Emerging market (EM) multinationals have exhausted a phase of “easy growth” and now face a tougher task battling against increasingly savvy developed market (DM) competitors and resurgent domestic rivals, a study released on Thursday finds.
The main problem experienced by a selection of 100 rapidly globalising EM companies is already familiar to DM multinationals: the costs of running a cross-border network and attracting top talent are shaving margins and racking up debts, according to the study by the Boston Consulting Group (BCG).
These headwinds have hit the relative performance this year of the EM multinationals – or “global challengers” as BCG calls them – compared to their DM peers, as measured by Total Shareholder Return (TSR).
“Although the global challengers have substantially outperformed other indexes over the long term, they have fallen short in the last year,” said BCG in the report (see chart).
“Among eight industries analysed over the past three years, only healthcare, technology, media, telecommunications and consumer products global challengers outperformed their global peers,” the report added. “Declining margins and stubborn debt levels are dragging down TSRs.” TSR measures share prices and dividend yields.
The heavy costs associated with international expansion foster a dilemma for EM “global challengers” as to whether they should sacrifice profitability for global growth or retreat to domestic markets.
But one thing they have going for them, the report says, is a generally superior understanding of the EM middle class phenomenon and the opportunities it presents. This advantage is reflected in a predominance of the new entries into BCG’s list of 100 “global challengers” this year that derive from the consumer goods (31 per cent of new entrants) and Telecoms, Media Technology (TMT) sectors (15 per cent), both of which draw impetus from middle class spending.
From 2009 to 2020, the size of the global middle class is set to expand from 1.8bn to 3.2bn people and nearly all these will live in emerging markets, BCG estimates. The geographical spread of this middle class phenomenon is reflected in the increasingly diverse range of countries serving as home markets for the 13 new entrants into the top 100 “global challengers” list (see chart).
Indicative of the type of company selected by BCG as new entrants into the top 100 this year are:
Concha y Toro, a Chilean luxury goods company that ranks as Latin America’s largest wine producer and the seventh largest in the world.
Jollibee Foods, the Philippine restaurant chain that has operations in China, Indonesia, Brunei and Taiwan and generates about one quarter of its revenues from its 500 overseas restaurants.
Thai Beverage, the Thai drinks company that sees about one half of future growth coming from overseas sales and acquired Frazer and Neave, a Singapore beverage and real estate company, in a 2013 deal that values the expanded company at $11bn.
Yildiz Holdings, Turkey’s largest packaged food company that rose to prominence after acquiring Godiva, a premium chocolatier with 600 outlets in Asia, Canada, Europe and the US, and generated revenues in 2013 of $8.2bn.
M&A activity among such “global challenger” companies is growing fast, helping to boost their corporate footprint and further diversifying global ownership structures. The table below gives details on some of the biggest recent deals by companies either included in the current top 100 or recently graduated from it (see table).