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India's Emerging

Global Challengers

A report by The Boston Consulting Group and

The Confederation of Indian Industry (CII)

April 2006

Confederation of Indian Industry The Boston Consulting Group

BCG

The Boston Consulting Group

India's Emerging Global ChallengersCII-BCG

India's Emerging Global Challengers

This report is based on a forthcoming BCG Report:

by Marcos Aguiar, Arindam

Bhattacharya, Thomas Bradtke, Pascal Cotte, Stefan Dertnig, Michael Meyer, David C. Michael, and Harold

L. Sirkin.

April 2006

The New Global Challengers: How 100 Top Companies from

Rapidly Developing Economies (RDEs) are Going Global – and Changing the World,

Rahul Jain

Project Leader

Vikram Bhalla

Vice President and Director

Nisheeta Bajaj

Consultant

India's Emerging Global ChallengersCII-BCG 1

Confederation of Indian Industry


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2 India's Emerging Global ChallengersCII-BCG

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The Boston Consulting Group (BCG)

The Confederation of Indian Industry (CII)

3India's Emerging Global ChallengersCII-BCG

Table of Contents

A Word from the Authors

1. The New Global Challenge

Many Companies on the Move

RDEs as Platforms for New Types of Global Competitors

2. The RDE 100 Emerging Global Challengers

Where They Come From

The Industries They Represent

Why They Are Going Global

Their Huge Economic Muscle

The Shareholder Value They Create

How Global They Are Today

3. How the RDE 100 Are Going Global

Six Strategic Models for Globalisation

How They Are Growing: by Buying or Building

Where They Are Growing: Next Door and Around the World

4. The Competitive Strengths and Weaknesses of Emerging Global Challengers

Low-Cost Resources

Home-Market Environments

Operations

Innovation

Supply-Chain Management

Going to Market

Management Talent

Strategy and Roadmaps

India's Emerging Global ChallengersCII-BCG4

Table of Contents

5. Lessons for and from Indian Companies

Evolution of Indian industry

The Indian 21: An Overview

Primary Motive in Internationalising

Form of Entry and Underlying Globalisation Models

M&A Activity

Globalisation Strategies

The India Advantage

The Future Global Agenda

6. Looking Ahead

Implications for Challengers

Implications for Incumbents

Closing Thoughts



A Word from the Authors

Executives of leading multinational companies recognise that a new set of emerging challengers are becom-

ing important players in both developing and developed markets around the world. These companies are

gaining global market shares, making major acquisitions, and emerging as important customers, business

partners, and competitors of the world's largest companies. And they are developing quickly.

BCG recently assessed the activities and strategies of these recently globalising companies. We identified and

profiled a hundred of them, focusing on those with large businesses, significant global activity, a clear

commitment to further globalisation, and solid prospects for continued success. A global team of senior BCG

consultants, based principally in Beijing, Mumbai, Moscow, and São Paolo but also spanning other rapidly

developing economies (RDEs) contributed to this effort. The results will be published in May 2006 in

another BCG Report, titled

The present report, incorporates much of the information and analysis

prepared for but has been edited to focus closely on India. We have also added a

chapter devoted specifically to the implications of the emergence of global challengers for Indian compa-

nies.

We are indebted to the authors of our colleagues Marcos Aguiar, Arindam

Bhattacharya, Thomas Bradtke, Pascal Cotte, Stefan Dertnig, Michael Meyer, David C. Michael, and Harold

L. Sirkin. We would also like to acknowledge the valuable contribution of Hardik Manek to the Indian section

of the study, as well as the editorial assistance of Kathleen Lancaster and of WordCraft Editing and Writing

Ltd.

The 100 leading RDE-based companies highlighted in were already, in 2004,

earning combined revenues of $715 billion and growing at an average of 24 percent per year. Among these

companies are 21 that are based in India. In 2004, these Indian companies earned combined revenues of $61

billion and were growing at around 30 percent per year. They represent a new breed of Indian companies

those that are actively seeking to expand in international markets and are willing to compete with established

names in their home markets.

BCG's analysis of these sample companies has yielded important insights into the broader trend of RDE-

based companies that are expanding globally. This trend is only just beginning. Ultimately its implications

will affect industries and markets throughout the world. We hope that you find this report interesting and

helpful. As ever, we will be pleased to hear from you and have your comments.

The New Global Challengers: How 100 Top Companies from Rapidly Developing

Economies are Going Global –and Changing the World.

India's Emerging Global Challengers,

The New Global Challengers,

The New Global Challengers,

The New Global Challengers

Rahul Jain

Project Leader

Mumbai

[email protected]

Vikram Bhalla

Vice President and Director

Mumbai

[email protected]

Nisheeta Bajaj

Consultant

Mumbai

[email protected]


8 India's Emerging Global ChallengersCII-BCG

1 The New Global Challenge

9

A revolution in global business is underway.

Companies from rapidly developing economies

(RDEs) such as Brazil, China, India, and Russia,

armed with ambitious leaders, low costs, appealing

products or services, and modern facilities and

systems, are expanding overseas and will radically

transform industries and markets around the world.

As this movement unfolds, established incumbent

companies will meet the new RDE-based challengers

in many arenas: in the competition for supplies, in

the search for talent, in the quest for innovation, on

the acquisition front, and in markets at home and

abroad. Each of these encounters will pose threats,

but will also offer opportunities for partnering and

cooperation. So it will be vital for all companies,

regardless of their home location, to understand

these developments and take action ahead of them,

lest their competitive positions deteriorate.

At the same time, the globalising companies from

the RDEs also face a set of unique opportunities and

challenges. They will have to ensure that they fully

leverage their strengths as they target the incum-

bents' markets. They will also have to learn

how to manage global organisations, build global

brands, undertake global M&As and partnerships,

and so on. Many of these companies are at an

important juncture of their global evolution, and

how they act and develop will shape their own

agendas as well as the global agenda.

The handful of RDE-based companies that have

recently captured media attention prominent

examples include Chinese manufacturers Haier and

Lenovo and Indian software houses Infosys and

Wipro. These examples represent only a small

fraction of a much larger phenomenon. The number

of RDE-based companies that are actively expanding

beyond their home markets, or planning to,

approaches several thousands.

Already, RDE-based companies have started

assuming leadership positions in lucrative devel-

oped markets and have established beachheads in

other RDEs. Here are just a few examples:

rapidly

Many Companies on the Move

Bharat Forge (India) is now the world's second-

largest forging company.

BYD (China) is the world's largest manufacturer

of nickel-cadmium batteries and has a 23 percent

share of the mobile-handset battery market.

Cemex (Mexico) has developed into one of the

world's largest cement producers.

Chunlan (China) has a 25 percent share of the

Italian air-conditioner market.

CIMC (China) has a 50 percent share in the

marine-container market, supplying the world's

top ten shipping companies.

Embraco (Brazil) is the world leader in compres-

sors, with 25 percent share.

Embraer (Brazil) has surpassed Bombardier as

the market leader in regional jets.

Galanz (China) commands a 45 percent share of

the microwave market in Europe and 25 percent

in the US.

Hisense (China) is the number one seller of flat-

panel TVs in France.

Johnson Electric (China) is the world's leading

manufacturer of small electric engines.

Nemak (Mexico) is one of the world's premier

suppliers of engine castings.

Pearl River (China) is the global volume leader in

piano manufacturing.

Ranbaxy (India) is among the top ten generic

pharmaceutical companies in the world.

Techtronic (China) is now the number one

supplier of power tools to Home Depot in the

US.

Wipro (India) has become the world's largest

third-party engineering services company.

To be sure, not all challengers will be successful.

Some players may meet the same fate as D'Long, a

Chinese investor company that in 2003 with great

fanfare acquired Dornier, a German aircraft manu-

facturer, only to go bankrupt a year later. But many

others will break through to become established

global players. Just as many companies based in


10

Korea and Japan are now firmly global, so too will

today's RDEs produce future global leaders. Indeed,

the RDEs themselves possess characteristics that

constitute particularly powerful platforms for the

creation and development of future global compa-

nies.

Why are we now seeing the emergence of such global

challengers from RDEs? Certainly, a variety of fast-

moving globalisation forces are spurring this trend.

These include the dramatic surge in low-cost

communication technologies, the internet, WTO,

and economic reforms in key RDEs. In addition, we

highlight here the development of RDE markets as

strong enablers for the creation and growth of

globally ambitious companies. And once they begin

developing, many of these companies realise that

they need to move beyond their home markets in

order to grow further, create value, and sustain long-

term competitiveness. Below, we briefly explore the

role of RDE countries as platforms for new Global

Challengers; later in the report we address the

companies' own motives for globalisation.

Markets such as China, India,

and Russia are sufficiently large and fast-growing to

support large domestic companies. For example the

Tata Group of companies, of which globalisers such

as Tata Steel and Tata Tea are a part, has a domestic

revenue base of approximately $13 billion. The

rapid growth of RDE markets in general over the

past decade means that domestic companies have an

opportunity to become quite large on their home

turf.

All RDEs have an

abundance of low-cost basic labour, and most offer

other resources at low cost. Domestic companies in

these markets are often better at exploiting these

low-cost resources than foreign companies are. We

discuss this issue extensively later in the report.

RDEs have rapidly growing markets, some of

which are very large.

RDEs have low-cost resources.

RDEs as Platforms for New Types of Global Competitors

Difficult operating environments in RDEs produce

some highly capable companies.

RDEs are training grounds for competing with

global incumbents.

The challenges of

operating in RDEs include selling profitably to low-

income customers, dealing with immature logis-

tics/distribution environments, navigating ambigu-

ous legal environments, handling rapid external

change, and managing despite shortages of manage-

ment talent. A company that has addressed these

issues in its home market will have an advantage in

seeking to grow in similar markets abroad.

Increasingly, RDEs are key

markets for multinational companies that are the

incumbent leaders in developed-country markets.

RDE-based companies have the opportunity to learn

from these competitors in their midst. Companies

such as Ranbaxy, Tata Motors and Videocon, for

example, compete aggressively in their home

markets against global incumbents such as Pfizer,

Ford and Philips respectively.

Despite providing all these advantages, RDE

markets in themselves do not allow companies to

attain global scale, no matter how big or fast-growing

they are. Ultimately, many RDE-based companies

find that they must seek opportunities abroad for

growth, value, and competitiveness. We will discuss

this point further.


