What is globalization? I will define it at two levels. At the macro level, it is about frictionless flow of capital, services, goods and labor across the globe. It is also about global sharing of ideas, knowledge, and culture. It is about creating a shared concern and plan to fight global issues like poverty, AIDS, terrorism and global warming. At the microeconomic or firm level, it is about sourcing capital from where it is cheapest, sourcing talent from where it is best available, producing where it is most efficient and selling where the markets are, without being constrained by national boundaries. Infosys, IBM and Adidas are all good examples of globalization at the firm level.
Thanks to globalization, today, we live in a world where every nation that has something to contribute to the global bazaar can improve the lives of not just her people but people throughout the globe – the rich and the poor, the powerful and the weak, the educated and the not-so-educated. Globalization has given an opportunity for developing countries to take their share of limelight in the global bazaar both as producers and consumers.
In fact, currently, more than half of world’s GDP, measured in purchasing power parity, is generated by developing countries. The air travellers in the US going from La Guardia airport to Ithaca flying Embraer aircraft from Brazil; well-known European companies running heart-beat systems designed by Indian software engineers; the Indian companies and the Indian operations of companies like Intel, GE, CISCO and Texas Instruments filing over a thousand patent applications with the US patent office in the year 2004 alone; and sophisticated electronic gadgets like IPods, manufactured in China and filling the shelves of supermarkets in the US and in Europe, are all good examples of the global integration and the contribution of the developing world to the global economy.
What are the implications of globalization? First, corporations worldwide will face extreme competition as innovation could come from anywhere in the world – both developed and developing nations. Second, lifestyles of people across nations, developed as well as developing, will undergo transformation. In the case of developed nations, consumers will find the imported products cheaper and better. In the developing nations, millions will be pulled out of poverty as the disposable incomes will increase on account of improved employability and enhanced per-capita incomes. Third, the consumer base will shift to developing economies, thanks to their fast-growing economies, higher disposable incomes and demographic differences, with countries like China and India having a large number of consumers in the less-than-thirty age category.
Thus, you have to stop thinking of just the ‘rich’ customers of developed economies. Fourth, innovation will become the key to success. Because there are so many competitors who will commoditize your innovation quickly, you will have to learn to innovate faster than your competitors. The flat world or the globalized world is essentially about how fast you can develop new ideas, implement them, and gain competitive advantage in the marketplace so that you can create a better company, society, country and world.
Top of your agenda
There are many reasons why globalization and emerging economies (EEs) should be on the top of your agenda. First, thanks to globalization, EEs have been growing fast. Several indicators show that the emerging economies are gaining dominance in the world economy. According to ‘The Economist’, their share of world exports has jumped to 43% in 2006, from 20% in 1970. EEs consume over half of the world’s energy and they have accounted for four-fifths of the growth in oil demand in the past five years. They also hold almost three quarters of the world’s foreign-exchange reserves. China, with an average annual growth rate of over 10% in the last fifteen years, and India, with over 7% average annual growth rate during the last ten years, are just two examples.
Domestic markets in the EEs are growing faster than ever. For example, the retail sector in China has been growing at 15% for the last 20 years. China is already the largest mobile telephone market with over 400 million subscribers. The mobile telephone market in India is growing at 9 million new subscribers each month. The fast moving consumer goods (FMCG) market in India is around US$ 10 billion and is growing around 7%. China adds 33 million PCs a year while India adds 8.5 million PCs a year. I can go on and on with such data. The message is clear – there is fortune to be made in these markets, in general, and from the poorest segment of these societies, called the bottom of the pyramid (BOP), in particular.
Second, the world has moved from viewing emerging economies as perennial recipients of aid from the rich countries to viewing them as sourcing zones, manufacturing hubs and markets. The flat world phenomenon has created a large number of jobs and has started the eradication of poverty in EEs. In other words, there is a consensus that creating a level playing environment leads to sustainable economic prosperity as against providing economic aid to the EEs. China’s success as the factory of the world and India’s emergence as the software development center of the world are good examples of this paradigm.
Third, a significant percentage (as much as 65% to 70%) of the population of these EEs lives with an income of just about US$ 2 a day. What is interesting is that these poor people are value-conscious consumers who will buy products and services as long as they get value-for-money. While per-consumer revenue and profits may be low, their large volumes will, indeed, add up to a tidy sum of profit.
Bottom of the pyramid?
Performance of European corporations like Philips, Nokia and Unilever has proved that there is money to be made at the bottom of the pyramid. So far, the EEs have mostly been out of the radar screen of most MNCs who were used to western business models. The challenge is to lure the bottom-ofthe-pyramid consumers by enabling dignity and choice through markets, as Prof. Prahalad says. This bottom of the pyramid market is close to 120 million households in just India alone. What is needed is to look at the poor as profitable consumers and provide affordable solutions through innovation. Let me give you just two examples to illustrate my point.
Philips, a firm with over 20,000 inventions to its credit, is targeting the bottom of the pyramid households very seriously. Philips has come up with several products and initiatives to improve the lives of the masses. Let me give you two examples. In the villages of India, women are forced to cook on indoor wood-burning stoves. This means blackened ceilings and walls, and a long wait. Philips has piloted a woodstove that reduces pollution due to smoke by 90 per cent. Philips is also piloting an initiative called SMILE (Sustainable Model in Lighting Everywhere). This initiative is aimed at providing affordable, high-quality energy-efficient, clean lighting solutions to rural India which is home to over 650 million people. Philips has also created two bottom-of the-pyramid products – a rechargeable lantern and a hand cranked LED flashlight – in the lighting category.
Another European firm, Nokia, has created a mobile phone for less than US$50 for the Indian markets. This has become a runaway hit and Nokia has introduced this model in other developing economies, making the model the best selling mobile handset model ever with 200 million pieces sold worldwide.
Fourth, the growth rates of companies in several sectors like food, personal care, automobiles, banking and retail in the developed world are flattening. These companies are looking at the emerging markets in Asia and Latin America for maintaining their growth rates, and margins. Open any magazine and you will see that the contribution of Asia is increasing steadily in the revenue and profit profile of several well-known corporations. For example, India and China are some of the fastest growing markets for auto and airline industries. A recent report by PricewaterhouseCoopers notes that the BRIC countries – India, Brazil, Russia and China – will account for more than 40 percent of the forecast for global light vehicle assembly increases, and represent 52 percent of the industry’s forecast for global capacity expansion during 2005-2010.
Fifth, most of the anger, violence and terrorism that we see today is due to the huge economic divide that exists between the haves and the have-nots. A sure way to reduce this divide is to focus on bringing the poorer world into the mainstream by making them trade partners so that it is a win-win proposition. A world concentrating on improving the quality of life through international trade is likely to be a peaceful world. In doing this, you, as the future leaders, have an important role.
Folks, I have no doubt at all that you, the future leaders of this nation, this continent and this world will adapt to this new world, face the challenges, seize the opportunities, exceed our expectations and leave a planet richer, happier, greener and safer than the one you have inherited.
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