By Stefan Wagstyl
Financial Times, 5 January 2011
Financial Times, 5 January 2011
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| The Pulpy fruit-based drink has been developed by Coca-Cola |
Introduced in China by the Minute Maid unit of the US beverages group and then rolled out across Asia and Latin America, it is now set for launch in other regions, including eastern Europe.
Pulpy is Coca-Cola’s first international product to be developed in the emerging world and make a significant – though undisclosed – contribution to group-wide sales. “This is one of the most successful Coca-Cola innovations of the 21st century,” says Joanna Lu, a Coke marketing director.
The success of the drink highlights the growing importance of innovation in emerging markets. Not only do China, India, Brazil and other countries offer companies fast growth prospects; they also generate opportunities for developing new products, services, manufacturing techniques and business processes.
These innovations do not yet involve transformational technological shifts – such inventions remain the preserve of the developed world with its long-established universities and commercial laboratories. But the emerging world is spawning product improvements with commercial implications that are game-changing. They do not win Nobel prizes but they do make money.
Multinationals that dismiss such innovation as localisation do so at their peril. The advantages competitors gain in emerging markets will be deployed in the rich world too. Christoph Nettesheim of Boston Consulting Group, a management consultancy, says: “The danger for many [multinationals] is that they don’t see the emerging market innovations coming because they are not yet coming direct into their home markets. But they will.”
There is a precedent: in the 1970s, Japanese groups advancing in world markets were often dismissed as low-cost, low-quality copycats. But later they were recognised as innovators, notably in miniaturisation and just-in-time manufacturing. While Japanese companies are themselves now under pressure from revived western groups and new east Asian rivals, their innovations are imitated everywhere.
Emerging market innovation is not new. More than 20 years ago, Hindustan Lever, the Indian consumer product affiliate of the Anglo-Dutch Unilever, pioneered mini-sachets as a way of taking its soaps to poorer consumers. What is new is the growing volume of such innovations, the internet-boosted speed with which they capture markets, and the increasing role played in innovation by local companies, notably Chinese, Indian, Brazilian and South African.
Certainly emerging economies make plenty of shoddy products and not a few rip-off copies of western and Japanese originals. But mere imitation does not sustain a business for long, given the fierce competition in the biggest economies, especially China. As Dieter May, a vice-president of Nokia, the Finnish mobile phone maker, says: “They don’t need to steal any more. That’s history.”
With China last year overtaking Japan as the world’s second largest economy, its companies are leading the charge. Huawei, a leader in switching technology, competes head on with Sweden’s Ericsson, even in Europe. Mindray, a medical equipment maker, has developed monitors priced at 10 per cent of western rivals. Haier, a white goods company, makes novel low-cost mini-fridges.
Elsewhere, India’s Tata Motors sets new standards for low-cost cars with the $2,500 Nano. Ranbaxy, the pharmaceuticals company, developed an anti-malaria drug from scratch. SAB Miller, the South African brewer, has developed a low-cost beer based on sorghum, a local crop that replaces costly imported malt. In Brazil, Embraer is a world-class maker of small commercial jets. Even in Russia, where business conditions are particularly tough, there is commercial innovation: Kaspersky Laboratories, a software group, exports world-beating own-brand security programs.
In services, Bharti Airtel has grown into India’s biggest mobile phone company by outsourcing almost everything from the transmission network to billing. Dr Devi Shetty has devised mass heart surgery at his 1,000-bed hospital in Bangalore.
Some companies have transformed whole global sectors. In outsourcing, Indian groups headed by TCS and Infosys have revolutionised information management by splitting work done by expensive on-site consultants from that carried out cheaply offshore. Kris Gopalakrishnan, Infosys chief executive, says: “We have changed the industry.”
Emerging countries have far to go before they match developed economies in science. Only Russia has significant numbers of science Nobel prize winners. But China beats the world in turning out engineers and scientists – 2m a year, five times the US total, according to Research-Works, an Asia investment company.
Many of the best leave, with about 30 per cent of US science and engineering PhD graduates born in China. Win Yinga, head of China Capital Group, a Chinese venture fund, says: “Our education institutions are weak. They are set up for rote learning and not for creating innovation-minded graduates.” But there is progress. Western-trained Chinese academics are returning home in growing numbers. China produces more peer-reviewed scientific papers than any country bar the US.