11

2 The RDE 100 Emerging Global Challengers

The RDE 100 Selection Methodology

The RDE 100 list was generated through a

detailed screening process. We began with more

than 3,000 companies based in 12 major RDEs,

which in turn had been selected on the basis of

the size of their economies (GDP), the value of

their exports, and the amount of their foreign

direct investments. Our list of RDEs comprised

Brazil, China, the Czech Republic, Hungary,

India, Indonesia, Malaysia, Mexico, Poland,

Russia, Thailand, and Turkey. The initial master

list of candidate companies was compiled on the

basis of rankings of the largest companies in each

of the selected countries, such as China's and

India's Top 500 by , or Brazil's

Top 500 by . An international BCG

research team consisting of business analysts and

economists from China, India, Mexico, Brazil,

and Russia and a panel of senior BCG experts in

Asia, Europe, and the US then conducted a

rigorous four-step triage. In step 1, we ensured

that only truly RDE-based companies were

selected, omitting foreign JVs and RDE subsid-

iaries of multinational corporations. In step 2, we

homed in on those players with revenues of at

least $1 billion (as of 2004), a threshold we believe

is necessary to drive serious globalisation

campaigns. In step 3, we eliminated players

whose current international business presence

amounted to less than 10 percent of revenue (with

exceptions for companies that were close to 10

percent and whose international business activity

had grown swiftly in the recent past).

Asia Business Week

Exame

In step 4, we scored the major globalisation

credentials of those companies that passed all

previous thresholds. The scoring was based on

five criteria: the international presence of the

company as indicated by its owned and operated

subsidiaries, sales networks, manufacturing

facilities, and R&D centres; major international

investments it has pursued in the past five years,

including mergers and acquisitions; its access to

capital for financing international expansion,

whether through free cash flows, stock markets,

or other sources; the breadth and depth of its

technologies and its intellectual property

portfolio; and the international appeal of its

existing offerings and value propositions.

This analytically rigorous approach generated a

list of 80 companies that fully met our criteria.

The remaining 20 companies, which did not pass

the $1 billion minimum revenue hurdle, are

nonetheless included in our RDE 100 because

they have created unique globalisation capabili-

ties or business models. From the original list of

12 countries, no companies from the Czech

Republic, Hungary, or Poland made it through

the screening, primarily because the larger

globalising companies in these countries are

actually subsidiaries of foreign multinationals.

We also included a company from Egypt in the

final list, though Egypt was not among the

markets in our initial screening.

To better assess the globalisation strategies of RDE-

based companies, we have identified 100 large RDE-

based companies that, in our opinion, are at the

leading edge of globalising their businesses. Having

identified this group of companies, we have also

looked at their similarities, differences, and

globalisation patterns, and have derived some

interesting implications from this analysis. Our RDE

100 Emerging Global Challengers are a diverse

group of companies based in ten RDE countries. We

identified these companies from a pool of some

3,000 candidate companies by screening

primarily for size, current extent of overseas

revenues, and prospects for further expansion.

With different strategies and at different stages

of globalisation, these companies share a strong

ambition to grow globally, as well as a set of

competitive advantages that they will leverage to

pursue global growth.


Relative to the current size of their national econo-

mies, India and China are disproportionately

represented on the list. China's share of the total

GDP of the group of 100 RDE countries is 29

percent, but its share of companies is 44 percent; for

India the numbers are 13 percent and 21 percent,

respectively. At the other extreme, Russia and

Indonesia are strongly under-represented.

Among the RDEs studied, China and India in

particular have already produced an impressive set

of companies with strong global ambitions. Where

the globalising Chinese and Indian companies differ

dramatically is in their ownership structures. More

than two-thirds of the Chinese companies among the

RDE 100 are state-owned or state-controlled, often

with minority stakes in the hands of strategic

investors (both domestic and foreign) or with

12

Where They Come From

Asia is home to the large majority 70 of our RDE 100 companies, followed by Latin America with 18 and

Central and Eastern Europe with 12. China is by far the dominant home base, with 44 of the RDE 100 located

there, followed by India with 21, and Brazil with 12. (See Exhibit 1)

publicly traded subsidiaries. Of the remaining third,

some companies have a mixed ownership structure,

while only four Chinese companies on the list are

privately owned (including one company actually

domiciled in Hong Kong).

The shares of Indian companies are usually divided

among private owners, strategic investors, and the

general public, with no single investor possessing a

majority stake. All Indian companies on our list are

publicly traded and all have foreign strategic

investors as shareholders. Only one Indian company

on the list is state-controlled. Companies from other

countries display a wide range of ownership pat-

terns. In some countries, such as Mexico, strategic

investors play an important role, while in others,

such as Turkey, the families of the founders still

exercise control.

E X H I B I T 1

Industrialgoods (33)

Consumerdurables (18)

Resourceextraction

(14)

Food andcosmetics (11)

Other (18)

China (44)

India (21)

Brazil (12)

Russia (7)

Other (10)(1)

Top 100 byindustry

Top 100 bygeography

THE BCG TOP 100 REPRESENT A VARIETYOF COUNTRIES AND INDUSTRIES

Mexico (6)Tech Equipment (6)

(1) Companies from Egypt, Indonesia, Malaysia, Thailand, and Turkey

Sources: BCG RDE Challenger Database; BCG analysis

Including:

• Automotive Equipment (12)• Steel (6)• Engineered Products (5)

Including:

• Household Appliances (6)• Consumer Electronics (8)

Including:

• Fossil Fuels (9)• Non-ferrous Metals (5)

Including:

• Telecom Services (6)• IT Services/BPO (4)


The Industries They Represent

The RDE 100 are active in a wide range of industries.

The largest area is industrial goods, which comprises

33 companies active in the automotive equipment

sector, basic materials, and various engineered

products. The second-largest group is consumer

durables, which comprises 18 companies and

includes mainly players in household appliances and

consumer electronics. Resource-extraction is the

third most important cluster, with 14 players. Food,

beverage and cosmetics companies and technology

equipment companies fall into fourth and fifth

place, with 11 and 6 players respectively. The

remaining 19 companies represent a broad spectrum

of industries ranging from pharmaceuticals and

mobile communication services to shipping services

and infrastructure.

13

When we view the industry distribution of the RDE

100 together with their geographic distribution,

certain clusters of regional capabilities emerge. (See

Exhibit 2.) China possesses the most diverse set of

emerging global challengers. Chinese companies

are well represented in consumer electronics,

household appliances, telecommunication and IT

equipment, and automotive equipment manufactur-

ing. India is well represented in automotive equip-

ment manufac tur ing , IT serv i ce s , and

pharmaceuticals, especially generic drugs. There are

a few Indian companies in other sectors as well. Most

other countries have large domestic players in only

one or two clusters, as well as perhaps a few individ-

ual challengers in other sectors. Examples include

raw materials extraction in Russia, household

appliances in Turkey, and food processing in

Thayiland.

E X H I B I T 2

MANY OF THE BCG TOP 100 FALL INTOREGIONAL COMPETENCE CLUSTERS

Mexico:• Beverages (2)

Brazil:• Metals & Mining (2)• Food Processing (2)• Engineered Products (2)

Turkey:• Home Appliances (2)

Russia:• Fossil Fuels (2)• Metals & Mining (3)

India:• Automotive

Equipment (5)• IT Services/BPO (4)• Pharmaceuticals (3)

South East Asia:• Food Processing (3)

China:• Consumer Electronics (6)• Home Appliances (5)• Telco and IT Equipment (6)• Automotive Equipment (6)


number of companiesamong Top 100

(x) number of companiesamong Top 100

(x)


Why They Are Going Global

Their Huge Economic Muscle

For RDE-based companies, the move to globalise is

ultimately driven by the need to create sustainable

advantage and shareholder value. International

opportunities can provide a strong platform for

shareholder value creation. Our research indicates

that for 88 of the RDE 100 companies, the key motive

for globalisation is gaining access to new profit pools.

To RDE-based companies, overseas markets may

bring higher margins and revenues, higher volumes

(which contribute to scale economies), and opportu-

nities for growth-enhancing acquisitions.

For the remaining 12 of our RDE 100 companies,

such as India's ONGC, globalisation is driven by the

need to secure access to global sources of raw

materials. The underlying motives may be both

nationalistic and shareholder-value oriented. These

companies, in general, might be less likely to

compete for overseas customers, but instead will

challenge developed-market companies for access to

supply and in M&A transactions.

In aggregate, the RDE 100 earned a total of $715

billion in 2004 revenues, equivalent to the 2004 GDP

of the entire national economies of Mexico or Russia.

About 28 percent of the RDE 100 collective revenues,

or $200 billion, stem from international sales. The

Indian 21 alone earned a total of $61 billion in

revenues.

Among other impressive statistics:

The RDE 100 grew at an impressive 24 percent

per year from 2000 to 2004. (The India 21 grew

at an even faster rate of 30 percent.) The RDE

100 growth was ten times as fast as the US GDP,

24 times that of Japan, and 34 times that of

Germany. They earned $145 billion in operating

profits, equivalent to a margin of 20 percent over

sales, compared to 16 percent for US S&P 500

companies, 10 percent for Japan's Nikkei

companies, and 9 percent for Germany's Dax

companies. The Indian 21 earned an operating

profit of $15 billion, translating to a margin of 25

percent over sales.

14

The RDE 100 collective portfolio contained

$520 billion in net fixed assets in 2004, which is

more than that of the world's top 20 automobile

manufacturers combined. The RDE 100

invested $110 billion per year. They employed

4.6 million people and had a payroll of approxi-

mately $20 billion. They purchased an estimated

$190-200 billion in raw materials and energy,

$50-60 billion in parts and components, and

$40-50 billion in services such as third-party IT

and engineering, shipping, and logistics.

The RDE 100 spent $9 billion for R&D in 2004,

equivalent to 1.3 percent of sales, to support the

innovation work of their 250,000 to 300,000

engineers and scientists.

On the acquisition front, the RDE 100 have

completed 200 international transactions over

the past five years (publicly announced deals

2001-2005). This number does not take into

consideration the sizeable number of acquisi-

tions in the individual companies' domestic

markets, which also strengthened their plat-

forms for launching global growth. In fact, the 21

Indian companies in the RDE 100 list have been

equally active in global acquisitions. They have

completed some 47 international transactions

over the same timeframe.


