Leaping Tigers, Roaring Dragons

Emerging markets and mobile firms take the lead.

by Robert Fox
Javier Baigorri

The tremendous progress being achieved across the world’s emerging markets is one of the great economic stories of our time, and now a new milestone has been reached. No longer does Microsoft have the world’s largest market value of any company in the fast-growing communications, media, and technology (CMT) sector. That honor now goes to China Mobile, which at year-end 2007 had achieved a market capitalization of $346 billion, surpassing Microsoft’s $338 billion.

And while developed nations lay claim to roughly two-thirds of the top 60 performing CMT companies over the past five years, emerging markets also produced the firm with the best single performance: Bharti Airtel of India.

These are not isolated examples. Oliver Wyman’s State of the Industry 2008 report, which tracked the five-year performance of 450 firms in the CMT sector, reveals a broader trend sweeping the globe: the rise of world-class CMT companies that are headquartered in emerging markets. (The report analyzes the performance of CMT companies as measured by the Shareholder Performance IndexSM, which enables consistent comparison of shareholder returns by adjusting for the volatility of returns, differences in local interest rates, and mergers and acquisitions.)

Consider the growth in emerging markets over the past five years:

Some of the emerging market successes are well known, such as Samsung and LG of South Korea, or Lenovo of China, which in 2004 bought IBM’s ThinkPad computer division. Three companies in India—Wipro, Infosys, and Tata – are now among the ten largest IT companies in the world.

Others don’t have much of a profile in the United States, but are no less formidable. América Móvil of Mexico is Latin America’s largest mobile telecom provider. Hon Hai of China manufactures many of the key parts that are used in computers and mobile phones sold by companies such as Dell and Nokia.

Greater China (which includes Hong Kong and Taiwan) has witnessed such rapid growth in CMT that companies originating there have almost achieved the same share of world’s total market valuation of CMT companies as Japan—9% and 10%, respectively. Companies domiciled in Greater China don’t yet have the brand reputation of Japanese companies such as Canon, Hitachi, Matsushita, Nintendo, Sony, and Sharp, but soon will. And it’s only a matter of time before CMT companies in emerging markets begin acquiring companies in mature markets, as has already happened in other sectors, such as steel and autos.

What’s Driving Growth

There are a number of factors driving this impressive growth. For starters, companies in emerging markets benefit from the economic growth underway throughout the developingworld. It’s also true that in some of these markets there aren’t as many competitors, and oligopolistic or monopolistic structures have been protected by the local governments.

But even more important to the growth of these companies has been their adoption of the kind of innovative practices that foster growth in the world’s most successful enterprises. A few such practices distinguish the 60 superior performers we identified:

Anticipating Where Value Is Migrating

Two-thirds of the top performers we examined have closely aligned their business with key Value- Migration® trends. Indeed, seven of the top ten super-large cap performers have aligned with the two most powerful such trends: emerging versus mature economies and mobile communications.

Many U.S., European, and Japanese communications companies lost a large share of value over the past five years, either through underinvestment in the new growth regions or to regulation protecting the emerging market carriers. Most of the high-growth firms are local entities that have benefited from the size and growth of these markets, low penetration, and sometimes oligopolistic or monopolistic structures protected by regulatory bodies.

China Mobile, for instance, has capitalized on its home country’s exponentially expanding wireless market by growing through customer acquisition. The company reached 68% market share in 2006 with an incredible 301 million subscribers.

América Móvil has expanded wireless services from Mexico to 16 high-growth markets in Latin America by acquiring 15 companies in the past five years, which has significantly diversified its subscriber base. Its revenue and EBITDA have grown annually at 39% and 37%, respectively, from 2003 through 2006.

Though many foreign multinational companies have missed the opportunity to stake a claim in high-growth markets or sectors, a few have bucked this trend. Telenor of Norway has cherrypicked its early investments in Asia and Eastern Europe to offset the commoditization of mobile voice services in Western Europe. These markets
now compose 61% of the company’s mobile revenues and drive the majority of its revenue growth.

Likewise, Telefónica has heavily invested in adjacent and emerging markets despite strong revenue growth in Spain, its home base. As of the third quarter of 2007, external markets accounted for 63% of this firm’s revenue and 53% of its operating income.

Enhancing Operational Excellence and “De-risking” the Business

Operational excellence is not a new concept and does not, in itself, suffice to vault a company’s performance far above its peers. Nevertheless, it can amplify the power of a superior strategy or an innovative business design. What sets CMT top performers apart from others? In addition to using traditional cost-cutting levers such as strategic sourcing and improved supply-chain effectiveness, these exemplary firms are deploying next-generation levers such as workforce planning, job architecture, and network outsourcing, and they are “de-risking” their businesses.

Hewlett-Packard (HP), for instance, has initiated a mix of traditional and novel operational improvements. Under the traditional category, it reduced its workforce significantly and restructured its IT operations, thereby reducing IT cost as a percent of revenue from 4% to just 1.5%. Less well publicized is HP’s use of innovative human capital initiatives such as workforce planning, job architecture, and total rewards optimization to lower costs and redirect human capital investments to the highest-return workforce
segments.

Other CMT companies have decreased their asset intensity to de-risk their business and become more adaptive to changes in demand.

