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SpirE-Journal 2010 Q4

Emerging World Outlook 2011

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Emerging World Outlook 2011

In this year-end edition of the Spire E-Journal, Spire’s Group Managing Director, Leon Perera, shares his views on trends that will impact the business and marketing landscape in 2011 and beyond.

Spire E-Journal (SEJ): When we look at the world economic order in 2011, wild cards abound – from sovereign debt defaults in Europe and war in the Koreas or the South China Sea to fresh conflicts in the Middle East. Will demand still grow in 2011? Where will the growth come from?

Leon Perera (LP): The growth story will be similar in 2011 to what it has been, on average, for the last 10 years or so. The emerging world will power global growth. The momentum will come more from internal forces rather than solely exports to the West. Among emerging markets, China, India, Brazil, Indonesia and Russia will play a leading role. In the second tier of emerging high-growth economies lie the Indochina countries (primarily Vietnam and Thailand), Andean countries (Colombia and Peru), Middle Eastern countries (the Gulf states, Turkey and Egypt) as well as some countries in Africa. Of these, China and, to a lesser extent, India are now joining the US, European Union (EU) and Japan in playing a global economic role – providing economic aid to other countries, buying up commodities and absorbing imports.

We are living through an epochal shift in global economic power, from a world order built around the US dollar, US market and US-dominated financial institutions towards a multi-polar economic order, where the EU, China, Japan and India compete with the US for global economic clout.

Yet global military as well as cultural and intellectual power (or “soft power”) is still very much US-centric, in spite of the conspicuous failure of US power in Iraq, Afghanistan, North Korea and Iran. The US continues its heavy military involvement to guarantee security in Korea, the South China Sea and the Middle East. Over decades, the political order will slowly adjust to the economic one. But such tectonic shifts in international relations never happen easily. The process will be fraught with potential for conflict.

SEJ: In the long-term, is the US finished?

LP: Far from it. Alone among the world’s major economies, the US is a net importer of vast numbers of the world’s most highly skilled professionals and entrepreneurs, countering the aging trend that is casting a shadow over the future of Europe, Japan and indeed China (though not India). This shows that the US will continue to be the most powerful single political and economic actor for the foreseeable future. But the unilateral economic (and hence political) dominance it seemed to exercise in the years following the so-called collapse of Communism will not return.

SEJ: It is by now a commonplace to say that emerging markets will grow faster than developed countries. But how bad does the economy have to get in the US, Europe and Japan before it derails emerging markets? And is all this emerging market growth really sustainable?

LP: There is a lot of talk of bubbles in emerging markets, as indeed there are. This has been driven by a flight away from US dollar-denominated assets as a result of the US Federal Reserve essentially printing more money. However in this context it is important to remember that emerging market growth rests on deep and stable foundations – growth in the formal economic sector and growth in productivity as a result of a virtuous cycle of rural-urban migration, education, business formation and government investment.

Across the emerging world there is an incredible self-confidence in the wake of the 2008 financial crisis and the role of the G20 (not the G8) in pulling the world back from the brink. The enormous hunger of 5 billion people to attain the living standards of the First World is now very visible.

In 2011, economic anemia will persist in the developed zone of North America, Europe and Japan. All three are mired in structural economic problems related to excessive (and rising) government debt. The only escape route for them is exports. And that will be one of the major themes of 2011. Developed country companies will benefit massively from emerging market growth by selling cars, aircraft, infrastructure, power generators, industrial equipment, luxury products, yachts, software, wine…the list goes on. But exports will not be enough to bring them back to economic health. They will be just enough to keep them from recession, as shown by the example of Japan since 1990.

SEJ: In 2010, economic discussions were dominated by issues like US Quantitative Easing, European fiscal debt and China’s currency policy. Yet some experts suggest that 2011 will see the world’s major economic powers assert their control over rival trading blocs and military spheres of influence. Will 2011 see the resurgence of politics over economics?

LP: The asymmetric growth picture between developed and emerging zones is tending to make the developed world less accommodating and the Emerging World more assertive at the same time. This is a recipe for conflict. There have been signs of zero-sum competition rearing its ugly head, especially in terms of trade barriers, currencies and the competition for supplies of natural resources such as energy and rare earths.

