed market. However, experience meeting emerging market consumer needs, particularly at low price points, is an advantage for emerging market-based firms competing against mature market-based multinationals in developing markets. Similarly, emerging market-based companies whose business models are based on unique local factor markets can replicate their models in other emerging markets having factor inputs similar to their home markets. For example, after seeking out customers in developed markets early in their corporate histories, many Indian IT firms later developed software development centers in other emerging markets like China and some countries in Eastern Europe.

Adapt Business Models to Developed Markets

To be truly global companies, many emerging market-based companies aspire to operate and be competitive in the world’s most developed markets. Entering these markets can enable emerging giants to learn how to compete amid developed market infrastructure, such as sophisticated retail channels, and cater to highly demanding customers. This experience can help prepare emerging giants to compete in their home markets as more developed market-based competition enters and as more sophisticated market infrastructure and more demanding customers emerge. Some emerging giants have targeted developed markets in part to build their brands and credibility in their home markets, which lack many of the market institutions that can provide credible market information and certify quality. Entering developed markets is a costly venture for emerging giants, particularly as they look to move up the value chain, but it can serve as a valuable long-term investment in building capabilities.

Like multinationals looking to establish a presence outside the global segment in emerging markets, emerging giants need to adapt to the market contexts of developed economies. Although these companies do not encounter institutional voids in developed economies to the extent they do at home, they need to compensate for the institutional voids of their home markets. Voids make it difficult for prospective emerging giants to rival the resources and capabilities of global multinationals in developed markets. Some emerging market-based firms have successfully adapted to developed markets and have compensated for home market voids by targeting underserved niches where their home market-developed capabilities will be rewarded as a point of entry.

Acquire Global Capabilities Through Global Institutions

For emerging giants, going global is a matter not only of entering new markets outside their borders but also of building global capabilities. To develop their capabilities, access capital, or build credibility, prospective emerging giants can access global institutions from developed markets to compensate for local institutional voids. Borrowing global institutions can take the form of listing on U.S. or other foreign stock exchanges (the approach of Indian IT firms Infosys and Wipro, among many others), seeking protections from developed market patent systems for their intellectual property (such as Korea’s Samsung, one of the world’s top patent holders), or acquiring companies in developed markets (the approach of Chinese firms Lenovo and TCL and several companies in India’s Tata Group).

Most of these global institutions are available only to those prospective emerging giants that have identified and successfully exploited business models amid the institutional voids in their home markets. Global share listings will attract investors only if an emerging market-based company brings something new to the investor’s proverbial table, through an established position in the home market, for example, and global acquisitions require prospective emerging giants to have amassed sufficient capital.

Although many of these initiatives are aimed at adding direct and tangible capabilities, such as capital, brands, or other resources, borrowing global institutions can be a particularly valuable tool for prospective emerging giants to improve their governance and build credibility.

TABLE 6-1

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Case examples

Strategic challenge	Examples
Replicate business models in markets having structural similarities	Zain Tata Consultancy Services Iberoamerica
Adapt business models to developed markets	Haier Teva Pharmaceutical Industries ICICI Bank
Acquire global capabilities through global institutions to compensate for voids	Overseas listings Overseas acquisitions

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In the rest of this chapter, we look at examples of emerging giants that have pursued these approaches as they have globalized their businesses (see table 6-1). Kuwait-based Zain grew into one of the world’s largest telecommunications providers by targeting developing markets, particularly in Africa—exploiting its ability to cater to segments and manage voids in emerging product markets. India-based IT firm Tata Consultancy Services used its experience exploiting emerging factor markets in its operations in Latin America. China’s Haier, Israel’s Teva Pharmaceutical Industries, and ICICI Bank of India each adapted to developed markets by entering through niches that both avoided incumbent competition and exploited capabilities developed in their home markets. A number of emerging giants have globalized their capabilities by seeking out foreign capital markets, acquisition targets, and other institutions, in effect borrowing developed market institutions to compensate for institutional voids in their home markets.

Replicate Business Models in Markets with Structural Similarities: Zain

Kuwait-based telecommunications provider Zain knew that it would need to extend its footprint beyond its home region to attain global scale and capabilities.⁶ Unlike some emerging giants, however, Zain saw entering developed markets relatively early in its globalization as a stretch. Zain “wanted to go grow internationally and we knew that we had to look at developing markets or else pay a lot,” said one company executive. “We saw a lot of potential in Africa—but it was a big gamble.”⁷ Zain had been a pioneer in developing mobile telephony service in Kuwait and the Gulf region and was similarly intrepid as it invested in the development of mobile communications in sub-Saharan Africa.

The company saw its familiarity with the region as an advantage. “Being adjacent to Africa, being people that have long historical ties, whether it’s geographical, cultural, religious, and other ties with Africa . . . we think we know Africa and we are more concerned with Africa than others,” said one company executive.⁸ Zain quickly grew its business in Africa and across the Middle East by replicating its ability to manage institutional and infrastructural voids in developing markets and to reach the local and bottom-of-the-market customer segments. The institutional voids in African markets—and the perceptions thereof—were barriers to entry for many large global multinationals. Exploiting these untapped opportunities—actively identifying and filling infrastructural and institutional voids—enabled Zain to differentiate itself from competitors and globalize its business.

Zain, then called MTC, had moved into sub-Saharan Africa by acquiring Celtel in 2005, a $3.4 billion deal that was, at the time, the largest investment from the Middle East in Africa.⁹ Established with the assistance of development organizations in 1999, Celtel had grown its footprint quickly by purchasing affordably priced mobile licenses from African governments eager to increase telecommunications penetration rates, which were among the lowest in the world.¹⁰

By the time of the acquisition, Celtel had established a successful brand in Africa, but Zain faced a number of challenges in adapting to and expanding in the continent’s markets. Although Celtel’s business in Africa was predicated on filling voids through its development of telecommunications infrastructure, Zain found that it needed to fill other voids in these markets to grow its business there, particularly as a first mover in many markets. In addition to the absent physical telecommunications infrastructure that the company had to develop, other voids ranged from the absence of banks—requiring the company to collect cash—to inadequate electricity supply for its base stations. In Nigeria, for example, the company purchased five thousand generators in a single day. In some of the markets in which it operated, Zain produced more electricity than the country’s power company.¹¹ (In Iraq, Zain similarly built four thousand kilometers of transmission lines in two years by mid-2008 and employed a “small army” of eleven hundred security guards to protect employees and network base stations and switches.)¹²

Zain’s move into Africa was bold in its scale and attracted attention from large competitors from the Middle East and multinationals based in more developed markets. “I used to tell the people at [Zain] when we came to Africa that we had a two-year window before we generate attractiveness to this region,” said a company executive. “The challenge is how we fill up these two years in the best possible way.”¹³ Relentless focus on differentiation from existing and potential competitors by filling voids was critical to Zain’s approach in Africa.

