New day in Brazil

A popular joke about Brazil of the ’70’s and ’80′s went: “It’s the country of the future, and it always will be.” Today, Brazilians wryly retell the joke as a reminder of those painful days when inflation reached 80 percent monthly and their country was adrift.

No longer a sleeping giant, the future has arrived for a growing number of Brazilians. Thanks to soaring commodity prices and a government committed to avoiding the mistakes of the past, the world’s sixth largest economy is on a path toward sustainable vitality.

Brazil now has an investment grade rating given only to stable, growing economies. Investors and entrepreneurs view the country as the emerging market that’s most likely to succeed. In a recent survey of 1,258 global chief executives, the country ranked highest, after China and the USA, in importance for their companies’ growth prospects.

Is the exuberance founded? Do the facts support the sanguine forecasts?

Brazil is the poster child of emerging economics. It has a trove of natural resources, flourishing domestic markets and sound governance.

The country is undergoing a massive facelift to prepare for hosting the 2014 World Cup and the 2016 Olympics. It’s pumping hundreds of billions of dollars into its spotty infrastructure with roads and railways being built across the country.

Global tide

Commodities have long been Brazil’s chief propellant. The country has benefitted in recent years from strong global demand for its agricultural and mineral products. It’s been a top producer of beef, coffee, sugar, soy beans, orange juice, grains, and iron ore.

Foreign investors have been flocking to the country’s agribusiness, metal and energy industries. Jaw-dropping oil reserves were recently discovered off the SE coast containing as much as 100 billion barrels of crude. One day Brazil could become a top oil exporter.

Recently, China became Brazil’s biggest trade partner, an alliance valued at $200 billion annually. To support its trade with China, Brazil is building one of the world’s largest superports 350 km north of Rio. The $2.7 billion complex is slated to open in 2013.

The country’s reliance on commodities is a dual-edged sword. In 2010, when commodities peaked, the economy grew at 7.5%. But, in 2011, it grew by only 2.7% reflecting falling prices. (The forecast for the second half of 2012 is 4.5%.)

Will Brazil flourish as China’s demand for commodities slows, or will Brazil succumb to the classic boom-and-bust cycle?

In a piece for Foreign Affairs, Ruchir Sharma warns that the forecasts about Brazil’s prospects are overblown due to heavy reliance on commodities.

“The problem is that the global appetite for those commodities is beginning to fall,” he said. “And if Brazil does not take steps to diversify and boost its growth, it may soon fall with them.”

New stage of development

Brazil has been heavily reliant on its natural assets and recent spikes in commodity prices certainly elevated its performance. But today the country is building a new engine of growth — a modern middle class, the envy of its emerging cohorts.

In the last seven years, 40 million Brazilians joined the middle class creating demand at home for goods and services. Brazil is entering a new stage of development fueled in greater part by consumer spending.

The nation’s factories are humming and millions of jobs are being created. At a time when global joblessness is at pandemic levels, Brazil’s unemployment rate is hovering near six percent.  Rising wages are leading to more consumer spending prompting a virtuous economic cycle — a new pattern for Brazil.

Brazilians are exuding confidence and optimism that wasn’t evident in prior booms which were driven by profligate government spending followed by hyperinflation. Brazil’s recent and current governments have been careful to avoid that cycle.

President Dilma Rousseff has maintained her predecessor’s inflation-control focus, floating exchange rate, and other fiscal measures. Recently, her administration took bold steps to weaken the country’s overvalued currency, the real. So far, Rousseff’s monetary efforts have been lauded by the markets.

Brazil Costs

Make no mistake: Brazil faces formidable challenges. Its education system isn’t keeping pace with that of other developing countries. Brazil’s students get low marks for basic reading, math and science skills. As a result, the country suffers from a lack of skilled workers that’s hampering growth.

In addition, burdensome local costs (“custo Brasil”) remain a barrier to development despite recent efforts at regulatory reform. The “costs” of doing business in Brazil include arcane regulatory procedures, uneven tax codes, and a slow, inconsistent legal system for enforcing intellectual property rights.

The country faces more tough choices in the near term, to be sure, but for now it’s on a track to weather a global economy that’s running out of steam. If Brazil continues to enjoy sound governance and modest investment lift, its prospects could one day match the rosy forecasts of its fan base.

***

.

Image – Sugarloaf, Rio: courtesy of Erik Ogan

___________________________________________

More?

