Battling for the Middle in Emerging Markets

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Foreign firms provide a reverse image. These companies typically have superior technology, sophisticated marketing capabilities, and highly desirable marquee brands, but their costs, driven by highly featured products, uncompetitive local operations, and global overheads, are high and their RDE distribution and service networks weak. To win the battle in the middle, their challenge is to lower costs and deliver suitable products, while broadening their distribution and service capabilities.

Custom Approach

To get there from here, global companies will have to change their mindset about the RDE markets and face the reality that "global" products designed ostensibly for high-price Western customers typically won't cut it in the middle markets of India, China, Vietnam, and other rapidly developing countries. They need to segment the market, focus on segments that are more attractive, and then develop products that are more durable, less complicated, offer fewer features, and cost less: products that offer features customers are willing and able to pay for—and are better and no more expensive than the "good enough" products offered by the local competition.

In many cases, these products will have to be customized: designed and manufactured specifically for the RDE market. Distribution and service networks will have to be created or vastly expanded in-house or through distributors. Entire new business models may be required, involving every step from research and development to sales and service.

If you want to visualize the changes that might be necessary, consider farm equipment, such as tractors. Agriculture still accounts for a significant percentage of GDP in many developing economies: about 20% in India and Brazil and just under 12% in China. But agriculture in these countries is labor-intensive. A company that manufactures tractors will not be selling to a large agri-business firm such as Archer Daniels Midland (ADM); it will be selling to a farmer, or possibly a village or farm collective.

Growing in the Middle

Agriculture is very different in the RDEs than in the U.S. A U.S. farmer in California, Iowa, or Nebraska, where the fields and farms are large and the crops grow tall, wants big tractors with all of the latest bells and whistles: air-conditioning, sound systems, even navigational aids.

But money is a huge hurdle in places such as India. Indian farmers don't need big, fancy, high-tech tractors costing tens of thousands of dollars; they need small, durable tractors they can both afford and rely on. And that's what they get from Mahindra & Mahindra, a homegrown Indian company with more than 500 dealers and nearly 1,200 service locations around the country—and, not surprisingly, a 90% share of the Indian tractor market.

The lesson for many Western industrial and technology companies is simple: If you want to continue growing in RDEs, hang on to the top, but aim for the middle; segment the market; reexamine all of your assumptions; deliver competitively priced products that are good enough; and do not under any circumstances underestimate the local competition.

Jim Hemerling is a senior vice-president and Shanghai-based managing director for Greater China at Boston Consulting Group. He holds bachelor's and master's degrees in engineering from the University of British Columbia and an MBA from the Richard Ivey School of Business. He is a columnist for Asia Insight.