Zain looked beyond differentiation by products and prices and saw that its biggest advantage—or potential advantage—vis-à-vis its competitors was its large regional footprint. Zain leveraged this presence with the introduction of One Network in Kenya, Tanzania, Uganda, the Democratic Republic of the Congo, Republic of the Congo, and Gabon in September 2006. One Network made mobile phone service borderless across the six countries. Under the service, customers could make calls and send text messages at local rates without roaming charges and, in the case of prepaid subscribers, add minutes to accounts in any of the countries. When One Network debuted, the Economist noted, “Celtel has, in effect, created a unified market of the kind that regulators can only dream about in Europe.”¹⁴ The initiative was targeted at the local and bottom-of-the-market segments. “The rich have no problem with roaming,” said one company executive. “It’s the poor that [have] a problem with roaming. We created it for the prepaid cards.”¹⁵

The successful offering resulted from an organizational openness to innovation. “We have not asked for the One Network,” said a company executive. “It’s an initiative that has come up from the field. It’s not us as management, [saying,] ‘Please look for a strategic competitive advantage for us.’ Our people thought of it out of experimenting [in] the field, and when it was proposed, we went for it.”¹⁶ A company executive describes the company’s approach to differentiation, not in terms of strategy or value proposition but in terms of organization and ethic:

Like many successful multinationals from developed markets operating in emerging markets, Zain was able to grow quickly by positioning itself as a partner in progress. “A great asset is your relationship with the communities you serve and how you position yourself to the world,” said a company executive. “That is the differentiation we seek.”¹⁸ Zain invested $14 billion in its first two-and-a-half years in Africa, making it the continent’s largest-ever investor, and created eight jobs in support services outside the company for every job it created inside the company.¹⁹ The company became the largest taxpayer in many of the markets in which it operated in Africa.²⁰ “So of course people love us,” said a company executive. “You have to invest in the future of this continent. This is turning around the whole continent, not a country. That’s the history-making mission we are in.”²¹

Unlike many emerging giants, which have rushed to enter developed markets, Zain was holding off as of 2008—emphasizing opportunities elsewhere. This strategy could be attributed in part to the nature of the telecommunications industry in these markets, such as high penetration and costly service and asset prices in Europe. “We want to apply our limited resources wherever it brings us the maximum value right in the beginning, because that’s growth,” a company executive said. “The strategy is to hurry—first-mover advantage—in an untapped market . . . and then become bigger and stronger in many ways and then refine yourself and reposition . . . for the next stage.”²²

At the prospect of facing more squarely the large developed market-based providers, such as Vodafone and Telefónica, Zain saw its origins as an advantage. Having operated in markets rife with institutional and other infrastructural voids, Zain had been, in the words of a company executive, prepared “to be more effective, more agile, and more capable than the larger companies in the long run. This is what we are betting on.”²³ Zain was more worried about other large emerging market-based firms, such as Bharti Airtel and China Mobile, which emerged from similar contexts.²⁴

Zain transformed itself from a government-controlled monopoly with only 600,000 customers in Kuwait in 2002 into the world’s fastest-growing wireless telecommunications provider with 32 million customers in twenty-two countries across the Middle East and Africa by 2008. By buying Celtel, Zain quickly acquired a significant footprint in Africa. Replicating its ability to operate in developing markets by investing in filling market voids, targeting poorer customers, and serving as a partner in progress, Zain was able to stay ahead of incoming competitors (see table 6-2).

TABLE 6-2

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Zain: Responding to contextual challenges in globalization

Contextual challenge	Response
Underdeveloped soft and hard infrastructure in developing markets	Replicated: Managed and filled voids in energy supply, banking system, telecommunications infrastructure, and security (in Iraq)
Difficult to reach local and bottom market segments	Replicated: Applied experience targeting poorer customers with prepaid cards and developed One Network

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Replicate Business Models in Markets with Structural Similarities:
Tata Consultancy Services Iberoamerica

Tata Consultancy Services (TCS), the Tata Group’s IT consulting and software services firm, developed into an emerging giant by exploiting the high quality and cost advantages of Indian technical talent and the company’s privileged ability to identify, sort, and manage that talent amid the institutional voids in its home market. Later in its journey, like many other factor market-based emerging giants, TCS sought to replicate its model to deliver services from other developing markets having factor market characteristics similar to those of India. Building a “global network delivery model” across other emerging markets compelled TCS—like Zain—to fill institutional voids as a source of differentiation and competitive advantage, as illustrated by the development of Tata Consultancy Services Iberoamerica (TCSI), the company’s subsidiary covering Latin America, Spain, and Portugal.

Developing operations in Latin America offered several advantages to TCS. The region was an additional source of talent at a time when salaries for technical workers in India had increased on demand from the outsourcing boom there.²⁵ Beyond salaries, the growth of the outsourcing industry meant that the best technical talent in India could find positions in desirable shifts, so the overnight shift posed staffing challenges to TCS.²⁶ “The third shift in India, which is our main shift in the United States, is chaos,” said one company executive. “Forty percent turnover.”²⁷ Latin American operations could help TCS cover this shift. As one TCS executive noted, “When [a customer] has a problem, he doesn’t want to wait for India to wake up and all that. He wants that solved today.”²⁸ As part of the TCS global model, TCSI sought to complement, not try to replace, its operations in India.²⁹

TCSI established operations in Uruguay, a decision based in large part on features of the country’s institutional context, such as its political stability and high level of education. Uruguay’s small size and the government’s desire to create jobs in a country with high unemployment meant that TCSI could be influential in its government relations. An arrangement with Uruguay’s Ministry of Foreign Relations enabled TCSI to secure a business visa for a foreign TCS employee to come to the country within twenty-four hours, a process that would take four months, on average, in Brazil, and eight weeks in Mexico.³⁰ TCSI both brought in employees to Latin America from India and trained its first local hires at training centers in India so that it could replicate its home market model.³¹ “We tried to do India in Latin America,” said one company executive. “Everything has been invented in India. Bring it here, we’ll localize somewhat, but let’s be another India.”³²

TCSI faced both local and multinational competition and was wary of possible entry by its Indian rivals, such as Infosys and Wipro. The local competition was “mostly bodyshopping,” according to one company executive, with Accenture and IBM dominating the top end of the market. “They had owned the market, and they still own the market, never paid any attention because they owned the market anyhow.”³³