NYT piece, “Brazil’s Influence is Nominal at Best”, by Carlos Pio. (Series, Have BRIC Nations Lost Their Momentum?)

For a breakdown of Brazil’s economy, by sector: Macroeconomic Policy, Growth and Income Distribution in the Brazilian Economy in the 2000s, 2011 (PDF), from the Center for Economic and  Policy Research (CEPR).

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

The West and the Rest

This is a tale of two economies with interlocking features. One has excess supply; the other has gnawing demand. In the West, economic growth is slowed while emerging markets are busting at the seams. An explosion in the number of urban, middle class consumers and related factors is powering growth in emerging markets.

The World Bank estimates that, on average, emerging nations will grow by 4.7 percent – double that of developed countries — through 2025. That growth isn’t only evident in the so-called BRIC nations, but in Turkey, Indonesia, South Korea, and across the developing world. Some of the fast growing regions are in Sub-Saharan Africa.

In fact, growth in emerging markets would be even greater if it weren’t constrained by a lack of capital, infrastructure and technological capacity. Western companies have the resources and expertise to help bridge many of these gaps.

This is a propitious time for Western firms with a global agenda to enter emerging markets. They can tap these markets by creating new business models, innovative services, and value-added plays by leveraging their IT capability. Here are points that Western businesses ought to consider if emerging markets are on their agenda.

Ready or Not? 

It’s interesting to work with Western companies that see opportunities in foreign markets but haven’t yet devised a market entry strategy. My advice for clients considering emerging markets is to focus on the fundamentals of value-creation. My playbook calls for first conducting a market readiness study to measure the potential demand for the product or service and, on that basis, to help plot a sound market entry strategy.

Understanding customers is central to serving any new market. Customers in emerging markets — both B2C and B2B — often have different buying drivers, like less disposable income, than those in developed markets.  It’s smart to visit the region, meet directly with prospective customers, and ask plenty of questions.  It’s important to gain a rich understanding of the market — its economics, demographics and business climate.

Then comes another round of questions — this one for key stakeholders — including: How will demand be generated (by segment)? Who are the competitors and how will they respond? What are the market barriers — regulatory hurdles, corruption, and supply chain gaps? In short, what are the known risks and how can they be overcome?

Soft Landing

For organizations that have completed the discovery exercises, tested assumptions, and are convinced of the merits of serving the target market, I suggest that they explore several market entry scenarios to choose a strategy that fits their situation.

Some companies benefit from acquiring businesses in the target market while others prefer to form alliances with firms that can help them establish a beachhead. Either approach comes with advantages and disadvantages.

Alliance-building is an undervalued competency that can be nurtured. A skilled alliance officer can identify prospective partners, negotiate partnership deals and help keep alliances on track as the business evolves.

The ‘Ecosystem’

After establishing its beachhead, the market entrant should build a network of diverse, local suppliers. This local ‘ecosystem’ can be leveraged to support many of the company’s critical market penetration activities.

On a related note, I think it’s smart to use local talent and develop local skills wherever possible. That’s an effective way to demonstrate a longer-term commitment to the community. The high caliber of talent that I’ve encountered in emerging markets has been inspiring.

Western companies with a global agenda ought to evaluate whether serving emerging markets makes sense for their business. If so, there are benefits to seizing the opportunity before the inevitable onslaught of competitors joins the fray.

 ***

.

As always, I’d appreciate your feedback.

……………………………………………….

.

TALE OF TWO ECONOMIES – ENDNOTES.

Thanks, Alexandre Giesbrecht, for the image.

The section title ‘The West and the Rest’ refers to Fareed Zakaria’s “rise of the rest” thesis in The Post-American World (’08) (updated in ’11).

Despite it’s popularity, I don’t care for the term ‘BRIC’ because it includes oil-based Russia with the more diversified economies of Brazil, India and China.

Seven of the 10 fastest-growing nations over the next five years are in the Sub-Sahara, as charted in this Economist piece (1/11).

More on this subject:

In their 2010 book, Winning in Emerging Markets, Tarun Khanna and Krishna Palepu offer their framework for evaluating and entering emerging markets.

The International Finance Corporation (IFC) provides their annual Doing Business reports ranking countries by regulatory barriers. Year-to-year changes suggest regulatory reform trends. This is Doing Business 2012. 

