A special report on innovation in emerging markets: The power to disrupt | The Economist Page 1 of 9 t Page 1 of 9 NewsletterLog out My account Home World Business & finance Science & technology Markets & data Culture A special report on innovation in emerging markets The power to disrupt Business innovations from emerging markets will change the rich world too Apr 15th 2010 | From The Economist print edition DURING the long boom of the 1950s and 1960s the Marxist intelligentsia in the rich countries, furious at their proletariat’s refusal to rise up in revolt, turned to the third world instead. Frantz Fanon celebrated anti-colonial revolutionaries in “The Wretched of the Earth” (1961). A generation of student radicals wore Che Guevara T-shirts and chanted “Ho, Ho, Ho Chi Minh” at any passing university dean. These days the third world is known as the emerging markets, the Che Guevara T-shirts are made in China and the wretched of the earth are enjoying growth rates that are the envy of the former colonial powers. Moreover, these emerging markets are likely to shake things up not only in their own backyards but in rich countries too. Clayton Christensen, of the Harvard Business School, has coined the term “disruptive innovation” for new products that slash prices and new processes that radically change the way they are made and delivered. Today many of these disruptive innovations hail from the emerging markets. They will make a bigger difference to life in the West than lean production, the previous great disruptive management innovation from the East. Comment (4) E-mail Print Reprints & permission Advertisement Related Items In this special r The world turned u First break all the r Reaching new cons Grow, grow, grow Business models in New masters of ma The power to disrup Sources and acknow Offer to readers http://www economist com/specialreports/displaystory cfm?story id=15879393 4/21/2010 A special report on innovation in emerging markets: The power to disrupt | The Economist Page 2 of 9 t Page 2 of 9 There are four reasons why things will move faster and further this time. The first is that the markets for corporate control and for senior managerial talent are much more liquid than they were 20 years ago. The great Japanese and South Korean giants grew organically, whereas emerging-market champions are keen on mergers and acquisitions. They have access to highly developed capital markets, both public and private, and to armies of experienced investment bankers and consultants. In 2007, before the crisis struck, Chinese companies did $30 billion-worth of outbound deals, 60% more than the previous year and $5 billion more than inbound deals. The figure for Indian companies was $35 billion, five times more than the previous year and $10 billion more than inbound deals. The gold rush continues. This year has already produced two mega-bids by Indian giants: Bharti Airtel’s for Zain and Reliance’s for LyondellBasell. The second factor is the sheer size of the emerging markets. The Japanese export machine was powered by just a few engines, notably cars and electronics. By contrast, the emerging- market export machine has engines in almost every industry. ArcelorMittal is the world’s biggest steel company. Infosys and TCS are among the world’s biggest IT companies. Haier is the fourth-largest manufacturer of home appliances. ZTE, which started foreign operations only in 1997, looks set to become one of the world’s top five mobile-handset maker. Just a decade ago not a single emerging-market company could be considered world-class. Today such companies are among the world’s leaders in 25 big industries, according to the Boston Consulting Group. The third reason to expect a big impact is the emphasis on volume. Emerging-market companies are obsessed by finding new markets to make up for their slim profit margins. Indian and Chinese mobile-phone companies have been adding 8m-10m new subscribers a month for the past few years. Emerging-world giants such as Infosys and ZTE have been growing at more than 40% a year. Fourth, the West’s best companies have grasped the potential of emerging markets. Henry Ford II, who ran the Ford Motor Company for decades after the second world war, continued into the 1980s to dismiss Japanese cars as “those little shitboxes”. By contrast, the best Western companies are now looking to emerging markets as sources of innovation and growth. Cisco expects 20% of its best people to work in its “Cisco East” centre in the future. Britain’s Prudential, a financial-services company, has recently bid $35.5 billion for the Asian assets of American International Group. If the bid goes through, the company will be earning more than half its overall profits from Asia. The West is ripe for frugal innovation. Western consumers and governments have been on a debt-fuelled spending spree for many years. American household debt rose from 65% of GDP in the mid-1990s to 95% in 2009. The American government was cutting taxes and raising public spending even before the recession struck. The British government increased public spending from 35% of GDP in 2000-01 to 43% in 2009-10. Look at my new hair shirt Now the age of profligacy is giving way to an age of austerity. Governments are having to put their fiscal houses in order and consumers are cutting back on their spending, worried about unemployment and shrinking wealth (American household wealth dropped by 22% Websites This animation loo country’s R&D spe international paten Products & events Stay informed t Subscribe to The Eco and alerts. Get e-mail newsle Subscribe to The Eco Twitter Follow The Econom See a selection of Th topical videos and de Follow The Econom http://www economist com/specialreports/displaystory cfm?story id=15879393 4/21/2010 A special report on innovation in emerging markets: The power to disrupt | The Economist Page 3 of 9 t Page 3 of 9 between 2007 and 2009). An annual survey of consumer spending by Booz & Company suggests that two-thirds of Americans are trading down and buying cheaper items. Andy Bond, the boss of Asda, a British retailer, says the frivolous is now unacceptable and the frugal is “cool”. But these spending cuts will inevitably dampen growth in the West, creating yet more demand for frugality. Historically, big financial crises have been followed by long periods of slow growth and economic malaise, and the recent crisis has been bigger than most. Olivier Blanchard, the IMF’s chief economist, predicts that painful retrenchment in Europe could last for 20 