Which World Is The Lion In You Planning To Conquer

Arrested development

• The British spread the telegraph and trains in Latin America. American firms sold a vision of the good life, honed by Hollywood and advertising. Kellogg’s changed what the rich world ate for breakfast, and Kodak how it remembered holidays. The next corporate revolution, is happening in Asia. This too will change how the world lives.
• Asian capitalism has brawn. The continent’s share of global GDP has risen from a fifth to 28% since 1984. It is the world’s factory, a diverse region of rivals bound together by supply chains. But it lacks brains and global savvy. Asia smelts 76% of the world’s iron and emits 44% of its pollution, but hosts only a tenth of its most valuable brands and venture-capital activity. Its multinationals punch below their weight, owning 17% of the world’s foreign direct investment. Wealthy Japan and South Korea have a cast of superstars, such as Toyota and Samsung. But few other firms command the world stage.
• That is because Asian capitalism has been too cosy. In the boom between 2002 and 2010 easy profits were made at home-growth was fast and labour and credit cheap. Two-thirds of big Asian firms are state-controlled or “business houses” (often family-run). These incumbents tend to be chummy with the government and get cheap land and loans. Half of all billionaire wealth in Asia has been made in sectors, such as property, that are prone to cronyism, versus 15% in the West. Outside Japan, Taiwan and South Korea, innovation has been neglected. Mahindra & Mahindra and Great Wall, car champions from India and China, have a combined research-and-development (R&D) budget that is 3% of Volkswagen’s.
• For Western firms, Asia’s shortcomings have been a relief. The iPhone shows why: although it is made by the hands of Chinese workers, it is the brains behind it, at Apple and at high-tech component-makers in the rich world, that take nearly all the profits. Now, however, the rules that have governed Asian capitalism for the past two decades are changing. Asian firms are having to become brainier, more nimble and more global.
• The immediate motivation is underperformance: growth has slowed, and Asian shares have lagged American ones by 40% in the past three years. Three deeper trends are also at work. First, labour costs are rising, not least in China, and East Asia’s workforce is ageing. Second, Asia’s middle class is becoming more demanding. They are no longer satisfied with fake Louis Vuitton handbags; they want clean air, safe food and more leisure, and are madly in love with the internet. Third, competition has intensified from Western multinationals, which have invested $2 trillion in Asia. They also now use the same cheapish labour, and they generally have much more sophisticated supply chains, brands and R&D.
• With their home markets no longer quite so safe, Asian firms are adapting-and becoming stronger. In response to rising wages, production (of clothes, for example) is shifting from China to South-East Asia and Africa, led by Japanese firms which are also worried about a war with the Middle Kingdom. Chinese firms such as Haier, which makes fridges, plan to automate factories and get into cleverer products. And as the Chinese push upmarket, the Koreans are redoubling efforts to stay ahead. Samsung’s spending on R&D rose by 24% in 2013. If they get their act together, India and Indonesia, Asia’s bumbling giants, will attract lots of factory jobs. Their best firms are also getting brainier. Once dismissed as “body shops”, India’s IT-outsourcing firms are now leaders in big data.
• Rising consumer aspirations are helping internet firms disrupt traditional industries. Alibaba, a Chinese internet giant, is expanding into banking, telecoms and logistics. Analysts think it might be worth $150 billion, more than China’s steel industry. China’s drive to reform its state-owned firms is meant to make them more responsive to customers. Xi Guohua, the boss of China Mobile, plans to give shares to his staff. Across Asia demand for health care is likely to create a whole new generation of companies-the industry comprises only 4% of the region’s stockmarket, compared with 12% in the rich world.
• In order to challenge foreign rivals, Asian firms are globalising, following the example of Samsung and Toyota. Lenovo, a thriving Chinese computer firm, has Western-style governance and many foreign staff. Huawei has overtaken Ericsson in telecoms equipment. India’s Sun Pharma is now one of the world’s biggest generic-drugs firms. Tencent, China’s Facebook, has hired the footballer Lionel Messi to advertise its services abroad. Sprawling business houses are evolving into focused multinationals. Tata Sons is now a superb IT firm and luxury-car maker tied to a ragbag of Indian assets.

Cereal killers

• Asian business needs to do much more. Big firms are spending 50% more on R&D than five years ago, but must get better at breakthrough innovations. Conglomerates must focus on a few areas where they can achieve global scale. Governments can do their bit, by freeing state firms from meddling and ensuring that powerful incumbents do not stifle entrepreneurs.
• Western firms should pay attention. In some industries-aircraft manufacturing, for example-the barriers to entry are still immense, but in other sectors brands and technology will no longer be a shield from emerging Asian competition. The threat to low-paid Western jobs may recede. Haier’s Chinese workers are paid 25% of what its American workers get, up from 5% in 2000. Instead it may be copywriters, scientists and designers who feel the chill of competition from the East.
• History suggests consumers will adapt fast. In 20 years, miracle cures for the old will come from Japan, the best web apps from India and couture from China. And cornflakes, once a cutting-edge food, will be rivalled by congee and dosas, sold in boxes by a global brand. Asian capitalism will change the world-even, maybe, what it has for breakfast.