TCSI sought to differentiate itself from the current competition by focusing on quality. The firm exploited a global credibility enhancer to attest to the quality of its capabilities by becoming the first firm in Latin America with Capability Maturity Model Integration (CMMI) level 5 certification.³⁴ TCSI also sought to raise a barrier to entry to potential competition from India by establishing scale quickly and quietly. “If I have a hundred and somebody else comes in with forty, I mean, there’s no difference,” said one company executive. “[But] if I have a thousand, they’re going to have to make a major investment.”³⁵

Institutional voids in education—missing labor market aggregators, distributors, and credibility enhancers—hampered TCSI’s ability to grow in the region. “‘Right now I have five hundred job openings I can’t fill, and the problem is education,’” a company executive told New York Times columnist Thomas Friedman in 2006. “‘The prestige career to follow in India is engineering, and in Latin America it is [still] law or being a notary public.’”³⁶ TCSI’s early success attracted rivals to the region, further stretching the talent pool, so the company decided to fill the institutional void by establishing a regional training center in Uruguay in 2007.³⁷ TCSI sees this strategy also as a way in which the firm can move up the value chain, according to a company executive:

Just as Haier developed its own distribution network in China, McDonald’s cultivated suppliers in Russia, and Zain offered One Network in sub-Saharan Africa, TCSI bet on filling institutional voids as a source of differentiation and competitive advantage, replicating its success at home (see table 6-3). By 2007, TCSI had grown to five thousand employees in fourteen countries, accounting for 4 percent of TCS worldwide revenues.³⁹ As the financial crisis and global recession of 2008–2009 pushes companies to pare back on costs even more, outsourcing to Latin America is tipped to increase further, bringing TCSI more opportunities but likely also more competition.⁴⁰

TABLE 6-3

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TCS Iberoamerica: Responding to contextual challenges
in globalization

Contextual challenge	Response
Underdeveloped training and certification intermediaries to build operations in Uruguay	Replicated: Exploited talent and training from operations in India; attained CMMI level 5 certification; established technology training institution

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Adapt Business Models to Developed Markets: Haier

Through its early development—as described in chapter 5—Haier engaged foreign multinationals as contract manufacturing customers and joint venture partners and competed against global brands as they entered China.⁴¹ By 1997, Haier had established itself as a dominant brand in China but faced the prospect of intensifying foreign competition and slimmer profit margins.⁴² In that year, the company began charting a strategy to become a multinational organization and global brand in its own right.

Starting in the mid-1990s, the company had opened production facilities in other emerging markets—Indonesia, Malaysia, and the Philippines—not unlike the replication strategies of Zain and TCSI. To be a global company beyond emerging markets, Haier needed to adapt its portfolio of offerings, most importantly by targeting a niche in the U.S. market, enabling the company to learn about the market and develop relationships with major retailers.

Developed markets were home to Haier’s largest global competitors. By playing in their backyards, Haier hoped to learn better how to compete against the brands that posed the most serious long-term threat to its market position in China. By gaining experience in navigating the mature distribution networks and discerning retail channels of developed markets, Haier could be better prepared to compete at home and in other maturing markets where the institutional voids that the company had exploited—missing product market aggregators and distributors— would lose relevance over time.

Although building a brand organically in developed markets can be a costly approach for emerging market-based companies, the premium attached to such a brand can be valuable in other, particularly emerging, markets (as a substitute for product market information analyzers and advisers). Haier was able to leverage its experience and reputation in developed markets to access prized distribution channels in other emerging markets. Moreover, Haier hoped that having even a few successful products in developed markets would burnish the brand’s reputation, enabling the company to introduce the full line of products to developing markets immediately upon market entry. In addition to serving as a credibility enhancer, operating in developed markets forced Haier to uphold high standards of quality that might be rewarded by customers at home as they increasingly demanded global-level quality.

Haier brought own-branded products to developed markets only after establishing competitive standards of quality. Among its early foreign contract manufacturing ventures, the company had partnered with appliance company Liebherr to sell refrigerators in Germany under the Blue Line brand. After a German magazine awarded eight top rankings to Blue Line—more than the seven awarded to Liebherr—Haier decided to bring own-branded products to developed markets. The foreign market intermediary served as a credibility enhancer, giving Haier confidence that it could hold its own in these markets.

Haier emerged from a crucible of competition in China by exploiting its product market expertise and by quick reaction and experimentation to meet local customer needs. The company transferred this capability as it globalized. When it entered the U.S. market in 1999, Haier initially focused on unpopulated niche segments in the white goods market to avoid directly competing against the market’s dominant brands. Haier started by selling compact refrigerators, such as those used in offices, hotels, and college dorm rooms—a segment eschewed by many large U.S. manufacturers because of its low volumes and low prices. Electric wine cellars—inexpensive stand-alone refrigerated cabinets for storing bottles of wine—were another niche successfully exploited by Haier in the United States. “We started on the fringe, building more the niche products for the market,” said one company executive. “Wine cellars can’t be considered a core appliance, yet it is a big business.”⁴³ With minimal competition, such niche products initially brought in high margins.

The company did not see Chinese personnel or low prices as sources of competitive advantage. Haier relied on an almost exclusively American staff for its U.S. operations.⁴⁴ “We behave as if we are Haier America,” said one company executive. “We don’t behave as if we’re Chinese.”⁴⁵ Although based in a low-cost market, the company knew that cost alone was not a sustainable competitive advantage and sought to differentiate itself on quality, innovation, and service—several of the key ways in which the company differentiated itself from competition in China.⁴⁶

Haier continued to work for developed market-based companies, even competitors, as a contract manufacturer to build global-level quality and capabilities. This work helped Haier acquire not only know-how but also credibility, as one company executive related. Speaking of Haier’s work on commercial air conditioners with U.S.-based heating and cooling equipment producer Trane, he noted, “Trane sent a team of engineers into our plant to help us develop an air conditioner that we really didn’t know how to build . . . That’s really made us a better company . . . from a manufacturing standpoint. It also earned us a lot of credit in the market because it’s sort of an open secret that we manufacture for Trane. So by default, our product[s] must be very good if it’s good enough for Trane.”⁴⁷

Haier’s other key competitive advantage at home—its willingness to invest in market infrastructure in logistics and distribution—would not transfer to developed markets that did not feature such voids. Instead, Haier needed to access the prime U.S. product market aggregators and distributors—big box retailers. It took Haier one year to arrange an appointment with Walmart, but by demonstrating product quality and success with its few initial niche products, Haier convinced retailers to stock a wide range of its appliances. “We have to take all the barriers away,” said one company executive. “We have to be better from a quality standpoint. We have to offer a better warranty. We have to offer a better price. We have to offer better aesthetics. That’s a tremendous challenge. And then, after we do all of that, we have to convince the person on the floor who is selling the product that we’re right.”⁴⁸ Establishing strong relationships with retailers such as Walmart and Best Buy in the United States not only offered Haier access to important U.S. distribution channels but also had the potential to help the company in China as foreign retailers established themselves there.