The World Bank’s report, Global Development Horizons 2011—Multipolarity: The New Global Economy shows that emerging markets will drive global economic growth through 2025.

Related: Strategy +Business piece, Competing for the Global Middle Class (8/11)

Addenda:

The World Economic Forum’s Competitiveness Index (2011-2012)

HBR piece, New Business Models in Emerging Markets (1-2/11), i.e. targeting the middle market opportunities

McKinsey Global Institute (MGI) publications on the subject of economic integration

KPMG’s High Growth Magazine

.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

To support his argument, he cites the case of PUR, a low-cost water purification system developed by Procter & Gamble. The product provides the obvious benefit of affordable clean water where the risks of drinking contaminated water are high. But curiously, PUR* achieved low market penetration rates in test markets.

Why would consumers reject a product as salient as PUR? The author contends that Western companies simply haven’t created demand among low income consumers. “Companies must create markets—new lifestyles—among poor consumers,” he insists. His prescription is that Western businesses need to do a better job “conditioning” low-income  people to be better consumers.  Really?

He argues that Western businesses ought to show people in emerging markets how enjoyable life would be if they were using products like PUR.  Companies, he says, ought to “make the idea of paying money for the products seem natural,” and “induce consumers to fit those goods into their long-held routines.”  Get a load of our stuff!

The fact is that consumers in developing markets usually know value when they see it. For example, businesses don’t have to create demand for mobile phones bought by the millions at the Bottom of the Pyramid—the fastest growing mobile market in the world. Consumers in developing markets can see how phones improve their lives.

Low-income consumers often buy mobile phones from street vendors, and they continually invent ways to squeeze more value from the devices than designers could have imagined. Customers use the devices to handle tasks like transferring money and finding markets for their goods that were never conceived by the phone’s developers or market researchers.

Jan Chipchase, a field researcher at Nokia who studies user behavior in developing markets observes that however cleverly products and go-to-market strategies are designed, “the street” figures out novel ways to distribute and use them.

So what does it take to sell products in developing markets? Listen to and carefully observe potential users. It makes sense to educate and inform emerging market consumers, but businesses have a lot to learn from them about creating value in their markets.

A more enlightened approach to serving the needs of potential consumers in emerging markets is to bring them into both the product design, communication and distribution processes.

I don’t mean to sound flip but next time a Western company comes up with a hot new product for the Bottom of the Pyramid, they should keep it out of the hands of marketing gurus. Instead,  they ought to consult vendors on on the street and figure out a way to share the revenue with them.  If street vendors can’t sell it, no one can.

…………………………….

* P&G now sells PUR in developing markets at cost and is partnering with non-profit organizations to distribute the product through humanitarian relief networks.

***

What do you think? As always, I’d love to hear your views…

Want more on this topic?

Check out INSEAD’s piece, Social Innovation — Creating Products for Those at the Bottom of the Pyramid. For a broader perspective, read C. K. Prahalad’s classic, The Fortune at the Bottom of the Pyramid.

My related posts include Mobile Growth in Emerging Markets and various posts on emerging markets.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

Every service interaction, regardless of the market, presents a unique opportunity to build a lasting relationship.

Working in diverse, global markets has been a lifelong learning experience for me. One of the more interesting and unexpected insights I’ve gained is that the similarities between people outweigh the differences.  We’re more the same than they we are different. I found this particularly striking while on a recent trip with stops in Africa, the Middle East and Eastern Europe.

Once the patina of culture is peeled away, people everywhere crave the same things — respect, appreciation and attachment. I call these “primal drivers” because they’re powerful, deep-seated, and universal. Once we satisfy them, we engender trust with customers and can then uncover their unmet needs.  I think that’s where the real opportunity lies.

Understanding customers is an organizing principal in my work.  It’s a fertile area for many of my clients including airlines, mobile operators, and retailers — whether they’re operating in Atlanta, Amsterdam or Amman.

While each client faces a unique set of challenges, most benefit from finding what their customers need, want and expect.  This requires a customer-centric approach. It calls for dropping outmoded assumptions. And it calls for engaging in conversations with customers at various touch points.

Companies that master this approach outperform their rivals in almost every market and sector. That’s why I often recommend that my clients re-think their approach to customers and take steps to deepen their understanding of them.