15

The Shareholder Value They Create

A total of 60 of the BCG RDE 100 are public companies or have publicly traded subsidiaries (considering

only major international capital markets). The total market capitalisation of these entities is $680 billion (as

of March 2006). These companies' RDE collective stock performance has been impressive. From January

2000 to March 2006, their total shareholder return (TSR) increased 2.68 times, while the TSR of companies

listed in Morgan Stanley's Emerging Market Index doubled and that of S&P 500 companies declined slightly.

Performance of the Indian companies on the list was even more notable, with their TSR increasing threefold.

(See Exhibit 3.)

E X H I B I T 3

RDE CHALLENGERS OUTPERFORM BOTH OVERALL EMERGINGMARKETS AND S&P 500 IN TOTAL SHAREHOLDER RETURN

50

100

150

200

250

300

350

TSR index(31/12/1999=100)

24/03/2006

Total shareholder return index(31/12/1999-24/03/2006)

31/12/1999

TSR Indexas of 24/03/2006

% increasesince 31/12/1999

RDE 100

Emergingmarkets

S&P 500

268.3

206.2

97.9

168.3%

106.2%

(2.1%)

Note: TSR index of RDE Challengers based on TSR of 60 RDE companies listed in HK, New York, Mumbai and other major stock exchanges; emerging markets TSR based on

Morgan Stanley Emerging Markets Index

Source: Datastream; BCG analysis

India 21 301.4 201.4%


16

How Global They Are Today

As a group, the companies in the RDE 100 already

represent a formidable force in the global economy.

Given their growth rates, most will continue to gain

strength in the coming years. The picture is differ-

ent, however, when we look at individual companies.

While some of the RDE 100 have already established

themselves firmly in the global marketplace, others

are rapidly doing so right now, while some are still at

an early experimentation phase.

In terms of the maturity of their globalisation drive,

our RDE 100 can be divided into three groups: early

movers, fast followers, and the up-and-coming.

At the top is a relatively small

group of ten players that started to globalise early

and have gained global leadership positions in their

industries. Mexico's Cemex, for example, has

developed into one of the world's largest cement

producers. The company has consistently generated

higher returns than its international competitors,

and has developed unique capabilities in the form of

a highly scaleable operating model, the serial

acquisition approach, and a global logistics system.

Other companies in this category include the $1.1

billion Johnson Electric, the world leader in small

electric motors, with more than a 40 percent market

share, headquartered in Hong Kong and building its

advantage on a strong China operating base. Also

well-established globally is Brazil's Embraco, the

$800 million world leader in small compressors,

holding a 60 percent global category share.

The next group of companies,

46 of the 100, are currently making rapid progress in

their globalisation, building on significant initial

experiences. Companies in this group include

China's Haier (household appliances); India's IT

services/BPO majors such as Infosys; India's Bharat

Forge (automotive equipment); and Turkey's Koç

(household appliances). These companies have

ambitious globalisation plans and a critical mass of

international business in their portfolios. They have

already signalled their global ambitions to the

investment community. Other players in this group

include the large RDE resource conglomerates

seeking either access to new raw material sources,

such as India's ONGC, or access to downstream

markets, such as Russia's Lukoil, as demonstrated by

its acquisition of parts of the Getty gas-station

network in the US.

The Early Movers.

The Fast Followers.

While the above-listed companies have already

received considerable public attention, others have

so far kept a relatively low international profile.

These less well-known players include, for example,

China's Pearl River (pianos), China's Hisense

(consumer electronics), Mexico's Nemak (automo-

tive equipment), and Turkey's Vestel (consumer

electronics).

The last group consists of 44

companies. These are players that are at an early

stage of globalisation or whose ambitions until

recently have been more regional than global.

Companies in this category include India's Tata

Steel, Indian pharmaceutical companies, Egypt's

Orascom (telecommunication services), Turkey's

Sisecam (glass), and Brazil's Braskem (chemicals).

Spanning a wide range of industries and home

countries, this group of companies includes many

that merit careful watching in the future.

Regardless of where in the globalisation process each

of our 100 companies stands, all of them share the

ambition to become truly global players. In pursuit

of this goal, they are devising and deploying a variety

of strategic models.

The Up-and-Coming.


17

Each of the companies on our RDE 100 list is pursuing globalisation in its own way, implementing a number

of different strategies. Their operations extend to every corner of the world. But certain patterns seem to

emerge from their actions to date.

Each company's overall approach tends to be based on one (or more) of six primary globalisation strategies:

Model 1: Taking RDE brands global

Model 2: Turning RDE engineering into global innovation

Model 3: Assuming global category leadership

Model 4: Monetising RDE natural resources globally

Model 5: Rolling out new business models to multiple markets

Model 6: Acquiring natural resources

We should note that these six strategies, while in principle distinct, often overlap in practice. Moreover, they

all have certain features in common. All of them build on positions of low cost a key competitive advantage

of RDEs. And virtually all the companies are highly adept at learning and adapting, enabling them to learn

the lessons of other, more established companies, as well as benefit from their own bold, entrepreneurial

experience and willingness to adapt to changing market conditions. We discuss the six globalisation models

below, with a closer look at some of the models followed by Indian companies. (See Exhibit 4.)

Six Strategic Models for Globalisation

E X H I B I T 4

3 How the RDE 100 Are Going Global

GLOBALISATION MODELS OF THE INDIAN 21

Source: BCG RDE Challenger Database; BCG analysis

Taking RDEbrands global

Turning RDEengineering intoglobal innovation

Monetising RDEnatural resources

globally

Assuming globalcategory

leadership

Rolling out newbusiness models

to multiplemarkets

Acquiring naturalresources

• Expand to acquire vital raw materials for homemarkets

• Extend business models generally pioneered in homemarkets

• Exploit advantage of domestic natural resources• Use low cost resource advantage while not

compromising on quality

• Establish themselves as specialists and globalleaders in a specific, relatively narrow product range

• Have well defined target markets and focused R&D

• Leverage strengths in engineering and research tomarket innovative technology-based solutions

• Exploit home-market products with global appeal• Often position as value-for-money alternatives to

established brands


18

Model 1: Taking RDE Brands Global.

Model 2: Turning RDE Engineering into Global

Innovation.

Of our RDE

100, 28 are growing internationally by taking their

established home-market product lines and brands

to global markets.

Companies in this category build international

momentum by exploiting home-market products

that have broad global appeal or are easy to

customise to new markets. In the target markets in

developed countries, these companies often position

their products as good value-for-money alternatives

to established brands. This positioning now consti-

tutes a sizeable and rapidly growing segment,

propelled by large discount retailers such as Wal-

Mart.

The 28 of our RDE 100 companies pursuing this

strategy deal primarily in consumer electronics and

household appliances. Other significant areas are

automotive equipment, speciality foods, and

beverages. These companies had combined reve-

nues of $138 billion in 2004, of which 19 percent or

$26 billion was earned abroad. Their average annual

growth over the past four years has been 24 percent.

A noticeably high number of the companies in this

category (18) come from China.

Representative of this strategy from India is

Mahindra & Mahindra, a $1.9 billion utility vehicle

and tractor manufacturer. With seven manufacturing

plants across India and approximate sales of 122,000

utility vehicles (UVs) and 65,000 tractors, Mahindra

& Mahindra enjoys a domestic market share of 49

percent in UVs and 27 percent in tractors. This

company has started marketing its tractors in nine

countries, key amongst which are China and the US,

the largest tractor markets in the world. The

Mahindra & Mahindra tractor brand is today

recognised in international markets and the com-

pany has emerged as the fourth largest tractor

manufacturer in the world.

Of the RDE 100 companies, the

international growth of 22 is based on marketing

innovative technology-based solutions that leverage

their strengths in engineering and research.

A representative example is Wipro, the Indian

services group. Wipro has expanded rapidly by

providing software coding support, initially during

the Y2K conversion. Since then, as offshore IT

services/BPO flourished, the company has grown

rapidly from $545 million in 2000 to $1.8 billion in

2004. While Wipro achieved its initial breakthrough

mainly on the basis of costs, driven by a mix of low

labour costs and scale advantage, the company now

creates much of its value by completely redesigning

its clients' business processes, a task requiring

comprehensive process innovation capabilities.

Furthermore, Wipro is now taking innovation to the

next level by creating extensive engineering capabil-

ities, making R&D services its next battleground.

The company already claims to be the world's largest

third-party provider of R&D services. Its 12,000-

strong Product Engineering Services (PES) group

offers a complete range of R&D services from

product strategy to hardware design to quality

consulting to clients that sell electronics-based

products. With more than 120 active clients in

industries such as semiconductors, automotive,

platforms and peripherals, consumer electronics,

and medical devices, PES's revenue has grown at 36

percent a year for the past three years and already

accounts for 36 percent of Wipro's total revenue.

Further examples of Indian companies that have

expanded into global markets using this stratery

include other leading IT services/BPO companies

such as Tata Consultancy Services, Infosys, and

Satyam and, more recently, globalised pharmaceuti-

cal companies such as Dr. Reddy's, Ranbaxy, and

Cipla. In addition, Larsen & Toubro, the engineer-

ing and construction group, as well as other compa-

nies in the engineered products space such as Bharat

Forge, Crompton Greaves, and TVS Motors have

adopted this approach. A total of 11 of the Indian 21

firms appear to be pursuing this globalisation

strategy, increasing the value and profile of India's

strength in engineering and research.

Innovation-based globalisation will require RDE-

based players to mobilise engineering and scientific

talent in areas where they can create sizeable and

sustainable advantage over their counterparts based

in developed markets. In many areas, the RDE talent

pool is deep and growing quickly, and RDE compa-

nies are at an advantage as regards monetising this

pool when compared to MNCs setting up RDE-

based R&D centres. In various surveys of employees

asking about preferred employers, home-grown

companies such as Infosys consistently come out on

top, often ahead of some of the leading MNCs.

The 22 of our BCG RDE 100 companies that are

pursuing innovation-based globalisation strategies

are active in areas such as telecommunications

equipment, aerospace, automotive equipment,

pharmaceuticals, and technology services. In 2004


19

their combined revenue reached $56 billion, of

which 39 percent or $22 billion was earned abroad.