Exploiting niches enabled Haier to establish a presence in a highly competitive market such as the United States and build relations with some of the country’s major retailers. Focusing on niche products also introduced the risk of being pigeonholed, leaving Haier unable to move into major appliances. “As a brand, Haier doesn’t work,” noted one U.S.-based industry analyst in 2002. “People may buy a dorm refrigerator from Haier, but I don’t think they’ll spend a lot of money on an appliance from a company they’ve never heard of.”⁴⁹

When Haier attempted to match the quality—and price—of the highest-end refrigerators on the U.S. market in 2007, it faced difficulties. The company introduced a $2,000 refrigerator that was developed and manufactured at its production facility in South Carolina, reportedly at a cost ten times the equivalent development costs in China.⁵⁰ The product was slow to sell because of the U.S. economic downturn, coupled with Haier’s limited brand recognition in that product segment.⁵¹ Haier had previously targeted the equivalent of the “local” market segment in the United States with compact refrigerators and rapidly moved to target the top market segment. This jump proved challenging.

As an emerging market-based company looking to compete in the world’s most competitive market against powerful, established brands, Haier faced a number of challenges in the United States (see table 6-4). To avoid the brunt of the market’s largest brands, Haier adapted its product portfolio, identifying and exploiting niches that were underserved by the major U.S. competitors. To compensate for the low recognition of its brand, Haier needed to pursue big box retailers aggressively, both to stock and to publicize its products. Even after finding early success through these strategies, Haier faced an uphill climb in high-end product segments.

Haier hoped its brand-building efforts in developed markets would allow it to reap advantages in other emerging markets, but in India, the company discovered the challenges of that market’s institutional voids. “In the United States you can easily find the top 10 chain stores,” noted one company executive. “But in India, you cannot find them” because of missing product market information analyzers and advisers.⁵²

TABLE 6-4

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Haier: Responding to contextual challenges in globalization

Contextual challenge	Response
Limited local knowledge in developed market	Adapted: Hired local management and staff
Limited ability to build brand in developed market	Adapted: Targeted underserved niche product segments
Limited ability to access big box retail distribution channels	Adapted: Used niche products to establish reputation for quality with retailers

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Building a powerful brand and organization based on institutional voids in the face of the tough competition in China was a significant challenge for Haier. To build a business in the United States, Haier needed to adapt to a different competitive and institutional context. Even after establishing a successful track record in the U.S. market, however, Haier—like other multinationals—encountered new institutional voids in other emerging markets.

Adapt Business Models to Developed Markets: Teva Pharmaceutical Industries

Teva Pharmaceutical Industries developed from a small foundation in Israel by effectively exploiting the factor market advantages in its home market—the deep pool of scientific expertise in Israel.⁵³ “I used to say in the early days that we have more PhDs per square inch than any other country,” a company executive said.⁵⁴ To enter foreign markets and grow to become the world’s largest producer of generic pharmaceuticals, the company, like Haier, needed to adapt to the contexts and competition of developed markets.

Teva began charting a strategy for globalization with the realization that it had the capabilities of a full-sized company—capabilities that would, if brought to bear in a large developed market, make Teva a billion-dollar company. Teva’s growth targets had always been incremental, but this “billion-dollar theory” recalibrated these goals.

Geographic proximity and cultural familiarity suggested Europe as a natural first destination for Teva’s international business, but the region’s institutional context suggested otherwise. Price controls and the wide variation in the regulatory environments in different European markets would have made the region particularly challenging as Teva’s first major foray outside Israel. The United States, by contrast, offered a uniform and liberalizing market for generic pharmaceuticals. Although emerging giants will not encounter institutional voids in developed markets as pervasive as those in their home markets, the most successful of these companies have aligned their business models with the institutional contexts of foreign markets.

Entering as large and competitive a market as the United States was a risky move for a relatively small, emerging market-based enterprise such as Teva in the mid-1980s. To minimize risk and acquire expertise in the new market, Teva sought out a joint venture with W. R. Grace & Company. “You start from a local company understanding the local environment,” a Teva executive noted. “We had an advantage that the health-care system in Israel is very advanced, but at the same time, when we came to the States I said, ‘Maybe we know English, but we don’t know American.’”⁵⁵

Teva said that it would contribute to the partnership whatever resources it could marshal—except significant capital. A member of the board of Teva’s North America business recalled, “Here comes Teva, a nothing company from a tiny country . . . and somehow, [Eli] Hurvitz [Teva’s chairman] manages to structure a deal where Grace puts in over 90% of the capital for 50% of the joint venture. Who else could negotiate that kind of deal? . . . Grace was so much bigger than us at the time, and yet Mr. Grace himself used to come to the office just to spend time with Eli. He viewed him as an equal. That was part of the genius of Hurvitz.”⁵⁶

Mastering the U.S. regulatory environment was critical to Teva’s success in the market. The company was able to execute applications to U.S. regulators to produce generic drugs more quickly than competitors, helping the company attain permission to produce during a coveted exclusivity period. The scope of Teva’s operation was also critical. Teva’s entry and expansion in the market coincided with the expansion of U.S. national pharmacy chains. By enlisting Teva, with its wide scope of products, the chains reduced their sourcing costs—cutting out wholesalers and distributors—and took advantage of Teva’s volume-based discounts and inventory management. Teva filled a void for these growing chains.

Teva successfully established itself as a top generic pharmaceuticals firm in the U.S. market. In 2006, every American consumed, on average, more than one hundred tablets per year produced by Teva.⁵⁷ As a generics producer, however, Teva’s profits were a fraction of those of innovative pharmaceutical producers.⁵⁸

Teva was tempted to move up the value chain and enter the innovative pharmaceuticals business—just as Haier took on the top U.S. brands in high-end products—but such a strategy posed serious challenges, particularly in research and marketing. The innovative pharmaceutical industry was dominated by a few firms—Big Pharma—with massive R&D budgets that even a highly successful generics producer such as Teva could not match. The innovative business also required a different approach to marketing. Teva’s customers in a market like the United States were pharmacists who could substitute generic alternatives for more expensive branded options at their discretion. The development of national pharmacy chains in effect consolidated Teva’s customer base in the market. In the innovative business, however, physicians—and not pharmacists—were the customers, and reaching them entailed much more substantial investments in marketing.

