#113 Tearing down BRICs, brick by brick?
Most of my inspiration for specific blog topics comes from current news items. And often, I discover those when traveling on long haul flights– one of the few times when my addiction to all things in print and some quiet downtime without interruptions intersect perfectly. June 17 was such an occasion. Two different papers ran a total of three stories with similar content. The Financial Times reports that European carmakers fear that the “China cash cow is dying”. Mercedes, BMW and their peers had such high hopes to be milking that cow for years to come, but recent developments have triggered a change of perspective. A slowing economy, rising global and domestic competition and limits of car ownership have led to anything from revised growth predictions for some to actual year-on-year declines in car sales for others. With similar declines in Brazil and Russia, this could end not so pretty for the automotive industry. Which leads me to an article the Wall Street Journal ran on the same day. Real estate developers, retailers, and consumer goods manufacturers alike have long predicted a gold rush in India – a market with a growing middle class. Or so, they thought. Over the last decade approximately 250 new shopping malls have been developed and it seems that many of them are struggling with weak sales. By now, so the paper, India’s middle class should have grown to approximately 400 million, but recent estimates by McKinsey count it at a meager 10 million. And, finally, the Financial Times also reports on Swiss food giant Nestlé’s recent decision to cut their African workforce in 21 different African countries by 15 %. At first glance, the reasons seem similar. Only four years ago, in 2011, the African Development Bank had estimated the African middle class at 330 million. A 2014 survey by Standard Bank, however, concluded that the middle was only approximately 15 million across 11 of Africa’s most important countries. On the other hand, however, that may not be the full story as the continued growth in Africa of retailers such as Wal-Mart or Carrefour suggests. Nestlé may simply have misjudged the demand for its highly standardized product offerings and it may have underestimated the challenges coming from poor logistics infrastructure. The truth probably lies in the middle, and that leaves us with a generally bad aftertaste: the promise that the BRIC countries held just a few years ago seems to be fading quickly. And if not even emerging markets hold any more promise, what does?
June 22, 2015 @ 9:07 am
Hi Gerhard,
two interesting articles related to that topic:
http://www.forbes.com/sites/joelkotkin/2012/10/05/the-braking-of-the-brics/
http://www.huffingtonpost.com/jonathan-adelman/whatever-happened-to-the-_7_b_7306714.html
Although the Forbes-Article is “rather old”, basically both articles point out that there was no foundation for sustainable growth in the BRIC States. The growth was based on low-cost production rather than on High-Tech. With the increasing wealth come increasing labor costs and there goes the competitive advantage and the basis for the growth. Additionally, the increasing wealth was limited to the major cities and didn’t reach the countryside.
Another similarity is the high amount of corruption “supported” by weak (in terms of democratic values) governments.
If they do not see a major change, I think China is the only one out of this group that might be able go establish itself as a global economic power. Ironically China is the only country out of this group that doesn’t even pretend to be a democracy but even pretends to be non-capitalistic…
Best regards,
Markus
March 24, 2016 @ 10:39 pm
The raise of the BRIC countries have been identified has markets with high growth rates and therefore with high opportunities. Currently, however, the expected growths planned few years ago are not leading to the expected results and have been accordingly revised.
Different aspects need to be taken into account. First, the economics models have been referenced to European or American ones in the past decades. These models are relying on specific countries culture that can influence how the individuals are performing in an expanding market. Especially, according to the Hofstede model, the all BRIC countries are showing a significant higher power distance and lower individualism than US. Further, the tong term orientation is significantly higher for all BRIC countries than for US, while the indulgence is significantly lower (except for Brazil where the values are similar).
The low power distance and high individualism (for US) is supporting population mixing at different hiearchy levels – consequently the maximizing the number of possible opportunities for a given population. Furthermore, low value for long term orientation and high values for indulgence (for US) are illustrating the willingness and understanding for risky activities and failure. In US, failure is a required experience to be successful the next time. This mindset is extremely important to take the chance of a growing economy and start new businesses – both at entrepreneur level and at society and governmental level.
Second aspect is the concurrency of mature markets. Hence, during the growth of Europe and US economies, no mature economy was competiting with these countries. This is not the case for the BRIC countries, which are confronted to competition with mature markets. This is consequently the question how the growth model for the BRIC countries shall be adapted according to these parameters.
March 26, 2016 @ 9:14 am
Important for a company is to avoid stagnation and focus on continue growth. Here I did not limit to pure financial growth. There are so many areas for a company to expand or getting better. Influenced by the world economic evolution a company faces the challenge to cope with changes of doing business. Here the external factor can be used to act either in a re-active or pro-active way. Due to the higher inter connectivity and distribution channels a company can´t hide behind the own boarders. Competitors can be everywhere distributed on earth and the customer has the chance to get in touch with them. So preparing a company from the foundation to be aware of international competition is crucial. Yip et al. (2000) figured out that “firms that are systematic achieve a better performance during their internationalization process”. Companies following the ten step approach of internationalization (Yip et al, 2000) show a higher success rate. The Miller´s ten step model described by Yip et al. (2000) can be compressed expressed with a 5 stage model from Apfelthaler. Here one big block is the “Target market selection”.