But scientific pre-eminence does not necessarily lead to economic success, as is demonstrated by Russia’s struggle to diversify out of commodities. Commercial innovation matters more, as China’s rise shows. In dollar terms, Chinese research and development spending has already exceeded Japan’s and is set to beat that of the European Union and match the US in the next 20 years. With R&D labour costs only 20-50 per cent of those in the west, the numbers employed are greater than in the US, EU or Japan.
Top companies are starting to deliver. In 2008, Huawei registered more patents than any other company, according to Wipo, the global patent office. Last year it was second after Japan’s Panasonic. But there is a long way to go: ZTE, another electronics maker, was the only other Chinese entry in the top 100.
Western multinationals complain that Chinese companies steal technology in a government-backed modernisation drive. But many blueprints were handed over voluntarily in co-operation deals: multinationals bet that the risks would outweigh the rewards of entering China. Now, Chinese companies are entering world markets, sometimes in partnership with western rivals, for example in high-speed trains where China’s CSR is working with General Electric of the US and Germany’s Siemens.
Sceptics dismiss many emerging market innovations as incremental improvements. But for business, that is beside the point, when such improvements lead to better products, services and processes. Peter Williamson, international management professor at Cambridge university, says: “The innovations may be incremental. The effects are not.”
Leading multinationals agree. Engineers at Siemens’ Indian affiliate developed a low-cost x-ray scanner camera that is so good it will be used in developed-world equipment. Peter Löscher, Siemens chief executive, says: “A good idea or product from, for instance, India can be plugged into a global system of sales and manufacturing. It helps increase a company’s competitiveness not only in emerging markets but also in industrialised countries.”
Scores of multinationals do the same. GE sells Indian-developed electrocardiograms and Chinese-devised ultrasound scanners around the world. Nokia uses Indian and Chinese software skills to develop smart handsets. Vodafone launched a mobile money transfer system called M-Pesa on Safaricom, its Kenyan affiliate. Similar schemes aimed at the unbanked have been introduced elsewhere in Africa and now India.
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Multinationals are also boosting R&D in the emerging world, mainly in China and India. Siemens has 12 per cent of its 30,000 R&D workers in Asia, up from 7 per cent five years ago. Microsoft, the US software group, heads a list of about 100 big companies with Chinese R&D centres. GE is one of more than 50 with Indian centres. Navi Radjou, a business expert at Cambridge university, says: “Once business solutions flowed only from west to east. Now they are flowing from east to west as well.”
Companies are not simply seeking geographical spread – or satisfying political pressures to localise R&D. They want the ideas generated by people working in different cultural and economic conditions. Cost-cutting ideas are key.
Many multinationals once targeted only the wealthiest segments of emerging societies. Now they are driving down into the fast-expanding middle-income groups. As Abbas Hussain, emerging markets chief at GSK, the UK drugs producer, says: “We need to push products down the pyramid.”
But cost reduction alone is not enough. Emerging market consumers want quality, convenience and flair as well, says Jean-Philippe Salar, Mumbai design studio chief for Renault, the carmaker. “Indians want dynamic-looking cars. The look is very important.” Moreover, with consumers in the developed world facing austerity, they too want cheap alternatives. Mr Salar says: “India is a perfect place to design new cars. New vehicles must be frugal, small and light compared to those of the last 10 years.”
Mr Radjou suggests mobile phone banking – developed by Safaricom – could be extended to developed states. Even in the US, some 17m adults have no bank account. Some western governments are studying the low-cost hospital treatments pioneered in India. Others buy cut-price medical equipment such as GE’s Chinese-developed ultrasound scanners.
Implementing global innovation is hard. Executives from the developed world often underestimate emerging market colleagues. Communication lines break when they stretch across cultural divides.
But businesses have little choice but to innovate in emerging economies, because that is where their customers are. As Mark Foster at Accenture, the consultancy, says: “Innovation doesn’t happen in black boxes. It happens in markets.”
Additional reporting by Kathrin Hille, James Fontanella-Khan and Jonathan Wheatley
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