Teva circumvented these challenges and moved into the innovative pharmaceuticals business by identifying a niche where it could exploit its inherent capabilities. The company minimized its R&D disadvantage vis-à-vis Big Pharma by exploiting its relationships with the scientific research community in Israel to build on original research instead of developing drugs on its own. In terms of marketing, the company avoided incurring the costs of expensive marketing by bringing an innovative drug to market that would not require such a significant investment. A company executive explained Teva’s approach:

Teva’s first innovative drug, Copaxone, became a blockbuster treatment for multiple sclerosis, generating worldwide sales of $1.2 billion in 2005 and contributing significantly to Teva’s profits.

As Teva moved into the innovative pharmaceuticals space, Big Pharma pursued the generics business more aggressively. Facing such competition, Teva—not unlike Zain—saw its origins as an advantage. “It is very easy to manage a generic company when you are poor,” a company executive noted. “It becomes very complicated when you are rich. It is impossible for a rich company to act poor. As long as we remember this equation, and we do not become bureaucrats, and as long as we fight the fat culture, we will succeed.”⁶⁰

When Teva looked to globalize its business, it sought out the market having an institutional context most amenable to its model and adapted to it (see table 6-5). To establish itself in the United States, Teva needed to acquire capabilities through its partnership with W. R. Grace. As the company expanded into the higher-value innovative pharmaceuticals, it exploited the capabilities to which it had privileged access—the scientific research community in Israel—to target an accessible niche. Later in its corporate history, Teva expanded its footprint through major acquisitions of Ivax and Barr Pharmaceuticals and managed well through the global recession of 2008–2009 as cost cutting made generics all the more attractive.⁶¹

TABLE 6-5

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Teva Pharmaceutical Industries: Responding to contextual
challenges in globalization

Contextual challenge	Response
Limited local knowledge in developed market	Adapted: Partnered with W. R. Grace
Limited ability to market in large developed market	Adapted: Targeted underserved niche product segment
Limited ability to rival Big Pharma R&D	Adapted: Exploited relationships with research institutes in Israel

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Adapt Business Models to Developed Markets: ICICI Bank

Both Haier and Teva developed global strategies that leveraged capabilities they developed in their home markets. Part of Haier’s success in China can be attributed to its willingness and ability to adapt products to local needs. Similarly, the company identified local product segments to establish a foothold in the United States. Teva drew on its relationship with external research institutes in Israel to compete against the large R&D budgets of Big Pharma in a portion of the U.S. market similar in scale to Teva’s home market. Similarly, Indian bank ICICI identified niches in developed markets to establish a global business, limiting its ambition early on to segments of foreign markets where its home market capabilities would be rewarded.⁶² ICICI built a global business by following Indian companies as they expanded overseas and filling a cross-border institutional void of offering seamless remittances and other financial services for nonresident Indians (NRIs).

Born with a mandate to fill institutional voids in India’s capital markets by providing development finance, ICICI developed into a large, full-service financial institution, offering corporate banking, retail banking, insurance, asset management, venture capital, and other financial services. Whereas larger rivals already had significant branch networks, ICICI focused on alternative distribution channels, such as ATMs and Internet banking. The bank began installing three ATMs per day—at a time when India had only forty ATMs. In 2001, retail banking was a growing but still small share of ICICI’s overall business. Unable to match the branch infrastructure of rivals in India, ICICI looked for ways to leverage its domestic strengths in the international marketplace.

ICICI viewed globalizing its business as a strong imperative for a number of reasons.⁶³ First, as the Indian corporations that were ICICI customers in India globalized their own businesses, it was important for ICICI to follow them for offensive and defensive reasons. The globalization of Indian business meant new opportunities in a wider range of corporate banking activities, such as trade finance, treasury and corporate lending, and investment banking. Although ICICI still had untapped— and insecure—opportunities in India, the bank was vulnerable to foreign competition expanding its presence in the country. ICICI could deepen existing business relationships by gaining the international business of these clients (who might otherwise work with foreign banks overseas) but also protect its business from foreign competition already operating in India—competitors that offered ICICI’s clients more seamless service offerings for both domestic and international financial needs.

Second, pursuing international business might help ICICI diversify its risk and access new pools of capital. International business might reduce ICICI’s country and credit risk of dependence on the Indian market, particularly domestic corporations. Finally, going global would give the bank exposure to best practices in foreign markets, experience that would help ICICI build its capabilities and, defensively, help it compete against foreign banks in India.

The large state-run Indian banks had built international presence, but none were particularly successful. The banks staffed their branches outside India with Indian personnel who had little exposure to or experience in the business environments in which they were posted. Marketing and product innovation by these foreign branches were minimal. Poor technology in these operations—and loan approval processes that were routed through India—slowed credit decisions. Nonperforming asset levels were high, and profitability was low in these international operations, leading to high closure rates.

ICICI’s globalization strategy exploited its domestic success in catering to Indian companies and, in its retail business, in sidestepping expensive branch networks through alternative distribution channels. The bank targeted Indian companies expanding overseas and NRIs for remittances and other financial services. The Indian diaspora, from blue-collar workers in the Middle East to wealthy professionals in the United States, United Kingdom, and other developed countries, numbered 20 million in 130 countries and held a huge amount of wealth. Remittances were a large source of capital in India—three times the total foreign direct investment in India in 2001—and NRIs were promising potential customers for deposits, mutual funds, wealth management, other financial services, and even real estate services for those returning to India for short stints or purchasing real estate as an investment. ICICI filled cross-border capital market voids for the Indian diaspora, as a transaction facilitator for remittances and real estate transactions and as an information analyzer and adviser for NRIs looking to invest in India. ICICI’s brand and experience in India gave the bank a relative advantage in filling this void compared with foreign competitors.

ICICI succeeded where the large state-run Indian banks failed, and it did so through sharp execution and by leveraging partnerships to enter new markets. ICICI sought out partners that were leading players in target markets but were not already present in India. Partnerships enabled ICICI to expand into new markets more quickly and less expensively than it could independently. Partnerships might also serve as opportunities for ICICI to build capabilities and gain local expertise and, because its partners were not already present in India, pitch ventures as symbiotic relationships through which ICICI could exploit its strong brand name to bring wealthy NRIs into the foreign partner bank’s client ranks.

ICICI elected to enter the Gulf states first through a partnership with Emirates Bank in Dubai, offering dual accounts—one in Dubai and one in India—through which customers could seamlessly transfer funds. Later, ICICI joined with Lloyds TSB in the United Kingdom. In addition to dual accounts and seamless transfer, ICICI placed a service desk within Lloyds branches, particularly to handle mortgage services.

ICICI built a valuable brand in India and sought to exploit it to build its international business. The bank targeted its marketing at specific communities within the Indian diaspora through ethnic Indian media and events held in regions that were common destinations of those communities.⁶⁴ ICICI’s international business broke even in its first year, and by 2005, international operations contributed more than 10 percent of the bank’s profits. ICICI’s share of the remittance market increased from 3 percent in FY 2002 to 15 percent in FY 2005. The bank’s market share in India, meanwhile, increased from 10 percent to 35 percent from 2001 to 2005.