Average annual growth over the past four years has

been 33 percent. As mentioned earlier, a particularly

high number of companies in this category 11 are

based in India, with a revenue base of around $13

billion.

Of the BCG RDE 100, 12 are growing internationally

by establishing themselves as specialists and global

leaders in one specific, relatively narrow product

category.

Companies in this category have in common a

relatively well defined target market for their

products; considerable depth in their chosen niches

(which in some instances amounts to global category

leadership); super-scale manufacturing; highly

focused R&D; and global logistics, which they have

down to a science. Their specialisation allows them

to be best in class, ahead of the competition in terms

of cost, innovation, and understanding of next-

generation customer needs. It also provides them

with a scaleable platform from which to drive global

industry consolidation, as well as to expand into new,

related niches.

Certain Indian players, such as Bharat Forge and

Crompton Greaves, while having principally

followed the engineering-led innovation approach,

have managed to establish strong positions in their

categories. Bharat Forge is today the world's second-

largest forging company.

The 12 out of our RDE 100 companies pursuing

global category leadership strategies fall mainly into

the category of industrial products manufacturers.

These 12 companies had combined revenues of $36

billion in 2004, of which 61 percent or $22 billion

came from abroad. Their average annual growth

over the past four years has been 23 percent. A

particularly high number of RDE companies in this

category are from Brazil and China.

Of our RDE 100, 13 are growing interna-

tionally by marketing products that exploit advan-

tages based on domestic natural resources. A

representative example from India is Hindalco,

worth $2.5 billion, Asia's largest producer of finished

aluminium and alumina and India's largest inte-

grated copper producer. With India having the fifth

largest reserves of bauxite in the world, reserves that

could last for more than 20 years, Hindalco has an

Model 3: Assuming Global Category Leadership.

Model 4: Monetising RDE Natural Resources

Globally.

inherent competitive advantage. Similarly, in steel-

making, India has access to some of the richest

supplies of iron ore in the world, which gives Tata

Steel a competitive edge as it globalises.

Companies in this category build their global

expansion on natural resources that are low cost by

international standards, without having to compro-

mise quality. The natural resource advantage stems

from rich supplies of energy, minerals, agricultural

feedstock, or some combination of these.

The 13 companies in our RDE 100 group that fall

into this category are active in fossil fuels, mining

and metals, and agricultural products. Brazil's

CVRD, for example, builds its global advantage and

growth on rich low-cost iron-ore reserves, and

Brazil's Perdigão and Sadia on highly productive

grain and soya-bean yields. In addition to leveraging

abundant natural resources, companies in this group

have generally developed high-class operating

models for their industries.

The 13 companies pursuing this model had com-

bined revenues of $110 billion in 2004, of which 66

percent or $73 billion was earned abroad. Their

average annual growth over the past four years has

been 26 percent. Companies in this category are

almost entirely from Brazil or Russia, with a few from

India and other countries.

Of our RDE 100, 13 are building

up regional or global portfolios in their respective

areas by extending business models that have

generally been pioneered in their home markets.

These 13 companies had combined revenues of $93

billion in 2004, with 29 percent or $27 billion

coming from abroad. Their average annual growth

between 2000 and 2004 was 28 percent.

A number the companies in this category are still in

the early stages of globalisation. Contenders

represent a variety of industries, including cement,

chemicals, food products, and telecommunication

services. These companies' expansion tends to follow

one of three models. They may have a comprehen-

sive formula for acquisitions, markets, and

operational excellence. Or they may operate in a

manner that creates superiority along a critical

dimension, as with Thailand's Charoen Pokphand's

approach to operational efficiency in agricultural

production through technology and scale. Or

finally, they may exploit a regional advantage in the

form of cultural similarities, shared language, or

Model 5: Rolling Out New Business Models to

Multiple Markets.


20

political ties that provide privileged access to

markets, as for example in the case of Egypt's

Orascom Telecom, using its Egyptian home base to

expand into neighbouring countries.

Indian companies adopting this globalisation

approach include VSNL, Reliance and Tata Steel,

with a combined annual turnover of $21 billion.

In contrast

to most emerging challengers, 12 of our RDE 100

companies are expanding overseas not in order to

tap new sources of profit but to acquire vital raw

materials for their home markets. A good example of

this is ONGC, the $13.8 billion oil and gas group.

Domestically, ONGC owns and operates more than

11,000 kilometres of pipeline, two offshore termi-

nals, 75 drilling rigs, 131 well platforms, and 28

process platforms. To gain access to global oil

resources, ONGC has expanded into global markets,

with committed investments of $4.3 billion in

overseas exploration projects.

The 12 RDE-based companies on our list that fall

into this category are active in either fossil fuels or

metal and mining products. Nine of them are from

China, which consumes far more oil, gas, and iron

ore than it produces. Irrespective of their countries

of origin, these 12 companies typically enjoy solid

government backing for their attempts to acquire

assets abroad. Following the build-up of

overcapacities in some sectors (for example steel in

China) and a further upgrade in their operational

capabilities, some of them seem set to compete in

global product markets. The 12 companies pursuing

this model had a combined revenue of $282 billion

in 2004, with only 10 percent or $30 billion coming

from abroad. Their average annual growth between

2000 and 2004 was 25 percent.

While much public attention has been focused on the

multi-billion-dollar acquisitions of a handful of

RDE-based companies, these transactions account

for less than 20 percent of the international growth

of our RDE 100. These companies have achieved the

remaining 80 percent of their international growth

organically, either by exporting from their home-

country bases or by establishing international

operations, in some cases via joint ventures. Only 24

companies on our list conducted more than three

M&A deals between 1988 and 2005, while 27

Model 6: Acquiring Natural Resources.

How They Are Growing: by Buying or Building

conducted no such deals at all. This being said, we

need to make two important qualifications.

First, acquisitions form an integral part of interna-

tional expansion in some globalisation models. For

instance, they are very important for companies

rolling out their business models to other parts of the

world. VSNL, for example, made two acquisitions in

North America in 2005 alone for around $370

million, while Tata Steel has invested around $360

million in acquiring Natsteel and Millennium Steel.

The same is true for raw-materials companies,

especially those attempting to secure access to vital

supplies. At the other extreme, companies launching

their home-market brands onto global markets have

seldom done this through M&As. (See Exhibit 5.)

Second, the M&A activities of our RDE 100 are on

the increase. In 2000 they recorded only 15 acquisi-

tions. In 2004 this number had risen to 40, and in

2005 to 59. Acquisitions by Indian companies have

similarly increased. From 28 in 2002, the number of

overseas acquisitions by Indian companies (not only

the 21 selected for this study) reached 192 in 2005.

(See Exhibit 6.)

Most of the deals made by the RDE 100 are small and

with specific objectives in mind. They are usually

intended to help an RDE-based company establish a

commercial beachhead through existing brands,

distribution channels, or local management. In

addition, many RDE-based companies, such as

India's Bharat Forge (automotive equipment), have

used M&As to obtain immediate access to vital

technologies. Some RDE companies have purchased

underperforming companies established in foreign

markets or dormant brands with the aim of turning

them around. An example of this is VSNL's acquisi-

tion of the North America-based Tyco Global at a

cost of $130 million.

Looking ahead, we can expect acquisitions to play an

increasingly important role. The desire among RDE

companies to expand, will in all probability exceed

their ability to develop the necessary capabilities in-

house, encouraging them to acquire other compa-

nies elsewhere. They will get better at identifying

and integrating their targets. Meanwhile, estab-

lished companies in mature markets may become

increasingly susceptible to M&As involving RDE

companies in similar sectors. Banks and private

equity companies will increasingly act as middlemen

in such deals.


21

E X H I B I T 5

Rolling outproven business

models

THE BCG TOP 100 PURSUE DIFFERENT EXPANSION MODELS

0.8

2.2

2.5

3.6

4.9

3.8

1.4 1.5

0.5

1.5

0.9

1.9

3.7

2.9

1.1

0.3

0.7

0.1

0

1

2

3

4

5

6

Acquiringnatural

resources

Monetisingresources

Assumingcategory

leadership

Taking brandsglobal

Turningengineering into

innovation

# of dealsper

company

19% 50% 61% 58% 37% 9%

Average share ofrevenue generatedabroad

Average numberof M&A deals percompany

Average numberof JVs percompany

Average numberof greenfieldinvestments percompany

Average numberof M&A deals percompany

Average numberof JVs percompany

Average numberof greenfieldinvestments percompany

Source: BCG RDE Challengers Database, BCG analysis

Exports and directinvestment

Exports andacquisitions

Acquisition-ledexpansion

E X H I B I T 6

M&A ACTIVITY OF INDIAN CHALLENGERS OVERSEAS ON THE RISE

0.2

1.7

4.5

1.78

192

6049

28

0

1

2

3

4

5

2002 2003 2004 2005

0

50

100

150

200

250

Deal value ($ Bn) No. of deals

4.5

Overseas acquisitions by all Indian companies(Number of deals and deal value, 2002-2005)

Source: Indian Advisory Partners; BCG analysis

Deal value

No. of deals

3

1

56

11

21

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005

No. of deals

Overseas acquisitions by Indian 21(Number of deals, 2000-2005)


22

Where TheyAre Growing:NextDoorandAround the World

Looking at the markets our RDE 100 are targeting for their expansion, we found that the crucial decision -

whether first to test the waters in other emerging markets or to move directly into large and already devel-

oped markets - is closely related to the nature of the particular industries and business models.

(See Exhibit 7.)

E X H I B I T 7

TARGET REGIONS FOR EXPANSION ARE RELATED TO INDUSTRIESSelected Examples

8375

50

17

10

25

40

66

100

17

17

0

10

20

30

40

50

60

70

80

90

100%

HomeAppliances

EngineeredProducts

ConsumerElectronics

Food &Beverages

TelecomServices

Source: BCG RDE Challengers Database; BCG analysis

mass marketsin developedcountries

niche marketsin developedcountries

otheremergingmarkets

Initial expansionto ...

mass marketsin developedcountries

niche marketsin developedcountries

otheremergingmarkets

Initial expansionto ...

nies tend to target developed regions such as North

America.