The Globe: How to Conquer New Markets with Old Skills

• Countless companies from emerging economies hesitate to jump into international markets-especially those in the developed world-because they see themselves as hopelessly flawed. While many are every bit as savvy and profit-oriented as traditional multinationals, they’re painfully aware that they don’t have cutting-edge technologies, dominant brands, or novel products. And the process of building those kinds of advantages looks long and daunting, even for companies that possess the necessary capital. So they remain at home, profitable but unable to live up to their full potential-and vulnerable to foreign competitors.
• Yet there’s really no good reason they should sit on the sidelines of global competition. Research shows that companies lacking strong technological knowledge or brand assets can still succeed in overseas markets by drawing on other capabilities.
• If they’re smart about how and where they venture abroad, global hopefuls can succeed by harnessing mundane capabilities, such as people skills and operational know-how, that they’ve been honing at home for years. A look at some of Spain’s multinationals shows how. Although the Spanish economy soured during the worldwide downturn, with GDP declining and unemployment hovering around 20%, many of the country’s approximately 2,000 multinationals are thriving abroad, even in wealthy economies, without technological or brand-related advantages.
• The world’s biggest bridal-wear maker, Pronovias, is one of Spain’s 2,000 multinationals. It sells 480,000 dresses each year and has a presence in 75 countries.
• The world’s fifth-largest telecom company, Telefónica, raced ahead of rivals by rapidly executing installations.
• The world’s fourth-largest bank, Santander, built its position through acquisitions in Latin America, Europe, and the United States.
• The world’s fourth-largest wind-turbine company, Gamesa, used networking to gain technological know-how and access to markets in 20 countries.
• The first foreign transit provider in China, ALSA, grew because of its shrewdness in local politics and licensing.
• In examining the international expansion of Spanish firms over the past 25 years, researchers found that the leaders used acquisitions to extend their reach but focused them on just a few industries and geographic areas. They then strengthened their positions by drawing on their homegrown political and networking skills, project execution knowledge, and vertical integration expertise-capabilities that many companies in emerging markets also possess.
• In the process, the Spanish firms were able to bypass the slow, incremental expansion strategy that multinationals have traditionally pursued. As we will see, speed was a critical factor in the international success of several Spanish companies-something other companies looking to go global should keep firmly in mind.

Late Bloomers Become Global Giants

• Spanish companies made few significant investments abroad until 1986, when the country’s integration into the European Economic Community began dismantling the barriers to trade and competition with the rest of Europe. At that point, Spanish companies in electricity, water, oil, gas, transportation, telecommunications, and banking started making major cross-border acquisitions. The pace of acquisition picked up after Spain’s adoption of the euro in the late 1990s gave Spanish companies increased access to capital for ventures in other parts of the world.
• Some of today’s best-known Spanish multinationals are offshoots of that first burst of globalization. As of 2009, Telefónica was the world’s fifth-largest telecommunications provider in terms of revenue, and Santander the fourth-largest bank. Four Spanish firms (ACS, FCC, Ferrovial, and Abertis) topped the list of the world’s largest transportation-infrastructure developers and managers; Iberdrola was the largest producer of wind power; Acciona the largest developer of wind farms; and Sol Meliá the biggest resort-hotel chain.
• Look more deeply, and you’ll find Spanish firms among the world leaders in the food-processing and apparel industries. Viscofan is the largest producer of artificial casings for the meat industry, and Freixenet has been the world’s number one maker of sparkling wine for more than two decades. In textiles and clothing, Spain is the home of global denim leader Tavex (now merged with Brazil’s Santista); and Pronovias, the planet’s largest bridal-wear designer and manufacturer. Though Spain has never produced global contenders in capital-intensive industries such as chemicals, metals, electronics, and automobiles, a handful of Spanish companies are formidable competitors in related niche markets such as automobile components (Grupo Antolin), stainless steel (Acerinox), and wind turbines (Gamesa).
• As they went global, Spanish firms tended to avoid the risky and expensive strategy of opening their own facilities abroad, instead favoring alliances, joint ventures, and acquisitions. Banco Santander, for example, used acquisitions to build its position as Latin America’s largest retail bank, then purchased the UK’s Abbey and other major institutions in Europe and the United States. And acquisitions in Europe, Asia, and the Americas made Grupo SOS the world’s biggest olive oil company and Ebro Puleva the world’s largest producer and marketer of rice and second-largest producer of pasta.
• Spain’s multinationals also tended to focus their foreign expansion efforts by geography. Nearly 90% of Spain’s outward foreign direct investment has been aimed at Latin America or Europe. This targeted approach to expansion helped companies balance their desire for global reach with the need to upgrade their capabilities-a dual challenge emerging-economy competitors now face. Latin America was a region where Spanish companies had natural advantages, such as cultural similarities, shared language, and connections, and nearby markets elsewhere in Europe afforded opportunities to increase sales and develop new capabilities. After establishing a beachhead there, Spanish firms then made selective investments in other advanced countries, such as the United States, to sharpen their technological and marketing skills. Through every phase of expansion, they relied heavily on old-school, time-honored business abilities.