ICICI had only a limited presence in developed markets, and its international exposure took a toll in the midst of the global financial crisis in 2008–2009.⁶⁵ Nevertheless, its approach to globalization illustrates how emerging giants can adapt their models to serviceable niches that leverage home market capabilities. Like Haier’s contract manufacturing and Teva’s joint venture with W. R. Grace, ICICI’s partnerships show the value of collaboration as emerging giants enter developed market contexts (see table 6-6).

TABLE 6-6

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ICICI Bank: Responding to contextual challenges in globalization

Contextual challenge	Response
Expense and regulatory constraints on building branch network in developed markets	Adapted: Partnered with local banks
Limited ability to build brand in developed market	Adapted: Targeted Indian corporate customers and NRI populations in developed markets

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Acquire Global Capabilities Through Global Institutions

To compensate for home market voids and to fast-track entry into foreign markets, emerging giants can look to acquire global capabilities through global institutions. For example, Zain leapt into Africa with its acquisition of Celtel. The acquisition gave Zain an established brand, substituting for the absence of information analyzers and advisers. Tata Consultancy Services Iberoamerica borrowed global credibility when it sought to establish itself by attaining CMMI level 5 certification. The German product rating publication certified the quality of Haier’s Blue Line products, instilling confidence that the company was ready to enter developed markets on its own. Teva and ICICI both borrowed through their partnerships in developed markets.

In some cases, emerging market firms do not need to seek out foreign institutional intermediaries overseas. Many developed market intermediaries, such as management consulting firms and investment banks, have set up shop in these emerging markets to profit from filling institutional voids not only for existing multinational clients but also for prospective emerging giants. In the talent market, many U.S. business schools have launched educational programs in Singapore, Thailand, and China, enabling emerging market companies to train and recruit employees whose skills are comparable to those working for multinationals. World-class emerging market companies with sound business propositions can therefore access levels of capital and talent that are somewhat similar to those available to multinationals in developed markets, although in practice various hurdles of regulation and reputation often make this option hard to exercise.

Overseas stock market listings and foreign acquisitions are two common ways in which emerging giants can seek out new capabilities from developed markets, but neither is a panacea, as we discuss next.

Listing Overseas

Listing overseas can help emerging market-based firms circumvent the institutional voids and other limitations of financial markets in their home countries.⁶⁶ South African Breweries (SAB), for example, moved its headquarters to London and pursued a listing on the London Stock Exchange in 1999 in part because of the state of its home market’s capital markets. South Africa generated more than half of SAB’s profits at the time, but the South African rand was depreciating. The company turned to global capital markets to circumvent the costs of raising capital in the underdeveloped South African capital markets. Another example is Mexico-based cement producer Cemex. As it expanded into other emerging markets, it raised debt through a subsidiary in Spain starting in 1996 to avoid a “Mexico discount” and raised equity through an American depository receipt (ADR) issue in New York. Cemex leveraged its home market business capabilities to enter other markets, many of which were similarly emerging, but simultaneously raised expansion capital in developed markets.⁶⁷

However, incurring the costs of accessing institutions in developed markets usually is worthwhile only for high-quality firms. Overseas listings require the implementation of changes in financial reporting and attendant internal organizational changes, which can be significant and costly. Lower-quality firms face steeper costs when listing overseas, but successful overseas listings can serve as credible signals of quality to potential customers and factor market providers.⁶⁸

For example, leading Indian software companies, such as Infosys Technologies and Wipro Technologies, have listed on U.S. stock markets in large part to help attract customers as well as talent. These listings allow firms to offer dollar-denominated stock options, something that can be critical to attract software programmers in the competitive worldwide market. By listing on the New York Stock Exchange or NASDAQ, emerging market firms subject themselves to rigorous disclosure requirements and other norms that offer a measure of credibility and reassurance to potential customers, which might otherwise be concerned about doing business with an entity based in a market having weak contractual enforcement.

Infosys, for example, was among the Indian software firms least in need of capital when it listed on NASDAQ, our research has found, although it was at the forefront of Indian software firms establishing international corporate governance standards. In fact, Infosys adopted these standards long before it listed internationally, and, when it did list on NASDAQ in March 1999, it voluntarily subjected itself to the more rigorous standards required of domestic companies listed on the exchange instead of the standards for foreign firms.⁶⁹ Reflecting on the overseas listing of Indian software firms, member of the Securities and Exchange Board of India said, “The industry that probably needs capital the least, went after the international capital markets most aggressively . . . In fact many of these companies don’t know what to do with the capital they raised.”⁷⁰ These companies have pursued listings on international capital markets largely for other reasons, such as building credibility and developing mechanisms to retain employees.

Institutional voids often compel emerging market-based firms to list overseas, but they also raise the costs for firms to do so. When Compañía de Teléfonos de Chile (CTC) issued Chile’s first ADR in 1990, it faced the challenge of overcoming the perceptions of political and financial risk held by international institutional investors who would be evaluating a firm from that country for the first time.⁷¹ “We had to go through an education process within Chile and with foreign investors,” recalled an executive who successfully orchestrated the ADR issue for CTC. “We have definitely done the Chilean corporate sector a favor.”⁷²

The “favor” done by the first ADR for Chilean businesses was not only in laying the groundwork for future ADRs. ADRs also furthered the development of financial intermediaries in Chile, most significantly by further deepening the pool of capital market information analyzers and advisers. New York–based analysts initially covered the Chilean companies issuing ADRs, but this attention to Chilean equities spurred the development of the domestic analyst sector. U.S. investor interest in Chilean companies stoked demand for domestic Chilean analysts, who learned first through imitation and the dissemination of financial analysis techniques and technologies from foreign analysts. “The quality of information available in the financial markets has improved radically,” noted one executive. “Before 1990, the information was primarily distributed through word-of-mouth, or through rudimentary newsletters issued by some domestic stockbrokers’ offices. Analysts became a part of the landscape only after the internationalization of the Chilean stock market.”⁷³

Foreign Acquisitions: Tata Motors

Acquisitions can enable emerging market-based companies to leapfrog into new markets and up the value chain, but they pose challenges as well. Companies often take on burdensome debt to finance the acquisition and must integrate diverse corporate cultures. The decision to acquire poses a strategic choice similar to the “compete alone or collaborate” choice facing multinationals in emerging markets and emerging giants competing at home. Like those other actors, emerging giants going global need to approach the decision to acquire with clear objectives and an appreciation of the risks involved.