The longer I travel and further I go, the more I come to appreciate how similar all of us are, at the deepest level, despite our cultural differences.  When we make the effort to set aside our own cultural lens, we find that most people share the same fundamental values. That’s an amazing insight, if you think about it.

What do you think?  As always, I’d love to hear your views on this subject.

__________________________

Want more info on this topic?

Visit my the website of my company, Osprey and read about our Deep Blue practice in Emerging Markets.

For anyone doing business  in global markets, I recommend Parag Khanna’s superb book (’09), The Second World: How Emerging Powers Are Redefining Global Competition in the Twenty-first Century.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

.

For those interested in delivering their services to emerging markets, BusinessWeek provides an informative piece on Cisco’s EM strategy. The piece provides a glimpse of the company’s ambitious model for expanding its global footprint.

The story doesn’t delve into exactly how Cisco collaborates with emerging players aross geographic and cultural differences, etc.  Often cultural disparities plague global alliances. I wondered how Cisco’s people engage their counterparts in emerging markets?  Has Cisco developed a collaborative model for bridging the cultural gaps that often hamper global service initatives?  These are my questions…

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

03b, a Jersey Island (UK)-based company, announced that it is building 16 satellites that will enable lower-cost Internet accessibility over 3G and WiMax networks. These satellites will provide “trunking” or backhaul  coverage zone between +/- 40 degrees of latitude which blankets much of the world’s underserved regions including Latin America, the Middle East, Africa and South Asia.

Fiber cable and the labor for digging fiber trenches in underdeveloped countries is costly by any measure. Mobile operators face prohibitive costs in building transmission capacity between their networks and towers. Using satellites had been long been considered problematic due to their latency or the time it takes for a signal to travel between earth and satellites.

Today’s geosatellites orbit the earth at an altitude of 22,500 and their latency can exceed 600 milliseconds. By contrast, O3b plans to use MEO satellites which orbit the earth at 5,000 miles and can reduce latency to only 120 milliseconds—not that much more than a fiber network. 

O3b which expects to activate service by late 2010 intends to provide speeds of up to 10G bps (bits per second) to regions. The companies collectively invested about $65 million with the total cost estimated at $650 million.

This is good news for “3b” consumers, and probably a smart investment for Google which recognizes that the majority of the world isn’t currently using its services do to lack of access.  With their $10M investment, Google is getting in on the ground floor, so to speak.  Consider this another milestone in moving forward their Android initiative. 

Want more info?  Download this PRI (Public Radio) Podcast, Google to invest in internet start-up (4:30). 

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

Here’s an interesting piece in Time (July 31, 2008), The Creative Capitalism Roundtable, featuring a conversation with Bill Gates, CK Prahalad and others sharing their views on creative capitalism and the Bottom of the Pyramid.  Their conversation led to a discussion of the telecom industry at the BoP:

 Stengel [Managing Editor - Time]: C.K., I know that Bill was influenced by, by your work, and one of the questions I have, and I guess it’s a question both about creative capitalism and how you see it, is that, when it comes to cell phones for Kenyan farmers for example, isn’t this just good old fashion capitalism in the sense that it’s a recognition of a market that people hadn’t figured out how to profit from, and now, and now they are.

Prahalad: I think it is, but there’s a twist to it, and I think it’s an important twist. If you look at traditionally how we have looked at all this product and services especially high-tech products like cell phones, we would never have gone to the poor. But, I think that growth opportunity is there, as the cell phones have demonstrated. Also, it is changing the asymmetry of information, be it the farmer, who can now get prices, weather conditions, or someone who can make small transactions with SMS messaging, suddenly the asymmetry of information which is the essence of poverty — that is why people are poor, they don’t have access to information — that is changing very, very dramatically. What is happening in the cell phone industry, three billion people are connected for the first time in human history, I think it will be four billion soon. That I think gives me tremendous confidence that we can really take Bill’s idea and see it through to its logical conclusion, which, for me, is how to democratize commerce.

Food for thought…

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

How should businesses respond? We see exciting opportunities for companies to leapfrog the traditional approaches that firms in developed markets have struggled with in the past.  Firms that make the most of their business intelligence and continually seek out new ways to gain new insights about their performance and their customers should have the upper hand.

There’s no magic bullet. Ultimately, it boils down to getting the fundamentals right. Simplicity and agility are critical.  But companies that tighten up their business processes and align their people around a clear, customer-focused strategy can gain a serious competitive advantage.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.