In Recession, Focus on Emerging Markets

By focusing on rapidly developing economies during this global slowdown, Western companies can turn economic crisis into global advantage

By James W. Hemerling

If anything is certain in these times of extraordinary uncertainty, it's that the current economic downturn is global in scope and will be felt the world over for quite some time. It's hard to miss this fact if you watch television, read a newspaper, or surf an Internet news site in any country. The stark reality stares you in the face. While we have weathered economic storms before, this one is radically different because it is truly global, reflecting an interconnected economic system where little happens in isolation. Virtually everyone, everywhere is affected by everything.

First, while worldwide economic growth is expected to drop from 5% in 2007 to 3% in 2009, according to International Monetary Fund projections, there is a significant difference between projected gross domestic product "growth" in the developed economies of the U.S., Western Europe, and Japan—all of which have already tipped into recession—and those in the rapidly developing economies (RDEs). Economic growth in the developed economies is expected to decline by half of a percent, while the RDEs are expected to post an average growth rate of 6.1%. Both projections may prove overly optimistic, but the key point is that the RDEs are expected to grow next year, while the developed economies are not.

Second, the global economic downturn is taking place in the new era of "globality," with companies everywhere competing with everyone for energy, raw materials, skilled and unskilled workers, management talent, scientists and engineers, knowledge, financing, customers, markets, and virtually everything else. The West no longer calls all the shots.

This radically new landscape means U.S. and other Western companies face a different set of challenges and opportunities than during previous recessions. While most executives are familiar with the challenges they face with recession marketing, far fewer have thought about the opportunities a worldwide recession creates that can turn economic crisis into global advantage.

The Trading-Down Phenomenon

The first major opportunity relates to cost. During these times of economic uncertainty, businesses and consumers in the U.S. and Europe are "trading down," choosing lower-priced goods. A recent Boston Consulting Group survey, for instance, found that consumers are trading down in almost every category, from mobile phones to snack foods.

Because of the trading-down phenomenon, companies will rely even more on RDEs, where production costs are 20% to 30% lower than in the developed economies. Although labor rates have increased in recent years, they are still a fraction of what they are in Western Europe and the U.S. Rising productivity, declining bulk shipping costs, and falling currency exchange rates, particularly against the dollar, increase the RDE cost advantage.

The second opportunity is for global engineering and capital-goods companies to capture business in the RDEs by focusing on their massive investments in infrastructure. China, for instance, is building upwards of 100 new airports, 186,000 miles of new roads, 75,000 miles of new railroad tracks, and may add additional projects, according to news reports, to make up for the slowdown in consumer goods exports. China also plans to expand port capacity by 85% between 2010 and 2020. This creates a huge opportunity for U.S., European, and Japanese companies. Similarly, India's government has plans to invest up to $460 billion on infrastructure in the next five years. Overall, infrastructure spending in India could increase from 5% to 9% of GDP by 2012.

Although not as substantial, the other two BRIC countries—Brazil and Russia—are also planning to make hundreds of billions of dollars in infrastructure investments over the next several years.

Substantial Opportunities

All told, rapidly developing economies could spend as much as $6.