Tata Motors, as described in chapter 5, was a leading producer of commercial trucks and a significant player in passenger cars in its home market, India.⁷⁴ The company differentiated itself at home through its sturdy, reliable vehicles—a ubiquitous presence on India’s highways and rural roads—and an intimate understanding of local product markets. Tata Motors invested in product development initiatives such as the Ace and the Nano in part to outmaneuver incoming foreign competition. This competition also pushed Tata Motors to build a foreign presence for reasons of stretch—to learn about more-developed markets (and competition and customers therein) and to build global capabilities. Acquisitions were a key vehicle for the company to globalize its presence and capabilities.

As of the early 2000s, Tata Motors’ international business had consisted of exports sold to a wide range of countries without much consideration for global strategy. As part of a plan to diversify the company’s business after an economic downturn in India exposed the vulnerability of its reliance on highly cyclical commercial truck sales, Tata Motors conceived a more focused global strategy. Like other product market-based emerging giants, the company targeted developing markets where it could exploit its home market capabilities. In South Africa, Korea, and markets in the Middle East, Tata Motors invested in developing an ecosystem of service, spare parts, and branding to support and help grow its business.

Tata Motors was able to compete against major multinational competitors such as Mercedes and the large Japanese brands outside India in part through an approach similar to its success with the Tata Ace at home. The company had heard customers complain about the high maintenance costs associated with the major global brands. Tata Motors saw an opportunity to price its spare parts strategically and sell customers on the total life-cycle cost of its trucks. The company needed to prove this proposition to customers, as it had with the Ace as a replacement for the three-wheelers that predominated as small commercial vehicles in India. “I’m upgrading myself, so I will give all that comfort that Mercedes is giving . . . I will take these people along with me once I’ve hooked them on the business,” said one company executive. “Then I’m able to satisfy both his commercial desire and his psychological desire. And that’s the philosophy that we’re trying to follow in other countries.”⁷⁵

To accelerate this upgrading, Tata Motors sought out acquisitions and partnerships in markets more developed than India’s. A 2003 attempt to bring Tata-produced passenger cars to the United Kingdom through a partnership with MG Rover failed to produce expected sales, but other efforts were more fruitful.⁷⁶ In 2004, Tata Motors bought Daewoo Commercial Vehicle Company of Korea. The acquisition complemented Tata Motors’ existing portfolio because Daewoo Commercial produced heavier trucks than any Tata Motors produced. “It was not M&A in the classical sense. It is not so much to get scale,” one company executive said. “Our thing was, how do I close the gap [with foreign competition] as quickly as possible? One was through these acquisitions.”⁷⁷ Similarly, Tata Motors bought a 21 percent stake in Hispano Carrocero, a Spanish busmaker, in 2005. The company has also “borrowed” global institutions by partnering with Fiat of Italy and building a product development technical center in the United Kingdom.

Challenges in the institutional context of China and the United States prevented Tata Motors from attempting to enter either market on its own. “I have not given up on China,” one company executive said, “but I think because of the restrictive nature of doing business there, it has certainly made us take a step back, and I don’t want to commit money for which I don’t see a return. We are not General Motors, and we are not Daimler Chrysler that you throw $2 billion or $3 billion. We have to be very prudent and cautious.”⁷⁸ Meeting the standards of demanding customers and the product liability regime posed a different set of challenges in the United States. “The only way I can enter the U.S. market is through mergers and acquisitions,” said one company executive. “So if I get an opportunity, then I will look at it very actively.”⁷⁹

In 2008, Tata Motors seized an opportunity for a major acquisition into developed markets with its $2.3 billion purchase of Jaguar and Land Rover from U.S.-based Ford Motor Company. The purchase gave Tata Motors access to global brands, technology, and distribution channels in developed markets, particularly in Western Europe and the United States. The acquisition, however, was completed just as the global recession hit car markets in the developed world.⁸⁰ Losses at Jaguar and Land Rover forced Tata Motors to inject more than $1 billion into the two brands.⁸¹ With its credit ratings downgraded, Tata Motors had difficulty refinancing its outstanding loans for the deal. The company was close to defaulting on a portion of its debt when the State Bank of India and other institutions guaranteed a bond for Tata Motors.⁸²

The global financial crisis and recession of 2008–2009 are rare circumstances—particularly given how acutely the world’s automotive industry was affected—but the experience of Tata Motors illustrates the risks of audacious globalization by emerging giants. The company sought out a global footprint because of vulnerabilities at home, but global acquisitions expose emerging market-based companies to a different set of vulnerabilities that they need to appreciate and take into account.

Foreign Acquisitions: Nicholas Piramal India Limited

Emerging giants also face acute challenges as they look to integrate acquisitions, particularly those from developed markets, into their fold. Consider the example of pharmaceutical manufacturer Nicholas Piramal India Limited (NPIL).⁸³ NPIL itself was created by the acquisition of the Indian operations of Australian pharmaceutical firm Nicholas Laboratories by family-owned textile firm Piramal. NPIL offered outsourced pharmaceutical development and production, largely for foreign firms and start-ups that lacked the capabilities to produce on their own. In a bid to position itself closer to clients in developed markets, NPIL acquired Avecia, with operations in the United Kingdom and Canada, in 2005. Avecia seemed to complement NPIL’s business model and aspirations perfectly.

The acquisition featured tensions common in many such deals by prospective emerging giants. Corporate cultures clash in any acquisition, particularly any cross-border acquisition, but these clashes are accentuated when the two companies emerge from sharply differing market contexts. One company executive described the tension at NPIL between “Indian action-oriented style versus the English plan/do/review style.”⁸⁴ Such acquisitions can create tensions of identity among employees. Employees of the acquired developed market-based firm simultaneously wear the hats of their former company (the acquisition target), their new employer (the emerging market-based acquirer), and as citizens of their home country, which often loses jobs as a result of the acquisition. This tension of identity can complicate and challenge efforts to integrate developed market-based acquisitions into the organizations of emerging giants.

Foreign Acquisitions: TCL

The experience of China-based TCL’s acquisition of Thomson of France—one of the most high-profile early emerging giant acquisitions of a developed market-based firm—starkly illustrates the challenges of acquisition by emerging giants.⁸⁵ Consumer electronics firm TCL’s early globalization journey was very similar to that of Haier. TCL established joint ventures in other emerging markets and, like many prospective emerging giants, differentiated itself in these markets by filling institutional voids of product market aggregators, distributors, information analyzers, and advisers.

One company executive described the company’s operations in Vietnam: “The distribution system was still weak, so it made sense to develop our own marketing and sales channels. We did a market survey to get a sense of how Vietnam was different from China . . . We were so busy with these markets that none of us were worrying about entering the U.S. or Europe.”⁸⁶ Like Haier, TCL had trouble cracking the distribution channels in developed markets. In 2002, TCL acquired German firm Schneider, a television manufacturer that had recently shuttered production in the face of high costs. TCL hoped to rekindle the operations by maintaining the Schneider brand and design—everything visible to consumers—while cutting costs on the rest. The venture failed, however, because of high production costs for the portions of operations still conducted in Germany.