The RDE 100 are directing their M&A strategies

both at companies in other developing countries

(43 percent of transactions) and at companies from

mature markets (57 percent). The Chinese and

Indian companies on our list have tended to

concentrate on competitors in the developed

world, whereas emerging companies based in

other RDEs have been focusing on interests in

other emerging markets. (See Exhibit 8.) Indian

companies in particular have been very active in

North America, driven by the growth in IT ser-

vices/BPO. Of companies that have focused on

other RDEs, most have targeted regions immedi-

ately adjacent to their home countries in prefer-

ence to more distant locations.

As mentioned above, providers of telecommunica-

tions services, such as Egypt's Orascom or Russia's

MTS, tend to expand into neighbouring regions with

close links to their home markets. This strategy is

also typical of branded Chinese consumer-

electronics manufacturers such as Skyworth, which

first penetrated smaller RDEs in Asia and the Middle

East before launching a broader roll-out.

Companies in the food and drinks industries and

in household appliances tend to adopt one of two

basic approaches. Companies pushing their own

brands, such as Mexico's Grupo Modelo (beer) or

China's Haier (household appliances), usually

start with other RDEs or niche markets, whereas

OEM suppliers such as Turkey's Koç (household

appliances) go directly to mature mass markets (in

this case Western Europe). In contrast, RDE-based

players such as the Indian IT services/BPO compa


23

E X H I B I T 8

0

20

40

60

80

100

THE BCG TOP 100 TARGET DIFFERENT REGIONSFOR M&A ACTIVITY

%

China(32%)

India(18%)

Target regions of 258 acquisitions of RDE Top 100, 1985-2005

Source: Thomson Mergers and Acquisitions Database; BCG RDE Challengers Database

Acquisitions inmature markets

Acquisitions inother RDEs

Mexico(14%)

Russia(14%)

Brazil(11%)

Turkey(3%)

Others(8%)

57%

43%

% of total


4 The Competitive Strengths and Weaknesses of

Emerging Global Challengers

The global success of RDE-based companies willdepend on the competitive advantages they developand maintain in the international marketplace.Clearly, one core advantage is access to low-costresources. Other advantages shared by many,include products that appeal to price-consciouscustomers, relatively modern and efficient plant andequipment, and access to huge talent pools. On theother hand, there are potential constraints to globalsuccess for some of these companies in the form of: alack of close relationships with overseas customers, aslow rate of innovation, a dearth of in-house intellec-tual property, a lack of strong brands and customerfranchises, problems with access to effective distribu-tion channels, and limited experience in managinginternational business portfolios.

The major area of advantage for RDE-based compa-nies lies in low-cost access to key resources. While, inprinciple, established MNCs that move into RDEs

Low-Cost Resources

may be able to gain access to similar resources, ourexperience indicates that RDE-based companiestypically retain an overall cost advantage. In addi-tion, for many MNCs RDE-based operationsrepresent a relatively small part of their globaloperations, whereas the opposite is true of RDE-based players. The RDE cost advantage primarilylies in labour, property and equipment, raw materi-als, and capital.

RDE-based labour is typically 10-20 times cheaper than labour in highly developedmarkets. This advantage alone translates into netsavings of 20 to 40 percent in the cost of many endproducts and services landed into most targetmarkets. Full employment costs for manufacturingworkers in RDEs are anything from $1 per hour inIndia to $6 per hour, the typical high-end rate inEastern Europe in either case a fraction of the $20-40 per hour typical in North America, WesternEurope, or Japan. (See Exhibit 9.) Similar differen-tials apply to labour rates in many service areas, suchas software programming, call-centre operations, orbasic engineering services.

Low-Cost Labour.

India's Emerging Global Challengers

E X H I B I T 9

(5)

0

5

10

15

20

25

0 5 10 15 20 25

RDE LABOUR COST ADVANTAGES ARE SIGNIFICANT

(1) GDP excluding agriculture and services

Source: S&P DRI; EIU; IMD; BCG analysis

Annualgrowth ofindustrialproduction’99–’04(%)

Average industrial manufacturingcompensation 2004 ($/hour)

China

Russia

BrazilMexico

India Canada

WesternEurope

Indonesia

Korea

U.S.

CzechRep.

ThailandMalaysia

Hungary

Poland

Japan

Rapidly Developing Economies

= Industrial(1) GDP $500 Bn

CII-BCG24

Low-Cost Property and Equipment.

Low-Cost Raw Materials.

In many RDEs,

setting up a manufacturing site complete with

grounds, buildings, access, and power and water

supplies can cost only 60 percent of a comparable

facility in a developed country. Savings come, not

only in the form of substantially cheaper construc-

tion labour, engineering, and architectural services,

but also from less expensive construction materials.

Another area of savings is machinery and equip-

ment, which often cost 20 to 60 percent less than

comparable items in developed markets. This

advantage is set to increase, as more locally made

state-of-the-art equipment becomes available over

the next few years. In addition, local communities

within RDEs compete fiercely for investment and

often make land available on favourable terms.

In India specifically, assets also cost less than in

developed countries. It is often possible to set up a

fully functional manufacturing facility in India,

including roads, power and buildings, for about 60-

80 percent of what this might cost in a developed

market, thanks to savings in the costs of materials,

equipment and construction services. Furthermore,

companies often have to invest in less and smaller

equipment than they would in developed countries.

Most plants in developed markets are heavily

equipped with sophisticated machinery designed to

replace high-cost labour. In India, this situation is

reversed: companies are able to reduce the capital

costs of complex machinery and replace it with cheap

labour. In addition, Indian companies are able to

reduce costs by outsourcing elements of their

manufacturing to cost-effective component suppli-

ers.

Depending on the

country, raw materials and energy can be plentiful or

very limited. Of the 12 countries we studied in depth,

the global advantages of Brazil and Russia are in

large part founded on low-cost natural resources.

Brazilian companies share privileged access to low-

cost hydroelectric power. Brazil also has a broad

resource base, ranging from rich and low-cost iron

ore (the main global advantage for domestic steel

producers such as Gerdau) to low-cost agricultural

feedstock that forms the basis for a thriving food-

processing industry. Russia markets its rich energy

resources either through direct exports, as in the case

of natural gas (Gazprom), or indirectly, as in the case

of aluminium (Rusal).

India also has significant advantages in certain areas

through its natural resources and raw materials. For

example, it has one of the world's richest sources of

iron ore, providing the key to the competitiveness of

Indian steel companies. It is also rich in certain other

raw materials such as bauxite, giving the country a

competitive advantage in aluminium and alu-

minium compounds. Another significant advantage

lies in materials for the textile industry, providing

incentives for any producer looking to convert these

materials into higher-value-added products for

adjacent markets.

Financing options for RDE-based

companies vary widely. Some, such as those in the

raw-materials sector, generate substantial free

operating cash flows that they can reinvest. Many

have access to relatively generous debt markets

(though approval standards are becoming more

rigorous in all RDEs). At least 60 of our RDE 100

have access to equity markets in Hong Kong,

London, Mumbai, and New York. In addition, some

companies are supported by governments eager to

promote the international growth of key industries;

one example is China's telecommunications equip-

ment industry. In combination, these factors put

most expanding RDE companies on at least an equal

footing with their western competitors.

Low-Cost Capital.

Although operating environments are difficult in

many RDEs, they can arguably provide real advan-

tages for local companies. Domestic markets are

often very large and among the fastest growing in the

world. In China, for instance, steel consumption is

2.3 times greater than in the US and car sales are

currently an impressive 29 percent of US levels and

growing by 10-12 percent a year. The markets in

Brazil, India, and Russia, though much smaller than

in China, are also significant.

These large home markets, with hard-to-please,

price-sensitive customers, provide a strong founda-

tion for building up export businesses in the future.

Many RDE markets also provide their domestic

companies with an opportunity to compete directly

with foreign companies established on their home

turf, helping to prepare them for expansion abroad.

The automotive market in India is one such exam-

ple, with local firms being forced to maximise their

engineering and research talent to create new

products for the value-conscious Indian consumer.

Home-Market Environments


Operations

Innovation

Many RDE-based companies have surprisingly

strong operating platforms. Their assets are often

much newer than those of established multinational

players. A survey by the US-based Manufacturing

Performance Institute identified the average asset

age of the Chinese companies it surveyed to be 7.2

years, as opposed to 16.9 years for their US counter-

parts. RDE-based production systems, similarly,

tend to be more flexible than those in highly devel-

oped countries because RDE-based companies often

use labour to replace machinery in their plants. For

example, rather than installing automated packing

lines, these companies may have the packing done

by hand. They also tend to buy their machinery from

domestic manufacturers whose products are 20 to 60

percent less expensive than comparable western

equipment.

In addition, RDE-based companies often achieve

higher capital productivity as a result of a longer

working week and fewer fixed assets than their

western counterparts. In world-class factories in

India, notably in pharmaceuticals, textiles, and auto

ancillary units, recent productivity levels have been

among the highest in all the emerging economies.

These factors may also help to provide greater

flexibility when coping with fluctuations in demand,

and to enable new products to be launched more

quickly and smaller order sizes to be handled.

Only a handful of RDE-based companies operate at

the cutting edge of innovation. Their general

weakness in intellectual property is reflected in the

small number of patents they hold. Between 1999

and 2003 all the companies based in the five largest

RDEs were granted only a total of 3,900 US patents,

as compared to companies from Japan and

Germany, with 166,000 and 54,000 respectively.

However, other factors are beginning to offset this

apparent weakness. First, RDEs are fast developing

R&D talent. For example, by 2010 the number of

engineers, mathematicians, technicians, and

scientists graduating in India is expected to reach

600,000 a year. This represents approximately five

times the output of the US university system in the

same disciplines.

In addition, R&D resources are far less expensive in

RDEs than in highly developed countries. With

approximately a fifth of the development costs of its

western competitors, a company such as India's

Ranbaxy (pharmaceuticals) can achieve a great deal

with its $87 million R&D budget. Little wonder that

MNCs are already rushing to RDEs to establish R&D

centres. RDE-based companies, however, may well

have an advantage in maximising local talent

effectively. For example, China's Haier claims to

develop two new household-appliance products

every day. While few current RDE-based innovations

are cutting-edge, with time the most successful RDE-

based companies will without doubt become true

innovators.