However in the short-term, I think that claims of a repeat of the 1930s are over-blown. The 1930s took place against the backdrop of the worst economic catastrophe in modern history, the Great Depression, which saw millions of lives ruined and stoked the rise of extremist politics. Both economic catastrophe and extremist politics are more or less absent in today’s world. The world’s dominant economic powers will pull back from the brink of total trade war in 2011, as there is too much to lose.

However that leaves the longer-term question unresolved – how to adjust the world’s political and military order (US-dominated) to its economic order (multi-polar). The 2010s could well be a long decade, one in which (hopefully low-intensity) conflict will break out over political spheres of influence.

SEJ: There is much talk now about how business leadership is passing to companies from the Emerging World, particularly India, China and Brazil. Theorists are hailing new management models like India’s “frugal innovation” and China’s corporatism (state-private sector collaboration), while the share of Global Fortune 500 firms coming from outside the West and Japan continues to climb. Will this be a major trend in 2011?

LP: I think the big corporate winners from emerging market growth in the foreseeable future will still be developed country firms. Their leadership in terms of intellectual property, R&D capabilities, innovation, branding and organizational processes is too deeply entrenched. It will be a very long time before the Emerging World’s share of corporate power resembles its share of GDP.

This is not to say that the Emerging World will not produce some corporate winners. Companies like Tata, Huawei, Baosteel and Infosys have already arrived (I am excluding the Korean companies here as Korea can be said to be part of the developed world these days). But this is far removed from such companies forming the bulk of the world’s biggest, most profitable or most admired companies.

Having said that, there will continue to be many local champions who are leaders in specific countries or regions. But these local champions are also increasingly aligning themselves with one of the big global players, to tap on their international networks, knowledge and economies of scale.

Interestingly, I think that emerging market companies who want tosucceed globally will adopt Western principles and indeed Western branding, in the same way that many Japanese companies took on Western-sounding names in the past, such as Canon, Bridgestone and Brother, not to mention how Korea’s Lucky Goldstar changed its name to LG.

SEJ: But isn’t this a question of short-term versus long-term? Won’t emerging market companies like Tata, Infosys and Huawei eventually outcompete the behemoths of the West and Japan?

LP: Eventually corporate power will adjust to economic power. In this way, US companies came to overshadow British and Dutch ones in the late 19th century, with the British and Dutch having out-competed the Italian trading houses much earlier.

But the rise of emerging market companies to become truly global leaders as opposed to just local or regional leaders will take a long time, due to the entrenched advantages of Western, Japanese and some Korean firms in global markets.

SEJ: Let’s take a look at how companies will build top-line growth in 2011. Will the marketing landscape be characterized by any big new ideas? Or will it be more of the same?

LP: As we have discussed before, Spire sees three over-arching themes in Emerging World demand in the decade of the 2010s – positional (or conspicuous consumption) goods, entertainment and privatized healthcare and education. There is a lot of growth and evolution in these three areas across Asia, Latin America and the MINA (Middle East-North Africa) region. However the big impediment to further development is consumer thrift, due to concerns over economic security, fears about political or currency stability and so on.

Asian governments like China’s are aware of the need to stimulate consumer spending, to reduce political pressure from the US and EU about the trade deficit as well as to create more sustainable economic growth. So one avenue they will explore more and more is to create more national public holidays and to zone more land for the construction of retail malls, theme parks and so on.

Companies will also pursue a similar tactic by promoting events and festivals that are not yet popular, such as Halloween in Asia for example.

SEJ: The last 10 years has seen an explosion of new business models all addressing themselves to the challenge of how to reach out to the consumer. We have run the gamut from new concepts like online sales, fractional sales (songs versus albums and sachets versus bottles, for example) and social media-driven “team buying”, to the resurgence of old concepts like direct selling and Multi-Level Marketing. And the awareness-raising game has seen all kinds of innovations, like social media messaging and product placement in movies and games. Has the last word been said about how to reach the consumer?