For my further argumentation I will focus on the automotive industry example of china.
After estimating the corporate and product readiness the target market selection is the next hurdle to take for a company. Using the automotive industry I expect that the corporate and product readiness is given because the argumentation for weak sales figures is based on a wrong economic forecast. But is this true? Is it true for the European carmaker that the “China cash cow is dying”? Or which other possibilities does the carmaker have. When having a look at the Shanghai Composite index I figured out that the boom is not really visible in the stock market. During 2009 and 2014 the index was limited by 3000 and 2000 points. There was a small but short spike in the middle of 2014 but this went back to the average value very soon (Finanzen, 2016a). The Brazil index Bovespa (Finanzen, 2016b) shows the typical recovery after the economic crisis in 2009 but is since 2010 on a declining way. On the other side the India trading index shows a huge growth rate since 2013 and it seems that now the index gets to swing into an average value of 425 points (Finanzen, 2016c). From this point of view, it is not clear why China should be seen on a rising edge. The market shows a different picture. So here the first assumption can be taken that the expectations in the BRICS market are not really based on the analysis of the stock market.
Statista (2016) concludes and forecasts that the German market is going to stagnate the next years and decline afterwards. The problem here is that carmaker have to find other regions where they can do business. I believe that they pushed or hoped to emerge now markets in the BRICS regions. Since 2005 the car production in China has risen from 3,08 mio cars to 19,92 mio cars which is equally a growth rate of 546%. Compared to the worldwide car production this is amazing. Here the figures show a growth rate since 2005 of about 45%. Additionally, the Chinese car production is now 28%. So having a look at this figure I assume that there was a big boom in China that also had a big impact. The current situation is that the overall car production is now going to stagnate. I think that the car producers hoped to get more out of this market and tried to push this. But here my opinion is that they already gained a lot of money and enlarged the market. As I figured out the whole market is stagnating, not only the car market in China.
But for all the BRICS countries I believe that the economist hoped to find regions where they can boost their business while Europe was in the recession. In general all car manufacture faces today the same challenge. They have to find other regions where they can extend their business. But here the focus must be to react pro-active and really search for the right market. The decision where to go should not be influenced by the speculation on others. A deep research and target market selection is one step for a successful future. A recent analysis from the IWF shows that the contribution of china to the total economic growth is reduced from 85% (in 2012) to 21% (in 2016). But that’s a snapshot of the whole economic development. The whole world is stressed by wars, terror and financial crisis. I assume that without all the unexpected incidents in the world will look different and the BRICS countries will have a better standing. Solving global problems first and then focus again on the growth in the BRICs countries. PwC (2016) shows a forecast till 2021. Here we can see that the world’s automotive growth is highly influenced by the Chinese market. North America and the European Union will decline. This market is a big silo in the future. The current situation is for sure not easy for each business segment.
I am looking forward to a response message.
BR, Herbert
Yip, G. S., Biscarri, J. G. & Monti, J. A. (2000).
The Role of the Internationalization Process in the Performance of Newly Internationalizing Firms,
Journal of International Marketing, Vol. 8, No. 3, 10-35.
Finanzen (2016a), retrieved from: http://www.finanzen.net/index/Shanghai_Composite4
Finanzen (2016b), retrieved from: http://www.finanzen.net/index/Bovespa
Finanzen (2016c), retrieved from: http://www.finanzen.net/index/DBIX_India_Index
Die Welt (2016), retrieved from: http://www.welt.de/wirtschaft/article151175833/Das-sind-die-groessten-Risiken-fuer-die-Weltwirtschaft.html
PwC (2016), retrieved from: http://www.pwc.com/gx/en/automotive/autofacts/analyst-notes/pdf/pwc-analyst-note-global-market-update-november-2015.pdf
March 27, 2016 @ 2:56 pm
The BRIC countries have been the hope of many companies dreaming of expansion beyond the served markets. In my opinion they still are, but I would question if tieing them together in a single acronym isn’t hiding the distinctiveness in required market approaches.
Personally, I have only been to three of them, namely Brazil, Russia and China. So, although I miss the intimate interaction with the Indian economy, the other three bricks in that wall are sufficiently different to make the point.
Some of the growth figures are still impressive across the BRIC countries. In example, gross domestic expenditures in R&D for the year 2016 show all four countries within the top 10 with respect to absolute dollar spendings. The statistics for the last five years, though, shows a mixed basket of increasing GDP and R&D ratio as percentage to the GDP for China and a rather stagnating investment in Brazil. Nevertheless, the latter example is only true when looking at US Dollar figures, as the Brazilian Real has weakened in the same time period by a factor of 2, meaning that the investment in BRL still shows a compound annual growth rate of 25%.
This top ranking in R&D investments shows to me that the BRIC countries are heavily investing in their growth themselves and Brazil, Russia and China are increasingly protecting those investments by making it harder to import goods that are also produced locally.
That being said, the way how they protect the local industry differs from country to country. Where in Brazil extensive import duties are charged as soon as local production is also present, China and Russia are closing their doors through increasing regulations, which can only be fulfilled if the value is generated locally. All three countries have a relatively high degree of corruption in common, making it harder to expand into those territories.