In 2004, TCL tried again—but with a much bigger target. TCL joined with Thomson to create TCL Thomson Enterprise (TTE), a joint venture that combined the television production assets of the two companies, making it the world’s largest television manufacturer. The venture, 67 percent owned by TCL, gave TCL instant global scale and the opportunity to exploit the Thomson brand in Europe and the Thomson-owned RCA brand in the United States.

The acquisition was seen as a watershed moment in the emergence of emerging market-based firms in global business. “TCL Thomson Enterprise is a milestone for China,” said one TTE executive. “If it succeeds, all the Chinese companies will follow. If we have trouble, they will ot. ”⁸⁷ Wary of the high costs of investing in LCD or plasma displays, TTE planned to focus on reducing costs and increasing the efficiency of the supply chain in the production of cathode ray tube (CRT) televisions. As one company executive described TCL’s view of the venture, “Chinese companies are still behind in technology, but our biggest advantage is our flexibility and finesse. We find Thomson a bit slow in reacting. So now we have to see whether we can infuse TCL’s flexibility into TTE to make it a strong organization. We already contribute our low-cost structure to Thomson, but can we bring TCL supply-chain efficiency to Thomson?”⁸⁸

High costs in Europe, linguistic barriers, and compensation discrepancies between Chinese and European employees challenged the venture early on.⁸⁹ Less than three years after TTE was established, TCL announced that it would close most of its European operations amid tough losses from the venture as the television market demand shifted to the LCD and plasma displays that TTE had eschewed.⁹⁰ The failed venture became a cautionary tale. “While going global is a must rather than a choice for many companies, they often underestimate the difficulties of managing a global organisation, when you don’t have the global expertise and the global sales channels,” said one analyst. “They think it is very easy to be a hero, but it is not.”⁹¹

Acquisitions are tempting avenues for emerging giants to use in fast-tracking their global growth, and many have succeeded, including Teva, Zain, and China-based Lenovo, which acquired the PC business of U.S.-based IBM in 2004. Executing acquisitions by emerging market-based firms, particularly of developed market-based companies, is more difficult than many anticipate, however, requiring clear objectives, truly complementary models, and a great deal of sensitivity.

Globalizing Emerging Giants

Emerging giants can extend their reach beyond their home markets by replicating their models in similarly structured markets, or by adapting to the contexts of developed markets. They can also build capabilities through global institutions once they have established value propositions in their home markets. Often, emerging market-based firms built on exploiting product market knowledge find success by targeting other emerging markets first and then attempting to tackle advanced markets. Firms built on exploiting factor market knowledge can often best exploit their capabilities by first seeking out customers in developed markets and later establishing operations in emerging markets where they can replicate models amid similar factor market features. As emerging market-based firms move into developed markets and compete even more squarely against world-leading multinationals, they need to adapt to the different competitive and institutional contexts of these markets. Acquiring new capabilities is often necessary if prospective emerging giants are to access resources and capabilities to improve their competitiveness in the global marketplace.

Although we have focused on individual initiatives of particular emerging giants, most successful emerging giants have pursued a combination of these strategies. Emerging market-based firms can extend the capabilities they have developed in their home markets into other emerging markets for scale while simultaneously stepping into developed markets for stretch and learning. As ICICI globalized its business, it targeted markets in the Middle East and developed markets in the United Kingdom and Canada. Although we focus on Haier’s entry into the United States in this chapter, the company also has built large businesses in emerging markets in the Middle East and Southeast Asia.

Globalization is not a straightforward process for emerging giants. Market selection is a difficult proposition. It is not always clear which markets will be easy for such firms to enter, as Haier found in India. Given the challenges for emerging market-based firms to establish themselves successfully as multinationals and the growth opportunities in their home markets, cautious globalization is often well advised. Execution is critical if such firms are to succeed outside their home markets, particularly in more developed markets.

By taking stock of their inherent capabilities and the context of new markets, emerging giants can establish an international presence (see toolkit 6-1). Many of these firms have successfully identified and exploited niches as foundations for larger global businesses. Like multinationals establishing themselves in emerging markets, emerging giants can reach deeper into foreign—and particularly developed—markets only by adapting to institutional and competitive contexts and acquiring new capabilities. Multinationals from developed markets that have succeeded in emerging markets have been willing to experiment, and so too have emerging giants that have become successful multinational enterprises.

To manage growth and globalization successfully, emerging giants need to cultivate a range of capabilities. These firms need to maintain the entrepreneurial drive that enabled them to distinguish themselves in their home markets while instilling a global mind-set not only among top managers but also among rank-and-file employees. Innovation is critical for any company to sustain competitive advantage. It is critical for emerging giants to develop and manage innovation as they begin to move into higher-value products and processes.

These firms need to identify not only sources of capital but also world-class talent and board members from within and outside their home markets, and they need to establish a leadership pipeline to manage and develop this talent. Establishing or acquiring businesses in foreign markets can add great value to emerging giants, but they need not globalize to become globally competitive. Many emerging market-based firms have become world-class companies without aggressively moving outside their home markets. Many of these companies have looked to borrow institutions beyond their borders, however, to build their resources and improve their capabilities.

As several of the examples in this chapter show, borrowing global institutions also can help build credibility. Accessing these institutions requires that prospective emerging giants not only have strong value propositions in their home markets but also high standards in their management and corporate governance. Corporate cleanup may be the best preparatory step that an emerging market company can take to bolster its positioning against multinational rivals. Even small efforts can be a major source of differentiation in emerging markets. By focusing on cleaning up its corporate structure to maximize efficiencies and support good business practices, a prospective emerging giant can build confidence and social capital in consumer, supplier, and investor circles, contributing to its competitive advantage. The chief executive of one emerging giant described his company’s objective:

Toolkit 6-1
Toolkit for Emerging Giants Going Global

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1. Self-Assessment

A. Business Model

What is the core of our business model?

B. Home Market Context

What key constraints do we face from institutional voids?

2. Opportunity Assessment

How can we extend our business model into new markets for scale (particularly in other developing countries)?

How can we transcend our home market contexts by operating in markets for stretch (particularly in developed markets)?

What global capabilities can we borrow from developed markets to compensate for institutional voids in our home market?

• Product markets: Branding and advertising intermediaries; patent protections
• Capital markets: Overseas listings; global private equity
• Labor markets: Talent from world-leading business schools and universities

Given our capabilities, domestic opportunities, and the state of foreign competition, does it make sense to go global now or later?