LP: Yes and no. I foresee a resurgence in good quality content as a key theme in consumer outreach. Consumers will be attracted to high-quality content, be it on television, blogs, movies, games, magazines, events and so on, simply because high-quality content is becoming more scarce amidst the sea of low-quality and user-generated content now flooding media channels. And there will be great opportunities for marketers to leverage off high quality content through advertising, product placement and so on, though at a price. Two other themes are going to be of interest in Asia and emerging markets:

The continuing trend of public relations thriving at the expense of advertising. With more specialized, segment-specific media emerging, there will be more opportunities for marketers to influence editorial content, thus gaining outreach at a lower cost.
Interest in sports is on the rise. This is partly because of a slew of international sporting events being held in Asia in recent times, such as the Beijing Olympics and the Delhi Commonwealth Games. It is also because of better penetration of sports broadcasts on Asian television channels, both terrestrial and pay-TV. The advent of 3D television will be a boon to sports viewership in the future. All this is increasing the addressable audience for sports marketing.

SEJ: A common complaint these days is of information overload. Is there a creeping backlash against there being too many types of media around competing for the scare time and attention of consumers?

LP: There is a certain amount of fatigue and confusion setting in as a result of all of this information and interactivity from so many different forms of media. Both households and business consumers feel assailed by marketing messages from all angles.

This is fuelling forms of consumer outreach that leverage human relationships. Aside from social media-based outreach, we see huge future growth in Multi-Level Marketing, where companies like Tupperware and Avon are best practice leaders. This channel is also well suited to marketing in smaller cities and towns, which are the key new frontier in emerging markets. The Multi-Level Marketing industry will be fuelled by the trend of aging societies that we see in so many Asian (and Eastern European) countries, which creates a pool of retired and semi-retired people who are keen to earn income from flexible work.

SEJ: What are the types of products that are really going to sell in 2011?

LP: As a result of the demography of aging, two segments will be of great interest – the very old and, paradoxically, the very young. As parents lavish more disposable income on ever fewer children, the market for high quality and branded products for children will see good potential. In terms of vertical sectors, Asia will continue to see tremendous potential in sectors where the average level of penetration or consumption is far below the OECD norm – for instance cars (the automotive boom still has a long way to go in countries like India), consumer and business banking, insurance, food-service and specialty foods.

SEJ: We are entering the decade of the 2010s. What types of marketing messages will work well and which ones will tend to fail?

LP: The future will lie in messaging around the themes of health and wellness as well as environmental and social responsibility. Brands that are positioned in this way are not only seen as preferable for intrinsic reasons. They are also being perceived as more advanced, cutting-edge, cosmopolitan and classy. Likewise, brands that neglect these two dimensions may be seen as traditional and backward.

SEJ: Will social media become the new “holy grail” for marketers?

LP: Corporate engagement with E-communities and social media has undergone an evolution. From using social media primarily as a research tool, companies graduated to sporadic dabbling in social media, with initiatives like sponsorships, competitions and blogger outreach. Now the most progressive marketers are working hard to create a powerful presence on social media like Facebook and Twitter, using them as a way of starting conversations with their customers and actually paying attention to what customers say, rather than just using the platform to broadcast updates and promotions.

We should remember that many governments and NGOs, and even many consumers, still have issues with social media, from the perspective of privacy as well as national security. The role of social media in society is still in flux and the social media of tomorrow will be different from that of today.

SEJ: We are talking about the world in 2011 in the context of the trends of 2010 continuing in a fairly linear fashion. What about the possibility of “black swan events” – almost-impossible-to-predict shocks that could derail all of these forecasts?

LP: In my opinion, the world contains more of these risks than at any time since the early 1990s. Shocks could emerge in three ways:

Inter-state tensions, such as on the Korean peninsula, the Taiwan straits or South China Sea, or in the Middle East, with the possibility of a nuclear armed Iran and a resurgent Turkey.
Internal political crises and regime change: Almost no one predicted the rapid downfall of Communism in the period of 1989 to 1991, or the fall of President Suharto of Indonesia in 1998 after ruling for over 30 years.
A shock economic event emanating from the economic fragility in the developed world, such as a sovereign debt default event in Europe or currency shocks.

Companies need to cultivate tremendous flexibility in their organizational structures and cultures to survive the shocks of the future, whenever or wherever they may occur.

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