What We Can Learn From IBM and Nestle

by Carl Delfeld

What We Can Learn From IBM and Nestle

by Carl Delfeld, Investment U Senior Analyst

Thursday, July 28, 2011

IBM (NYSE: IBM) has long been respected as one of America’s highest-quality businesses representing all the best this country has to offer.

It’s also successfully navigated from being a technology hardware company to a software and consulting services company.

But IBM’s most startling transformation is how it became a global enterprise in terms of people, organization and revenue.

IBM still employs 105,000 workers in America, and this number is growing. But it also has more than 300,000 foreign nationals on the payroll.  Big Blue has spread decision-making authority across the globe:  Global procurement is based in China while data processing and accounting is in India, Brazil and the Philippines.

My, how the world has changed...

Multinationals Growing Faster in Emerging Markets

If you look at the companies that make up the S&P 500 Index, on average, about 45 percent of their revenue comes from overseas.

For IBM, the number is 66 percent and growing fast.  But IBM is not alone. Coca-Cola (NYSE: KO) is at 75 percent, Intel (Nasdaq: INTC) at 82 percent and even newcomer Google (Nasdaq: GOOG) now gets over half its revenue from overseas.

Nowhere are companies growing faster than in emerging markets. The New York Times reports that IBM’s sales to markets like Turkey, Vietnam and the Philippines are growing at a 20-percent clip. Procter & Gamble’s (NYSE: PG) sales to emerging markets now make up 35 percent and this volume is doubling every five years. Amazing!

It’s easy to understand why these emerging and frontier markets are so appealing to these giants since they account for:

  • 82 percent of the world’s population
  • 50 percent of global growth
  • 32 percent of global GDP
  • 35 percent of global consumption
  • 38 percent of global billionaires

You can see that there’s plenty of room for these multinationals to grow and no more is this truer than in consumer markets. While the average American consumes $112 of P&G goods each year, the average consumption per capita worldwide is $12. The number for China is only $3 and for India a paltry $1.

Emerging Markets Offer Growth Potential With Fierce Competition

These numbers show not only the growth potential, but they also highlight the fierce competition found in global markets. It’s not a cakewalk, but more like a knife fight.

Even multinational giants like Nestle confront formidable local competition in almost every market they compete in. They fight hard but also try to buy up their local competitors.

Just last week Nestle announced that it was in the process of buying Hsu Fu Chi, a Chinese candy company listed in Singapore. This highlights Nestle’s strategy as it confronts the fact that it sells the same amount each year to Australia and China even though China’s population is 60 times greater.

While some of these foreign competitors trade on U.S. exchanges, unfortunately the vast majority of them are only listed overseas. A second-best option is to invest in a basket of the 30 largest emerging market consumer companies through the EGShares Consumer GEMS ETF (NYSE: ECON).

What We Can Learn From Big Blue and Big Chocolate

The biggest lesson for investors is to recognize that much more important than where a company is based is the company’s growth prospects, competitive edge, balance sheet and quality of management.

Search for growth and value worldwide, like IBM and other leading multinational companies, and don’t neglect the opportunities in emerging markets growth.

Good investing,

Carl Delfeld

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