Effectively connecting RDE sources with remote

markets remains a challenge. The Asia-US supply

chain, for example, takes on average 60 to 90 days

from original order to delivery at the point of sale,

and adds 10 to 30 percent to RDE manufacturing

costs, wiping out up to half of the RDE manufactur-

ing cost savings. Our experience indicates that 20 to

60 percent of these supply-chain costs are due to

goods being out of stock, emergency shipments, or

permanent backups built into the system.

Optimising the overall performance of a long-

distance supply chain requires considerable skill,

first-rate processes, and organisational discipline. A

few RDE-based companies, such as China's Li &

Fung (textiles) have mastered this skill and turned it

into a central plank of their business. For many RDE-

based players, however, supply-chain management is

still a greater challenge than for established MNCs

that have well-developed supply-chain operations.

One way to address the supply-chain problem is to

establish production beachheads within the target

markets. Of our RDE 100, some 39 companies have

already done so. This strategy is particularly useful in

cases where products have high transportation costs

relative to their value, where products are exposed to

extreme demand volatility or short lead times, where

there are significant trade barriers, or where being

local still constitutes a strong selling point.

Supply-Chain Management


Going to Market

Establishing a foothold in a new market, particularly

a highly developed one, is still difficult for most

RDE-based companies. The hurdles are many:

building up familiarity with customers and channels,

understanding their needs, designing the right

products, and creating competitive distribution

capabilities. While many RDE-based companies

have adjusted well to new requirements in their

home countries, transferring these skills to foreign

markets usually means moving up into a different

league of competition.

The more successful RDE-based companies are

aware of the issues involved and employ one or more

of the following approaches to help them extend

their operations into foreign markets:

Using acquisitions to gain access to markets and

the required commercial structures (for exam-

ple, Dr. Reddy's acquisition of Germany's

Betapharm Arzneimittel in 2006).

Building up strong relationships with a limited

number of large retailers (for example, Midea's

sales contracts for air conditioners with Home

Depot and Wal-Mart).

Targeting high-volume sales at a relatively small

number of large industrial/OEM purchasers (for

example, BYD's contract for mobile-phone

battery supplies with Motorola, Nokia, and Sony-

Ericsson).

Concentrating their efforts on developed

markets that are a lower priority for existing

companies on these markets (for example,

Konka's sales in Australia, where it ranks second

in the TV market).

Serving other RDE markets with characteristics

similar to their own home markets before

moving out into more highly developed markets

(for example, Skyworth's building up of a strong

position in consumer electronics in Malaysia,

Mexico, and Russia before attempting to move

into Western Europe).

Management Talent

Strategy and Roadmaps

Our study of the globalisation patterns of the RDE

100 revealed quality of management to be an

important success factor. RDE-based countries face a

major constraint in the shortage of managers with

international experience. The need is great, both for

people who can develop global business strategies at

the corporate level and for those who can operate

effectively on the ground in the target markets.

Among our RDE 100, only a handful of companies

have foreigners among their directors and few have

foreigners in senior management positions.

Most RDE-based companies recognise this short-

coming and are grooming management talent

within their organisations. Many have established

international job-rotation programmes for their

local managers and are now hiring internationally

experienced managers, often tapping into the pool

of native-born executives working abroad.

For example, today Dr. Reddy's has around 1,100

international employees out of a total workforce of

7,000; Ranbaxy around 1,600 out of 9,000, and

Bharat Forge around 1,800 out of 5,300.

As mentioned earlier, many of the RDE 100 are still

in the early stages of globalisation. For these compa-

nies in particular it will be important to go beyond

haphazard and opportunistic moves towards

globalisation and develop more coherent strategies.

Vital elements for success include a well-defined,

long-term globalisation strategy solid financial

management, and a roadmap with specifically laid-

down targets. For example, Brazil's Natura

Cosméticos (cosmetics) has set out a long-term

globalisation plan to guide the company's moves into

international markets. Combining its operating

capabilities with a systematic approach to accessing

new markets, the company aims to spread its value

proposition and strengthen its brand recognition

abroad.


5 Lessons for and from Indian Companies

In this brave new world of international business, Indian industry is prominently represented. Global

competitiveness is a challenge that Indian companies are eager to meet. In targeting global markets, many

Indian firms are already among the most competitive in their industries. A brief excursion will place this

competitiveness into historical perspective. (See Exhibit 10)

Evolution of Indian industry

Indian industry as it is today has been shaped by four

recent historical phases. The first phase, from 1947

to 1965, was characterised by government-led

investments in manufacturing – investments aimed

at creating a strong industrial foundation. Several

large public-sector units in steel, chemicals, and

power were set up. Many of these companies still

exist, and are among the largest in their sectors.

The second phase, from 1965 to 1980, was marked

by continued high levels of government involvement

in industry, the introduction of strong licensing laws

and a sustained focus on import substitution. This

combination led to further growth in public-sector

units on the one hand, and to the formation of

several low-scale private-sector manufacturing

entities on the other. It also led to the broaden-

ing/diversification of the country's manufacturing

base.

In the third phase, from 1980 to 1990, India partially

opened its economy to external trade and de-

licensed some major sectors for private participa-

tion, leading to strong growth in a few sectors. A key

event was the formation of the Maruti-Suzuki JV

between the Government of India and Suzuki of

Japan: it reflected a new, more liberal attitude, and

marked the beginning of technology transfers into

the country.

In phase four, in the early 1990s, Indian industry was

further liberalised. The scope of licensing was

E X H I B I T 1 0

• Government investmentscontributed 53% of totalGross Capital Formationand 92% of all investmentsin greenfield projects

• Growth led bymanufacturing andinfrastructure sectors;electricity and water grew at11.2%

• Government investmentscontributed 53% of totalGross Capital Formationand 92% of all investmentsin greenfield projects

• Growth led bymanufacturing andinfrastructure sectors;electricity and water grew at11.2%

• Oil shock (1970s) and de-valuation of rupee

• Licensing restrictionsand continued public-sector investments

• Import substitution policy

• Oil shock (1970s) and de-valuation of rupee

• Licensing restrictionsand continued public-sector investments

• Import substitution policy

• De-licensing insome keysectors; allowedgrowth ofprivatecompanies

• Opening ofcapital goodsimports

• De-licensing insome keysectors; allowedgrowth ofprivatecompanies

• Opening ofcapital goodsimports

• Broad reforms,reduction oflicensing

• Higher compe-tition, access totechnology andimported inputs

• Higher share ofprivate sector infixed investment

• Increased threatperception fromChina

• Broad reforms,reduction oflicensing

• Higher compe-tition, access totechnology andimported inputs

• Higher share ofprivate sector infixed investment

• Increased threatperception fromChina

• Removal of mostimport controls

• Resurgence ofkey industries

• Indiancompaniesacquiringcompaniesabroad, gainingglobal identity

• Outsourcingboom inmanufacturing

• Removal of mostimport controls

• Resurgence ofkey industries

• Indiancompaniesacquiringcompaniesabroad, gainingglobal identity

• Outsourcingboom inmanufacturing

1950-1965Industrial foundation

1965-1980Import substitution

1980-1990De-licensing

1990-2000Liberalisation

2000 onwardsGlobal competition

• PSUs• Basic industries

• PSUs• Basic industries

• Growth• Cost-cutting

• Growth• Cost-cutting

• Technologytransfers

• Technologytransfers

• Innovation• Globalisation

• Innovation• Globalisation

• Diversification• Vertical

integration• Ancillarisation

• Diversification• Vertical

integration• AncillarisationO

utc

om

es

EVOLUTION OF INDIAN INDUSTRY


significantly reduced, custom duties were slashed,

and foreign direct investment (FDI) in various

sectors was permitted. Accordingly, global competi-

tion made its presence felt within the domestic

Indian market in the late 1990s, especially from

Chinese and South East Asian companies, and

anxious Indian manufacturers resolutely set about

enhancing their productivity, scale, and efficiency.

During these four phases, Indian firms have risen to

the various challenges, and have acquired unique

capabilities. Companies that had to be self-reliant for

equipment and technology, for example, developed

a deep knowledge of manufacturing processes. This

“forced” domain knowledge is proving advanta-

geous in the “upstream” steps of the manufacturing

value chain, even before assembly. Companies that

had to diversify and/or vertically integrate owing to

the license raj have helped create the diversity and

breadth of India's manufacturing base. Companies

that invested strongly in operational and productiv-

ity improvements have achieved cost competitive-

ness with key global companies, and indeed are the

cost leaders in some areas. Complementing this

evolution has been the growth of the Indian service

sector in the last decade.

Today, Indian industry is in phase five – a phase best

characterised as one of confidence and global

aspirations. Companies are reaping the rewards of

all the development and learning that took place in

the earlier phases, and many are becoming a force to

reckon with in global markets.

What kind of firms constitute the Indian 21 global

challengers identified in the BCG RDE 100, and

what drives their global pursuits?

Their sectoral composition is interestingly different

from those in other RDEs. The Indian globalising

companies come mainly from three sectors –

technical and commercial services, automotive, and

healthcare (with a few representatives from con-

sumer durables, resources, and other industries).

While China is a comparable contender in the

automotive sector, India appears unique in its focus

on the other two sectors. (See Exhibit 11)

The Indian 21: An Overview

E X H I B I T 1 1

RELATIVE WEIGHT OF SECTORS FOR INDIANVS CHINESE AND OTHER RDE100 FIRMS


0

20

40

60

80

100

0

20

40

60

80

100

24%

24%

14%

14%

10%

India (21)0

20

40

60

80

100

Sectors (in %)

China (44) Brazil (12)

Russia (7)

Others(2)

Malaysia (2)Thailand (2)

Tech. & Comm. Services

Telecom Services

Food Processing &Cosmetics

Tech. Equipment

Transport

Automotive

Healthcare

Other Industrial Goods

Raw Material Extraction

Consumer Durables

Mexico (6)

Turkey(4)


Among the firms that have brought India onto the

global map are these:

• Automotive manufacturers such as Bajaj Auto,

Mahindra & Mahindra, Tata Motors and TVS

Motors. Bharat Forge, India's largest exporter of

auto components, is the world's leading chassis-

component manufacturer.

In the IT/BPO space – Infosys, Satyam, Tata

Consultancy Services and Wipro.

Larsen & Toubro is a major engineering &

construction conglomerate.

