Global Economics

Recession Will Boost Challengers from China and India


From autos to outsourcing, these companies can operate at low cost in tough markets. They're likely to survive the downturn and thrive

In what seems like the blink of an eye, companies little known in the U.S. and Europe just a few years ago have become global leaders. Their common attribute is this: They all come from the rapidly developing economies (RDEs) of Asia, Latin America, the Persian Gulf, and Central and Eastern Europe. They are what the Boston Consulting Group calls the "Global Challengers."

Some financed their global expansion by borrowing heavily in the years just before the downturn became apparent and now face a day of reckoning. For others, cash-rich or with access to capital through government programs, the recession creates new opportunity.

As a general rule, RDE companies with healthy balance sheets and access to capital will fare better than those with heavy debt burdens. Indian outsourcing services should gain, as these companies take advantage of Westerners' efforts to slash personnel and overhead costs. Companies that produce consumer essentials, such as food, will do better than those providing things people can forgo during a downturn: aircraft, automobiles, home appliances, building materials, machine tools, shipping products and services. Those with incomes derived largely from their domestic markets will do better than those dependent on exports for growth. And Chinese and Indian companies, with economies that are still expanding (albeit at a much-reduced rate), should do better than companies in contracting markets.

Many Variables

Not all Chinese and Indian companies will gain during the recession. And not every RDE company that gains will be Chinese or Indian. There are too many variables.

But there will be winners. China's largest state-owned nonferrous metals provider, China Minmetals, for example, has offered to purchase Australia's OZ Minerals—hard hit by tumbling commodity prices—for $1.2 billion. Minmetals President Zhou Zhongshu told China's Xinhua News Agency that the deal, scheduled for a vote by OZ shareholders on June 11, would not only give his company control of the world's second-largest zinc producer, but would enhance Minmetals' capabilities. "We need their experience in mining exploration and management," he said.

Other Chinese firms also are positioned to take advantage of the global downturn. Sichuan Tengzhong, a truckmaker from China, has signed a preliminary agreement to buy Hummer from General Motors. Geely Automotive, one of China's top domestic automakers, is reported to be a leading candidate to purchase Ford's (F) Volvo division, a global leader in safety technology, and GM's Saab. And ZTE, a leading manufacturer of telecom equipment that has become the world's No. 6 maker of cell phones, on May 22 announced it will receive a $10 billion credit line from China's Import-Export Bank to help its overseas expansion; earlier this year the company received a $15 billion credit line from the China Development Bank.

Not every company or industry will be so lucky, and not all companies that gain will be Chinese. China's COSCO Group, for example, one of the largest shipping companies in the world, and China International Marine Containers, the world's largest manufacturer of shipping containers, may be hit by the recession as overseas shipping comes to a grinding halt. Grupo Bimbo, on the other hand, Mexico's largest wholesale baking company, will emerge strong after purchasing the U.S. operations of Canada's George Weston, which includes such popular brands as Entenmann's pastries and Thomas' English muffins.

Up and Coming Rapidly

When the Boston Consulting Group published its first report on the emergence of the Global Challengers in 2006, few Western executives, journalists, or political leaders had heard of most of the 100 companies we then identified as ready to compete globally. That's hardly the case today.

India's Tata Motors (TTM), for example, one of the original "challengers" we identified, now owns Jaguar and Land Rover, two of the world's premier auto brands. China's BYD has become a world leader in rechargeable batteries, and its auto subsidiary, established just six years ago, was the talk of the North American International Auto Show in Detroit earlier this year, where it displayed a prototype electric car with more power and greater range than most of its likely competitors. Russia's Gazprom is the world's leading producer of natural gas. Malaysia's MISC, then known as Malaysia International Shipping, is the leading shipper of liquefied natural gas. And China's Guangdong Galanz is the world's leading manufacturer of microwave ovens.

Despite the sharp economic downturn, with the International Monetary Fund predicting world economic growth slowing to no more than 0.5% this year (and announcing in early February that even that may be high), RDE challengers have certain advantages over many of their competitors, since they are used to operating at low cost, in tough markets, and improvising on the fly. That's how many achieved their rapid growth; and that's why most are likely to survive and thrive.

The 2009 BCG 100 New Global Challengers report, published in January, indicates that the challenger surge is far from over. The combined revenues of the 2009 BCG 100, for example, grew by 29% per year from 2005 through 2007, with 2007 sales reaching a combined $1.5 trillion.

A Trend Gathering Speed

Two-thirds of the 2009 challenger companies come from Asia, with China again leading, with 36 companies. The 13 other RDEs with 2009 challengers include India (with 20 companies); Brazil (14); Mexico (7); Russia (6); United Arab Emirates (4); Chile, Indonesia, Malaysia, Thailand, and Turkey, each with two companies; and Argentina, Hungary, and Kuwait, with one each. The five Persian Gulf companies—none of which is involved primarily in energy production—were all new to the list, as were 14 others, including four from China (China National Chemical, Dalian Machine Tool, Sinosteel, and Suntech Power [STP]); three from India (Tata Chemicals, United Spirits, and Vedanta Resources); and one, a Malaysian/Indonesian company, headquartered in Singapore (Wilmar International).

The 2009 Asian challengers represent a wide range of industries, some of which—including autos and auto equipment, aerospace, logistics and transportation services, machine tools, and metallurgical and mineral resource development—are being hard hit by the recession. Others are likely to be less affected: agribusiness, chemicals, food and beverages, and pharmaceuticals.

Recession or not, the emergence of global challengers is far from over. This isn't going away. The game is on, and the pace is picking up; in truth, we are still at the beginning of the trend, not the end. Challengers will continue to ascend to global leadership positions at breakneck speed, disrupting the established order in many industries. Although volatile financial markets and other risks present obstacles, challengers will learn quickly to manage these hurdles—and build stronger businesses in the process.

Some challengers will falter, owing to the shortcomings of their business models or their inability to weather the current economic storm. Others will succeed—some beyond their wildest expectations—and take their places among the world's leading businesses.


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