THINK YOU NEED AN EMERGING MARKETS STRATEGY?

THINK AGAIN

 (part 3 out of 3)

by Dinesh Khanna, Alexander Roos, Enrique Rueda-Sabater, David C. Michael, and Janika Gauselmann

Identifying High-Priority Markets

If the world has changed so dramatically in such a short period of time, how can corporate leaders determine which markets are most relevant for them to track? And how do they prioritize amid such shifting dynamics? Two approaches to sorting global economies can be useful tools in answering these questions.

Approach One: The Contribution to Global Growth as a Measure of Market Importance. A powerful way of answering such questions can be found by rating countries on the basis of their expected contribution to global GDP growth. For each country, this is a function of its economic size and its growth rate.

Applying this lens on an ongoing basis can help companies identify critical markets as dynamics change. Currently, 20 countries stand out because as a group they are expected to account for 85 percent of global GDP growth from 2014 through 2016. (See Exhibit 5)

A couple of critical facts emerge from this list. First, this lineup serves as a strong reminder that in the near future, the shape of the global economy will be determined primarily by developments in two countries: China and the U.S. Despite China’s slowing economy, it is still expanding at a pace that outstrips most other economies. And combined, the U.S. and China account for half of the expected growth in the global economy from 2014 through 2016.

Second, although the G20 is often viewed as a proxy for the most important global markets, the list of the top growth contributors does not match up well with G20 membership. G20 members Argentina and South Africa, for example, do not make our top-20 list, while five countries that are not G20 members—Colombia, Malaysia, Nigeria, Philippines, and Poland—do. Those five countries demand attention not only because their prospects are relatively good but also because they provide a focus on subregions that might otherwise be overlooked.

Certainly, there are some economies that companies cannot afford to ignore, regardless of their growth rates. Four such countries—Brazil, Italy, the Netherlands, and Russia, each of which currently accounts for at least 1 percent of the global economy—are missing from the list above because of weak or negligible growth momentum. As a result, we have added them to the list of the top 20 contributors to global growth, creating a roster of 24 critically important countries that should be on the current radar screen of most global companies. (See Exhibit 6)

Approach Two: Using Demand Blocks as a New Lens for Global Markets. Although it is very useful to look at country growth momentum and economic size, it is also valuable to take another approach, one that zeros in on the most promising markets on the basis of demand blocks.

The global economy weighed in at $74 trillion in 2013. There are two basic ways of looking at GDP: the first is supply (the economic value added that is produced by activity in different sectors), and the second is demand (reflecting different types of expenditure). We focus on the latter because it provides a valuable perspective on the size of and dynamics within particular markets.

Domestic demand is made up essentially of three components: private consumption, gross investment, and government consumption. Overall, the 2013 world economy consisted of $43 trillion in private consumption, $18 trillion in gross investment, and $13 trillion in government consumption.

In many countries, notably the U.S., private consumption is the dominant demand block, representing more than two-thirds of GDP. In China, the comparable figure is 37 percent of GDP, and investment is the main driver at nearly half of GDP. (China is the only major country where the investment share is larger than private consumption.) The role of government consumption also varies considerably: the Netherlands, France, Brazil, and Saudi Arabia are among the countries where it is most significant.

Using this lens to examine the 24 countries on our list, we can see clearly that affluent countries dominate the private-consumption market while midfield countries are making a major investment effort. The latter point reflects a combination of an infrastructure build-up and the process of urbanization—and what that entails in terms of residential construction—in many midfield countries.

A further set of insights can be gained by reviewing the largest demand blocks overall. The largest two blocks are private consumption in the U.S. and investment in China, $11.5 trillion and $4.4 trillion, respectively. (See Exhibit 7.) These demand components are important in terms of the growth outlook for the world economy: both private consumption in the U.S. and investment in China are expected to contribute about 15 percent of total growth worldwide from 2014 through 2016. Other major demand components include private consumption in China ($3.4 trillion) and investment in the U.S. ($3.2 trillion), as well as private consumption in Japan and Germany and government consumption in the U.S.

It is critical that multinational companies understand how the size and importance of such demand blocks differ in various markets around the world. After all, the opportunities—in infrastructure development, for example—presented by countries with investment-driven economies are different from the opportunities in economies driven more by private consumption.

Fuente: bcg. perspectives
 

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