In healthcare, leading pharmaceutical compa-

nies – such as Ranbaxy, Cipla and Dr. Reddy's –

with a focus on exploiting the US generics

market.

From other sectors – ONGC, Reliance

Industries, Videocon, VSNL and Tata Tea, for

instance; and industrial goods companies such

as Hindalco, Tata Steel and Crompton Greaves.

When companies are questioned about their

globalising thrust, they sometimes cite reasons such

as access to complementary technology or access to

global raw material sources. But almost always the

primary motive is growth. Many Indian firms are

now targeting global profit pools. In healthcare, for

example, Indian firms are taking advantage of their

low-cost manufacturing to deliver generic drugs in

global markets.

Much of the Indian corporate growth into interna-

tional markets has been organic, but some at least has

been through M&A activity overseas. Such activity is

on the rise, and is supported by the changing policies

of the Indian Government. Indian entities are today

permitted to invest up to 200 percent of their net

worth without prior approval, as opposed to 25

percent in 2001. Indian firms can also automatically

utilise ADR/GDR proceeds freely, or they can take

the stock-swap route.

Over the period 2000-2004, Indian firms accounted

•

•

•

•

Primary Motive for Internationalising

Form of Entry and Underlying Globalisation Models

M&A Activity

for about 15 percent of all RDE-based companies'

M&A activity overseas – and about 26 percent in

mature markets, more than any other RDE can

claim. In fact, some 60 percent of Indian M&A

activity overseas takes place in mature markets. This

emphasis, shared perhaps with South Africa, is quite

different from that of most RDEs, which concentrate

their M&A activity in developing economies.

For its mature-markets acquisitions, India has been

most active in North America, followed by Western

Europe. This concentration on North America is

driven to a considerable extent by the entry of Indian

firms into the IT services/BPO space in the region.

The only other country with a North-American focus

is Mexico. For other RDEs – South Africa, and those

in Central Europe and South East Asia – the focus

tends to be on Europe. (See Exhibit 12.)

Globalisation Strategies

Indian companies have followed several different

globalisation strategies, sometimes overlapping in

practice, as with the other RDE 100 companies.

Given India's great advantage in its inherent

engineering talent, the lion's share of the Indian 21

have used the engineering-led innovation approach.

Dominating the list are firms in healthcare and IT

services/BPO. While IT services/BPO firms have

been offering promising value propositions, pharma

companies such as Ranbaxy and Cipla have been

engineering low-cost generic drugs. Other firms

using this model include Larsen & Toubro, and

companies in the engineered-products sector, such

as Bharat Forge, Crompton Greaves, and TVS

Motors.

Bharat Forge and Crompton Greaves, which were

among the earlier Indian firms to internationalise,

have also built category leadership today. The auto

companies, which internationalised more recently,

have concentrated on taking their brands global.

ONGC, by contrast, has focused on acquiring

natural resources internationally, and Hindalco on

monetising the existing natural resources. VSNL and

Reliance have been rolling out business models

pioneered in their home markets. Others have used

a combination of approaches: Tata Tea, for example,

has been both monetising natural resources and

taking its brand global; and Tata Steel has been

rolling out its business model and leveraging its

captive sources of iron ore.


E X H I B I T 1 2

PERCENTAGE OF ALL RDE ACQUISITIONS IN MATURE MARKETSBY TARGET REGION VS ACQUIRER (2000-2004)

0

20

40

60

80

100Japan

Australia & New Zealand

Western Europe

North America

(%)

India26 %

South Africa22 %

SEA14 %

China11 %

CentralEurope

9 %

Russia8 %

Mexico7 %

Brazil3 %

58

35

7

22

46

32

25

33

39

3

49

24

20

7

19

78

11

26

72

2

88

11

2

56

44

Percentage of RDE acquisitions in high-cost countries bytarget region and acquirer (2000-2004)

Source: Thompson Mergers and Acquisitions Database; BCG analysis

n = 776


The India Advantage

India's core advantage, as everyone knows, is its

manpower resource pool. What is less well known is

what the underlying elements of this advantage are,

and whether they are likely to continue.

The manpower advantage extends from manual

labour to skilled manpower. Labour-wage levels in

India are among the lowest in the world. In 2003,

they averaged $1.12 per hour for a production

worker – well below that of most low-cost countries,

which average $2.10 per hour. What's more, India's

wage rate is not likely to increase disproportionately

in the near future, but is expected to grow in line with

average growth of low-cost countries at about 6-7

percent per year.

The country's labour advantage extends beyond low

wage rates. It involves the demographic profile too.

India has a demographic bulge in the most salient

age bracket of 20 to 35. (See Exhibit 13.) And the

future scenario appears even more attractive. India's

workforce surplus is likely to persist, while other

countries (including key developed economies such

as the US, Europe, and Japan, as well as fast-

developing China and Russia) are likely to face

manpower shortages.

Savings due to lower labour costs can account for

anywhere between 25 and 90 percent of the cost

advantage that India offers, depending on the

nature of the industry. (It is in areas such as mainte-

nance, overheads and repairs that the 90 percent

savings might be achieved.) And India's productivity

levels have been some of the highest among the

emerging economies, especially in its world-class

factories in pharmaceuticals, textiles and auto

ancillary units.

Complementing the labour-resource advantage is

that of skilled manpower – an enormous and high-

quality pool, with the bonus of widespread compe-

tence in English. Indian universities produce

engineers, chemists, MBAs, and so on in large

numbers – some three million graduates and

700,000 post-graduates every year, whose average

salaries generally remain well below those of other

low-cost countries. So India enjoys not only a cost

advantage but also a great access advantage to highly

skilled manpower, even in areas where global

companies are generally facing bottlenecks.

31

32

E X H I B I T 1 3

FUTURE DEMOGRAPHIC PROFILE OF INDIAVS. CHINA AND FRANCE

India Demographic Profile (2020) China Demographic Profile (2020) France Demographic Profile (2025)

-60 -40 -20 0 20 40 60

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

Mn people

Age group

Female Male

-60 -40 -20 0 20 40 60

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

Mn people

Age group

-3 -2 -1 0 1 2 3

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

Mn people

Age group

204060204060 123

Source: CII Conference 2002; CSFB Report; UN Population Division; BCG analysis

20 - 35 age group :

325 mn people (~25 %)

20 - 35 age group :

308 mn people (~21 %)

20 - 35 age group :

11 mn people (~17 %)


The impact of abundant talent is already manifesting

itself in many ways. Over the last few years, India has

been the largest filer of patents among the develop-

ing economie s . In indus t r i e s such a s

pharmaceuticals, Indian companies have achieved

great cost advantages by leveraging process

improvements in manufacturing. In engineering-

related areas, Indian engineers develop tools and

designs at a fraction of the cost in international

markets, thereby transforming the economics of

their companies. Strong Indian research teams have

developed low-cost product ranges in the automotive

arena, while in auto ancillaries they have been able to

design customised products with great rapidity.

Bharat Forge, for example, engineers a new product

in 3-4 weeks, compared to the 6-12 weeks that its

competitors might take. The advantage is even more

marked in the software and IT services/BPO space,

where the need for skilled manpower is more critical

still (and where India enjoys the further advantage of

a strong client base, which includes some of the key

Fortune 500 companies).

Next, India also has a capital-cost advantage – one

that that can enhance the return on investment in a

manufacturing facility. The benefits here go beyond

cost, to include: reduction in hurdle rates for

investments, lower fixed costs, greater flexibility, and

easier risk-management. This capital-cost advan-

tage flows from three key sources. First, assets can

often cost less to buy in India than in developed

countries: thanks to savings in materials costs,

equipment and construction services, you could set

up a fully fledged manufacturing facility in India,

including roads, power and buildings, for about 60-

80 percent of the cost in a developed market.

Secondly, Indian companies often use fewer, smaller

and less complex assets than their developed-

country counterparts do, often by the simple

expedient of using more labour instead of sophisti-

cated machinery. Thirdly, Indian companies

outsource their components to a considerable

extent, thereby often lowering costs.

One last advantage: some Indian industries secure a

competitive edge from the country's natural

resources and raw materials, such as iron ore and

bauxite.

What then might restrict the India advantage? The

following are a couple of likely culprits. The brands

of the Indian challengers, though typically very

strong in the home market, remain little recognised

in developed markets. Further, Indian firms tend to


lack the benefits of scale, and also to suffer from

some significant product-portfolio gaps.

Today India is indeed uniquely positioned. Indian

firms have a set of extremely valuable capabilities

and resources. Low cost in manufacturing, domain

knowledge in different sectors, and home-grown

strengths in engineering and research – jointly these

place India on a very strong platform. At the same

time, Indian firms need to meet several challenges:

enhancing their go-to-market and management

capabilities, building scaleble business models, and

so on.

Now is perhaps the right time for Indian firms to

start introspecting again, and to ask themselves a

series of questions:

The Future Global Agenda

• Do we really realise and leverage our advantage

to the fullest?

• Can we bring together different elements of our

strengths, to create new and sustainable sources

of competitive advantage that could transform

our business economics or value propositions?

• Should we be looking to further horizons now,

beyond our inherent resource advantage?

• And finally, what really are our global aspirations

– do we want to create a quantum shift in our

global growth?

As Indian firms once again begin to go through the

process of self-discovery, they could start to drive

their global agenda forward more actively.

34

6 Looking Ahead

Until recently, only a dozen or so RDE-based

companies could have been described as emerging

global challengers. Today, these challengers number

in the hundreds. Among them, the RDE 100 will play

important roles in shaping the global marketplace.

While some of them are already in positions of

relative strength, many are still gearing up for major

global growth campaigns. All are hungry for global

expansion. They are increasingly cash-rich. They are

aware of their advantages and know how to deploy

them. They are also actively working to overcome

their traditional weaknesses. In this effort, many

have the strong support of their home governments.

We expect that by 2010, our RDE 100 will double

their international revenues. At the same time, the

portion of revenues they derive from international

operations will probably rise from its current 28

percent to more than 40 percent. Perhaps 20 or more

of these companies will be among the top five

companies in their categories globally, up from five

currently. We further expect that the number of

prominent RDE-based globalisers will expand into

the hundreds in the years ahead. The implications

are massive, both for emerging challengers and for

incumbents.

