Emerging Market Innovations Garnering Attention From Multinationals

by Tony D'Altorio

Emerging Market Innovations Garnering Attention From Multinationals

by Tony D'Altorio, Investment U Research

Wednesday, February 2, 2011

Rewind to the 1970's when Japanese companies in global markets were often dismissed as low-cost, low-quality copycats.

Years later, that theory became laughable. Though many American businesses found that out the hard way first.

Today, that 70's-style opinion towards innovation from emerging markets is coming back to the forefront. Developed nations seem to accuse countries like China as merely making low-cost, low-quality copycat products.

  • U.S. companies complain about their Chinese counterparts stealing technology in a government-backed modernization drive. But much of that was handed over voluntarily in cooperative ventures.

  • Many of them simply bet the rewards of entering China would outweigh the risks.

In their defense, emerging economies do make plenty of shoddy products, as well as rip-offs of American, European and Japanese products. But such dealings don't sustain a business for long, given stiff global competition.

To really succeed, they have to innovate and come up with their own products. And that's exactly what many of them are doing...

Emerging Market Innovations and Multinationals

Skeptics turn up their noses at many emerging market ideas. But those advances result in better products, services and processes.

Peter Williamson, international management professor at Cambridge University, says: "The innovations may be incremental. The effects are not." Product improvements in emerging markets may not often win Nobel prizes, but they can still change the game.

"A good idea developed in the emerging world can often be plugged into a multinational's global system of manufacturing and sales. The advantages gained in developing markets can, in many cases, be deployed into developed markets as well."

There are numerous examples of developments from multinational's emerging market affiliates that are marketed globally. For example, the Indian affiliate of Siemens ADR (NYSE: SI) developed a low-cost x-ray scanner camera that is so good it will be used in developed world equipment.

Other examples include how:

  • General Electric (NYSE: GE) sells Indian-developed electrocardiograms and Chinese-devised ultrasound scanners around the world.

  • Nokia ADR (NYSE: NOK) uses Indian and Chinese software skills to develop smartphones.

  • The Kenyan affiliate of Vodaphone ADR (NYSE: VOD) - Safaricom - developed M-Pesa, a mobile phone banking system destined for developed markets.

Multinationals Boost Spending in Emerging Markets

It should come as no surprise then that numerous multinationals are boosting research and development spending in emerging markets, especially China and India.

Siemens now has 12% of its 30,000 R&D workers in Asia, up from 7% five years ago. Meanwhile, GE and 49 other multinationals have research centers in India, while Microsoft (Nasdaq: MSFT) and about 100 other big companies have them in China.

Cambridge University's Navi Radjou summed it up perfectly: "Once business solutions flowed only from west to east. Now they are flowing from east to west as well."

Multinationals now want ideas generated by a truly global community. That helps them develop products better suited for the main source of their future customers in emerging markets.

They used to target only the wealthiest segment of these countries, but not anymore. As Abbas Hussain, emerging markets chief at GlaxoSmithKline ADR (NYSE: GSK), said, "We need to push products down the [income] pyramid."

Not All Multinationals Are Impressed With Emerging Market Innovations

Of course, not all large U.S. companies are moving aggressively into emerging markets.

Some don't seem to mind their competition gaining an advantage there. They also appear unfazed when Chinese businesses enter world markets with improved products.

But that doesn't mean they shouldn't be worried. Instead, they should look back in history to see the effects of underestimating emerging market competition.

Christoph Nettesheim of management consulting firm Boston Consultancy Group warns: "The danger for many is that they don't see the emerging market innovations coming because they are not yet coming direct into their home markets. But they will."

And when they do, it may be too late for some of them. Just like it was decades ago.

Good investing,

Tony D'Altorio

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