Consider Bharti Airtel of India. This predominantly pure-play mobile operator built a successful organization on a lean and asset-light operations model, fully outsourcing its network deployment/set-up, IT services, and customer contactcenters. The company has grown effectively by simplifying its processes and saving significantly on capital expenditures. Operating expenses as a share of the company’s revenue have declined 8% annually since 2003. By reducing risk in its business and targeting highgrowth
emerging markets for mobile services, Bharti has the strongest risk-adjusted performance of any CMT company in the world. To put this in perspective, Bharti has been growing, on a risk-adjusted basis, faster than stock market darlings Apple, which ranks third, and Google, which comes in at tenth.

Another example is Hutchison Telecommunications of China. In addition to exploiting growth opportunities in pure-play mobile in emerging Asian markets, the company has an asset-light model. It outsources its network, IT services, and maintenance to streamline operations and reduce costs. This helped to drive operating margins higher, by about 6 percentage points, from 2005 to 2007.

Devising Innovative Business Designs

Aligning strategy with value-migration trends and improving operational excellence are not sufficient to explain the success of many of our top 60 performers. Indeed, some of these companies have come from underperforming regions and sectors. The other characteristic that defines market leaders is that they devise innovative business designs, not just innovative products. These outperformers have asserted control over their value chains, attracted new and different kinds of customers through smarter segmentation,
and leveraged new advertising business models—often driven by search engines or social networking.

Reintegrating the value chain. Conventional wisdom in the technology industry since the launch of the personal computer has been to let specialized players make each component of the value chain. Hence, Intel in semiconductors, Microsoft, SAP, and Oracle in software, and so on.

However, several leading performers have defied conventional wisdom. Today, the interplay between hardware, software, and Internet services is strong. Top performers have realized that to deliver the best customer experience, they need to control key links in the CMT value chain, even if they do not need to own those links outright.

As excellent example is Research in Motion (RIM), based in Canada, which provides wireless communication solutions through its renowned BlackBerry devices. RIM determined that the interplay between a device and software was too important to focus on only one or the other. Its integrated approach, featuring a seamless
interface between hardware ergonomics, device software, and back-end systems, has enabled the company to win over legions of professionals worldwide. RIM’s products also come with robust security features and full compatibility with office email, which has helped the company convert skeptical corporate IT buyers before expanding to the consumer market. RIM’s revenues have grown 87% annually over the last two years, and its SPI of 377 places the company in seventh place on our super-large cap list.

Attracting new customer segments. Over time, many firms fall into the trap of competing for the same customers that their rivals are trying to attract, using the same value proposition and the same business design. Occasionally, a player or a new entrant will change the rules of the game by identifying a particular customer segment
with a very different set of priorities and by developing a compelling value proposition and business design tailored to those priorities.

One apt example in our top-60 list is Nintendo and its Wii product. Conventional wisdom in the gaming industry is that only 15- to 35-year-old males play video games. Nintendo’s Wii console has revolutionized the gaming industry by appealing to the mass market and particularly to women and older consumers. For instance, the console has been used in retirement homes as a physical-therapy device. The company’s DS console is being rolled out to the mass market as an “information terminal” with a range of
applications that go far beyond gaming. Driven by the Wii’s success, Nintendo’s shares doubled and net profit jumped 77% in the most recent fiscal year from $0.6 billion to $1.47 billion on sales of $8.13 billion.

Leveraging new advertising models.

Advertising-sponsored business designs have a long history in print, radio, and television. Online advertising is already a $40 billion industry and is expected to grow at well over 20% annually over the next few years. Now a large share of the population is increasingly working, communicating, and consuming content online, companies have an opportunity to tailor advertising to ever-finer customer segments and thus earn higher returns on their marketing investments. While much of the focus in recent years has been on search-based online advertising, new categories—particularly mobile, in-game, and video—should grow even faster.

One early innovator in advertising models is Tencent, based in Hong Kong. Tencent took disparate mobile applications like instant messaging, emails, Internet access,  community portals, and shopping to build a seamless, “one-stop online living” experience to register 715 million users, almost half of whom actively buy the company’s extended offerings. Tencent’s revenues have more than tripled in the past three years.

Market Saturation Ahead?

Looking ahead, the key question is whether these successful companies will be able to maintain their recent growth rates. The lack of competition from companies in mature markets is beginning to change, as companies such as Telenor and Telefónica push further into emerging markets. AT&T has said it will be focusing on the opportunities presented by India to expand its consumer mobile operations. And Vodafone, of the U.K., recently purchased a nearly $11 billion stake in India’s fourth-largest wireless operator, Hutchison Essar.

A fundamental challenge for all companies doing business in emerging markets, but particularly the companies headquartered in these markets, will be coping with market saturation. Mobile operators, for example, are going to find a ceiling on the percentage of the population they can enroll. Will they be able to build on the installed base to convert usage from basic voice to video, value-added services, and mobile payments? Similarly, the strong economic growth found in emerging markets over the past five years is destined to cool down. How well positioned are these companies to absorb the impact of economic slowdowns in their largest markets?

The one constant for top performers companies in emerging markets—particularly those in the CMT space—will be dramatic change, in everything from the profile of their customer base to the state of their industry. This will present today’s best performers and aspiring stars alike with numerous forms of strategic risk. To secure their position, companies will need to become ever more prescient about market dynamics and more adaptable than ever.