As noted, many of the RDE 100 are already well

along the path to globalisation. The essential

capabilities are listed below, and most of them have,

in general, already been put in place by the more

advanced companies on our list. Other companies

on the list are still in the early stages of globalisation

and will need to strengthen their positions in several

areas to advance their international growth success-

fully.

All companies need to clarify “why and

how” they are going about globalisation. Some of the

companies on our list have begun globalising only

opportunistically. To succeed in the longer term,

they will need a clearer vision and purpose, set from

the top, and detailed roadmaps for their

globalisation endeavours.

Clear, long-term globalisation targets and

roadmaps.

Implications for Challengers

Internationally capable management teams.

Enhanced overseas selling, marketing, and

supply-chain capabilities.

Going beyond low cost.

Expertise in partnering, M&A, and leveraging

suppliers.

An effective global organisation.

While

some companies on our RDE 100 list already have

global management teams, others have only just

begun to address this issue. For example, very few of

the Chinese companies profiled have any foreigners

in their senior management ranks. A globally

capable management team will be essential to

success abroad.

RDE-based companies

need to move beyond being “secondary suppliers”

for global customers, and become primary suppliers.

To move up to this level will require matching or

beating incumbent suppliers in selling, marketing,

and supply-chain capabilities.

As RDE-based challengers

seek sustainable global positions, they will need to

move beyond cost-based differentiation. Otherwise,

they will face incumbent competitors who will be

cutting their own costs while building market

barriers based on innovation and other advantages.

Just as leading Japanese and Korean companies have

become true innovators, so our current crop of RDE-

based challengers need to innovate their way to long-

term success. The abundance of affordable engi-

neering talent in markets such as China, India, and

Russia, gives companies based in these locations the

potential to become innovation powerhouses.

In the race to compete, the most success-

ful RDE challengers will include those that leverage

others. Some will create this leverage through

successful M&A activities. Others will do it by

forming strategic partnerships or by leveraging the

innovation of suppliers at home and abroad.

For long-term

success, RDE-based challengers – like incumbent

MNCs – must redesign their entire organisations to

be truly global. There is an enormous transition

involved in moving from being mainly domestic with

some overseas sales, on the one hand, to being truly a

global organisation on the other. The move requires

difficult decisions regarding the composition of the

management team, the centralisation or decentrali-

sation of various key functions, and the extent to

which organising is done geographically rather than

by business line.


35

Implications for Incumbents

The impact of emerging RDE-based challengers on

individual companies varies from industry to

industry, as well as reflecting companies' current

competitive positions. Many incumbents are

successfully riding the wave of globalisation, by

engaging in sourcing, manufacturing, selling, and

conducting R&D both at home and around the

globe. Others, however, have not yet adapted to the

challenges of globalisation, and the emergence of

strong RDE-based competitors will both raise the

stakes and reshape the playing field. How to

respond?

The first step seems

obvious: you need to identify and understand the

RDE-based challengers in your industry. Who are

they? Where are they operating today? What are

their strengths and vulnerabilities? How are they

changing the competitive landscape? Which steps of

the value chain are affected? How big an impact do

you expect? Will the impact create threats or oppor-

tunities or both? RDE-based challengers are some-

times hard to get to know: they are based far away,

they may not be well covered by the business media,

they may not publish financial results, and they are

evolving rapidly. So you need to make extra efforts

simply to understand them.

Envision your global

priorities in an environment inhabited by successful

RDE-based competitors. What are the implications

for the segments and businesses you can defend?

Which segments and businesses might you want to

exit? What new growth opportunities and competi-

tive imperatives do you see?

The exercise

described above will trigger important decisions

about how you will contend with these new challeng-

ers. Your choices might include:

• Competing head-on with the challengers,

erecting obstacles to keep them out of key

markets, or attacking their home markets

Partnering with one or more challengers in

order to strengthen your global position and

defend against other challengers

Creating your own challenger by establishing a

subsidiary in an RDE, designed explicitly to

capture the same kinds of advantages that RDE

challengers possess

Know your challengers.

Take a hard look ahead.

Design strategy for the new reality.

•

•

• Selectively exiting some lines of business or some

value-added steps, and putting these activities

into a JV with a challenger company. For exam-

ple, you might build a new business model that

benefits from this JV through royalties and

service fees.

For most incumbents, the main

arena of competition with RDE-based companies

will be in product markets. Here, in our experience,

most incumbents still have considerable room for

improvement in their key operations, by developing

cutting-edge new products, manufacturing them

efficiently, getting them to market effectively, and

servicing customers well. In their home markets,

incumbents are often closer to customers than

challengers are. They should take full advantage of

that relationship. While incumbents focus on

improving their performance in their domestic

operations, they should also systematically assess

options to relocate production to low-cost countries.

Incumbents and

challengers alike should consider opportunities to

create value by acquiring, investing in, or partnering

with each other. Many are already systematically

assessing and pursuing options to cooperate as a way

of advancing their own growth objectives.

Opportunities exist in many areas. In sourcing, for

example, RDE-based companies can become new

suppliers to incumbents (as exemplified in the

market for automotive equipment) or partners in

exploiting raw material resources (as is happening in

the oil industry). Conversely, the RDE 100 challeng-

ers are already purchasing huge volumes of materi-

als, parts and components, and services, and should

thus be regarded as potential customers of incum-

bents.

Similarly, partnerships between incumbents and

challengers figure prominently in the globalisation

of R&D – for example in the pharmaceutical indus-

try, where global giants are starting to conduct joint

research programmes with companies in India and

China. Glaxo, for example, has forged an exciting

partnership with Ranbaxy for joint R&D work, and

Wyeth, in a deal estimated at $40 million, has

commissioned GVK Biosciences to set up a dedi-

cated R&D centre, to be staffed with 150 scientists.

In operations, subcontracting and outsourcing are

now common in almost every industry. Indeed, the

business models of some challengers are built

entirely on serving multinational players in this way

Hone your operations and reinforce your cus-

tomer relationships.

Find ways to ride the wave.


36

(in such industries as IT services/BPO, technology

equipment, and household appliances). Many

incumbents also enter JVs or distribution partner-

ships with RDE-based companies to tap into their

growing home markets (for example in the Chinese

automotive equipment and consumer electronics

industries).

RDE-based companies can also be partners in

incumbents' exit strategies. When an incumbent's

management team decides to retreat from a market

segment in a mature market, partnerships with RDE-

based players can help to stage this exit. In the case

of an outright sale, an RDE-based company might be

willing to pay more for a business than a domestic

competitor would, because the purchase might

provide exactly the sorts of assets that the RDE-based

company needs in order to offset current weaknesses

(for example, IP, brands, or distribution channels in

mature markets). In other cases, a temporary

partnership with an RDE-based acquirer might

create more value than an outright sale would.

Incumbents have recently pursued this model in

M&A deals with Chinese companies, generally in the

form of JVs.

From the incumbent's perspective, partnerships

make sense for at least three reasons. First, the assets

of the acquisition target sometimes need to be carved

out of the seller's operations, making it impossible to

complete an immediate sale. Secondly, the incum-

bent may want to retain some of the most attractive

assets – such as IP, including brands and patents, or

jointly used operations such as sales channels – and

provide them to the acquirer for a fee. Finally, the

acquirer may be an attractive partner for the seller in

penetrating an RDE market, or even as a client.

Ultimately, incumbent companies in global indus-

tries must quickly become comfortable with a world

full of RDE-based challengers. It will be critically

important to get to know these challengers well and

to use that knowledge in making key business

decisions. Decisions made without such insights

stand little chance of success.

Closing Thoughts

We are entering a new era, in which RDE-based

challengers populate the world's largest industries.

These challengers will be major participants,

reshaping many markets and forcing incumbent

companies to respond.

The rise of these challengers takes place amidst the

rise of RDE economies generally – and of China and

India in particular. By 2050 China and India will be

two of the world's three largest economies. At that

point, any truly global company must by definition

have a major presence in China and/or India, as well

is in North America, or Europe, or Japan.

Our list of 100 companies represents just a small

sample of the RDE-based challengers that will

ultimately emerge on the world stage. Of course, not

all will survive. Success will require strategic deci-

sions and the building of capable organisations

possessing competitive advantage.

Survival for today's incumbent companies is also not

guaranteed. Clearly, one success factor will be the

ability to identify, understand, and anticipate the

new wave of RDE challengers, and to quickly devise

the new strategies and capabilities required to deal

with the challenges they pose. The future looks very

interesting indeed.



The Boston Consulting Group publishes other

reports and articles that may be of interest to senior

executives. Recent examples include:

A report by The Boston Consulting Group, March

2006

A report by The Boston Consulting Group, 2006

Opportunities for Action in Industrial Goods,

November 2005

Opportunities for Action in Operations, July 2005

Opportunities for Action in the Automotive

Industry, June 2005

Opportunities for Action in Operations, May 2005

Opportunities for Action in Operations, May 2005

“Organising for Global Advantage in China, India,

and Other Rapidly Developing Economies”

“China Outbound M&A. How Chinese Companies

are Entering the World Stage”

“Spurring Innovation Productivity”

“The New Economics of Global Advantage: Not

Just Lower Costs but Higher Returns on Capital”

“Winning in Today's Chinese Automotive Market”

“Globalizing R&D: Knocking Down the Barriers”

“Globalizing R&D: Building a Pathway to Profits”

“Avoiding Supply Chain Shipwrecks: Navigating

Outsourcing's Rocky Shoals”

Opportunities for Action in Operations, March 2005

“ The Central and Eastern European Opportunity:

Creating Global Advantage in Serving Western

Europe”

“Navigating the Five Currents of Globalization:

How Leading Companies Are Capturing Global

Advantage”

Capturing Global Advantage: How Leading

Industrial Companies Are Transforming Their

Industries by Sourcing and Selling in China, India,

and Other Low-Cost Countries”

“What Is Globalization Doing to Your Business?”

A Focus by The Boston Consulting Group, January

2005

A Focus by The Boston Consulting Group, January

2005

A report by The Boston Consulting Group, April

2004

Opportunities for Action in Industrial Goods,

February 2004

For a complete list of BCG publications and informa-

tion about how to obtain copies, please visit our Web

site at www.bcg.com.

To receive future publications in electronic form

about this topic or others, please visit our subscrip-

tion Web site at www.bcg.com/subscribe.

“

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