years. Moreover, the need for such retrenchment comes at a time when demand for welfare services is rising as the baby-boomers start to retire and medical innovations push up health -care costs. By 2050 one in three people across the rich world will be drawing a pension. America’s Congressional Budget Office predicts that spending on entitlements will grow from 10% of GDP today to 16% in 2035. Many European countries, particularly in the south, will come under even greater pressure. The search for cutbacks in public spending will become ever more urgent. According to Thomson Reuters, America’s health-care system wastes $600 billion-850 billion every year because of inefficient administration, unnecessary treatment and litigation costs. (On the other hand it has proved to be a huge job-creation machine.) Dr Shetty first started thinking about the dismal management of health care when, as a trainee doctor at Guy’s hospital in London, he had to spend hours sitting around doing nothing. Most Western bureaucrats try to deal with such problems with successive rounds of cost-cutting. But the experience of the emerging markets suggests that “cost innovation”— redesigning both products and processes from scratch to take out costs—is a much more productive strategy. A growing number of Western company bosses have become aware of the potential for such innovations to change the way business is done in the West. Carlos Ghosn of Renault has praised India’s frugal innovation. Jeff Immelt of GE has backed the idea that his company should disrupt itself with cheap products from India and China. When Arun Sarin was boss of Vodafone, he sent his top executives to India to learn about its low-cost business model. Shifting the centre of gravity The same message can be heard from management gurus. Peter Williamson, of the Judge Business School at the University of Cambridge, regards emerging markets as repositories of “value-for-money strategies for recessionary times”. John Hagel and John Seely Brown have even predicted “blowback” from emerging-world innovations: the Western companies that exported capitalism to developing countries in the first place may soon find themselves humbled by more innovative companies from that part of the world. Frugal innovation is already beginning to make itself felt in the West, particularly in health care. GE’s cheap ultrasound device, originally developed for the Chinese market, has become the basis of a global business, with eager customers in the developed as well as the developing world. This year 6m Americans are expected to travel to developing countries http://www economist com/specialreports/displaystory cfm?story id=15879393 4/21/2010 A special report on innovation in emerging markets: The power to disrupt | The Economist Page 4 of 9 t Page 4 of 9 such as India in search of affordable health care, up from 750,000 in 2007. At the same time Dr Shetty is building a 2,000-bed hospital in the Cayman Islands, a short flight from Miami, where he will offer surgery at half the price charged by American hospitals. But the trend is apparent in consumer goods too. Haier has become the market leader in the West for cheap fridges. Most Western carmakers are producing small, inexpensive vehicles that have been influenced by the Nano. Mahindra & Mahindra’s nifty little tractors are popular with hobby farmers and gardeners in America. Westerners have long been less enthusiastic about globalisation than people in emerging markets. According to the 2009 Pew Global Attitudes Project, only 65% of Americans think that external trade and business ties are good for their country, compared with more than 90% of Indians and Chinese. Hostility to globalisation in the developed world is likely to grow as emerging giants disrupt one product market after another. Yet such disruption will bring benefits as well as problems for rich countries. Re-engineered medical devices could slash health-care costs without reducing the quality of care. Compact cars will allow people to keep driving but cause less damage to the environment. The developed world still has some powerful weapons in its arsenal. The average Western company is much better managed than the average emerging-world company (see chart 6): for every Infosys and Haier there are plenty of poorly managed and uncompetitive firms in developing countries. America in particular is remarkably good at encouraging entrepreneurial start-ups and allowing them to grow. Michael Gibbert, of Italy’s Bocconi University, notes that the West also has a long tradition of inventiveness in hard times, demonstrated during the second world war. Mr Williamson points out that Western companies such as Wal-Mart are already making a success of value-for-money strategies. And some of the most articulate promoters of reverse engineering and frugal innovation from emerging countries run Western companies or teach in Western business schools. Even so, the new management paradigm now taking shape in the emerging world has big implications for the global balance of power. The world’s creative energy is shifting to the developing countries, which are becoming innovators in their own right rather than just talented imitators. A growing number of the world’s business innovations will in future come not from “the West” but “the rest”. Anand Mahindra, vice-chairman of the eponymous family firm, says that these days when Indians go to bed at night their dreams about their country’s future “are not just colourful http://www economist com/specialreports/displaystory cfm?story id=15879393 4/21/2010 A special report on innovation in emerging markets: The power to disrupt | The Economist Page 5 of 9 t Page 5 of 9 but steroidal”. His compatriots are at last beginning to believe that “the sandcastles we build in our minds are not going to be simply washed away by the morning tide.” The same is true across the emerging world, whose “sandcastles” are now being built on the solid foundations of business innovation. They will endure, changing not just emerging markets but the rest of the world as well. Readers' comments The Economist welcomes your views. View all comments (4) Add your comment Next article » Want more? Subscribe to The Economist and get the week’s most relevant news and analysis. Classified ads About The Economist online About The Economist Media directory Staff books Career opportunities Contact us Subscribe Copyright © The Economist Newspaper Limited 2010. All rights reserved. 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