Consequently, the way how to enter those markets cannot be seen as uniform, just because they nicely fit within an acronym. A decision to enter any of those countries to pursue internationalization requires dedicated decisions per country, meaning that one strategy that turns out to be succesful in Brazil may not be feasible in Russia.
This is also underpinned by a study from Boyd & Dyhr Ulrich (2014) on the entry strategies chosen by 177 small and medium entrprices from Denmark, expanding into the BRIC countries. Although the primary focus of the study was to examine the differences between family owned versus non-family owned business models with respect to the chosen entry mode, it also reveals stubstantially different choices per country within and between the observation groups. The investigated control variables were risk, control and flexibility. Fitting to the profile of SMEs, the prevalent entry mode were direct sales and sales through agents or distributors.
Nevertheless, what is in line with the observations about regolatory behavior in China above, the highest number of joint ventures / strategic alliances or subsidiaries as entry mode can be found there. Those modes have a high degree of local value generation and thus fit to the country’s strategy.
All in all, I think that the growth vector is still hot in the BRIC countries and I also think that it is as tempting as dangerous to assume that they are similar to approach.
With best regards,
Martin
References:
2016 Global R&D Funding Forecast. (2016). Retrieved March 27, 2016 from http://www.rdmag.com/articles/2016/02/2016-global-r-d-funding-forecast-0
Boyd, B., & Dyhr Ulrich, A. M. (2014). Market entry strategies into the BRIC countries–a comparison of Danish family and non-family businesses. International Journal of Globalisation and Small Business, 6(1), 15-36.
Corruption PerceptionsIndex 2015. (2016). Retrieved March 27, 2016, from http://www.transparency.org/cpi2015
March 27, 2016 @ 8:34 pm
B R I C = now just C in the automotive market ?
BRIC markets were the major growth driver of the global automotive industry over the past decade. Within BRIC, China accounted for more than 70% of the additional production volume during that period (2002 – 2012). Successful automotive OEM (Original Equipment Manufacturer) generate min of 1/3 of their global sales in China, due to government’s local content requirements also the production has increased significantly in China. BMW opens in May 2012 the Tixie plant, the second production plant in Shenyang. The two sites combined could deliver more than 400,000 units/year. On top of sales, the profit generated in China is significant higher than on the ROW (rest of the word). Some automotive brands did generate more than 50% of the total company profit in China.
However, three of the BRIC markets reached a turning point in 2013, with China the only exception.
What will be the future development in the BRIC markets? How long will the downturn be in India and Brazil?
For Brazil at return to growth can be expected in 2016, interesting point, German brands enjoy a significant boost in 2016 due the soccer world championship. BMW opened the first production plant in 2015, with a capacity of 20.000 unit/year and has enlarged their sales by 25% in the first quarter 2016. Based on current political turbulence, Russia can be expected it will not return to growth before 2015/2016. Automotive OEM and suppliers have consolidated by decreasing the local production capacity in the last 3 years. India’s growth is expected to return to high levels starting in 2015 – Recovery speed depends on future government policies. India’s high share of low-cost vehicles requires a low-cost setup wherever possible, e.g. with low-cost parts/design centers. But most western Automotive OEM have no answer to real low cost vehicles.
Is there a positive market outlook?
After becoming the world’s largest car market, China’s growth rates are expected to drop to a moderate level of about 5%. Stable single-digit growth is expected in China over the medium to long term, mainly due to increasing disposable income. (Disposable income is total personal income minus personal current taxes.)
From a global and long-term perspective, BRIC markets will further increase their world market share to over 40% by 2019. China will exceed North America (16.8 mn) and Europe (19.9 mn) to become the No. 1 area market in 2020.
Rond Berger BRIC Study (May2014)retrieved from:
http://www.rolandberger.at/media/pdf/Roland_Berger_Automotive_BRIC_Study_20140530.pdf
June 15, 2017 @ 10:03 am
With all the uncertainty in the global market an annual GPA growth over two digits cannot be reached over a long decade. Therefore, it is not a surprise that the BRICS states did not pull up with the high expectations. Even Goldman Sachs has closed down its BRIC fund, accepting a loss of 88% in its asset value since 2010. Also, other global investors are taking out their money as they must face difficulties in their own countries. The BRIC(S) states still have a lot of potential but they are also confronted by problems within their borders.
To pick up the example with Nestlé’s fail in Africa, I believe there were other factors apart from the lack of demand for their standardised products and the poor logistic infrastructure. In Africa corruption is still widely common. The richer get richer while the poor people remain poor and the gap between these two groups grows. Therefore, the estimation that the middle class is up to 330 million was a bit utopic. In summary, you may say that economic growth does not necessarily lead to higher quality of life and there are a lot of cultural factors that need to be considered in doing forecasts.
http://time.com/4106094/goldman-sachs-brics/ (14.06.17 15:54)
https://www.weforum.org/agenda/2016/04/what-is-the-state-of-the-brics-economies/ (14.06.17 16:27)
https://www.transparency.org/news/feature/corruption_in_africa_75_million_people_pay_bribes (14.06.17 18:04)