Parlaying Political Skills into Growth

• Historically, many industries in Spain, such as banking, utilities, highway construction, and transportation, have been heavily regulated, with high-ranking officials holding the authority to make or break deals. As a result, numerous Spanish companies became adept at navigating what at times was a highly complex process of obtaining licenses. They learned not to react passively to policy risks but to actively manage relationships with local officials and forge personal connections to gain information that allowed them to anticipate shifts. That political savvy has helped them achieve remarkable success outside the Iberian peninsula. In transportation-infrastructure management, for instance, seven of the world’s 10 largest private companies are from Spain. In fact, our research reveals, some Spanish firms have deliberately chosen to operate in countries where government officials possess broad powers to grant licenses and issue regulations, precisely because of their political expertise.
• Take the bus-service company Automóviles Luarca, SA (which is now part of the UK company National Express). Founded in 1923 in a fishing village, ALSA grew by gradually adding routes around the country, obtaining new licenses or buying companies that owned licenses in the process. In 1964 it began extending its business model to other countries, establishing an Oviedo-Paris-Brussels route. As demand rose and highways improved, ALSA started to add international routes elsewhere in Europe. Acquisitions played a key role in the company’s growth, but so did other factors, including operating efficiency and service innovation. The firm invested heavily in training and bus maintenance and established a Supra nonstop intercity service, offering luxury coaches with larger seats and more legroom.
• In the 1980s, ALSA sought to apply its know-how to running bus routes in distant countries. Its first important foray was into China, though the choice was somewhat serendipitous. On a trip to investigate importing an innovative Chinese toothpaste into Spain, founder José Cosmen discovered another opportunity, in the form of China’s underdeveloped transportation services. (The toothpaste turned out to be less promising than it had appeared.) Through a joint venture, the company began offering taxi transportation services near Hong Kong, where foreign investors were allowed to operate as minority partners. ALSA considered this joint venture a good platform from which to learn how to operate in China and build relationships not only with local partners but also with government administrators, who have to approve every project developed in the country.
• By the time the Chinese government gave foreign investors the freedom to operate bus services, in 1990, ALSA was fully prepared to be the first mover. It created a new joint venture to run a route between Beijing and the rapidly industrializing coastal city of Tianjin. It offered services that China had never seen before, such as regular schedules and modern coaches with comfortable seats. New joint ventures were set up to operate routes between Beijing and Shanghai. The company then moved to smaller cities. Step by step, it replicated its business model, eventually introducing special services like the Imperial Class, a version of Supra. To overcome the subpar infrastructure, ALSA formed more joint ventures, which built bus stations, assembled buses, and developed and managed maintenance facilities.
• Political skill and expertise in licensing were critical to the company’s success in China, where the process of obtaining licenses is far more complex than in other countries. One of the joint ventures promoted by ALSA, for instance, required four years of preparation and approval. China is by far the most successful international expansion project ALSA has undertaken. The company has become such an expert on the market that it has established an import-export subsidiary that helps other multinationals operate in China.
• Cynics might ask whether Spanish companies are drawn to certain countries chiefly by the ease of lobbying or bribing officials, but a strategy based on targeting malleable government agents isn’t sustainable. Spanish firms have shown that they are willing to use every possible resource to defend their interests abroad, sometimes even battling foreign governments in court over decisions and regulations.
• The downside of operating in places where government officials are free to negotiate the terms of a foreign corporation’s entry is that those officials also have the authority to renege on such agreements without opposition from the legislature or the judiciary. A few Spanish firms learned this lesson the hard way and, once bitten, became noticeably shy. For example, the water-management company Aguas de Barcelona (now part of France’s Suez) invested heavily in Latin America in the 1990s but withdrew from certain countries there after facing increased regulatory problems.

Adding Capabilities Through Networking

• Many Spanish companies have shown a knack for piggybacking on the operations of established multinationals. That approach allows firms to build vertical and horizontal networks that help them penetrate foreign markets, deepen their knowledge, and gain access to competitive resources.
• Gamesa, in wind energy, is a case in point. Founded in 1976 as a maker of auto parts and military ordnance, it developed expertise in aerodynamics and electrical machinery and transformed itself into a wind-energy company. It has managed to become one of the world’s largest wind-turbine manufacturers, with an operational presence in 20 countries and throughout Europe, Asia, North America, and Northern Africa-and yet it has never been a technology leader. Instead, Gamesa has used its networking skills to grow, relying on alliances for both capability building and market access.
• Contrary to appearances, generating electricity from wind is an exceedingly complex activity, involving turbine manufacturers, farm developers, distributors, and regulators. The viability of wind power depends on a number of factors, ranging from technology to demand, and from regulation to the structure of competition.
• During the 1990s, Gamesa signed an agreement with the Danish firm Vestas, the world’s leading wind-turbine manufacturer, under which Vestas took a 40% equity stake in Gamesa and the Spanish company obtained technological licenses for sophisticated components. By the time the companies parted ways, in 2002, Gamesa’s engineers had managed to acquire the experience needed to design its own turbines. Within six years the company obtained or applied for 118 patents.
• Gamesa has also used its networking skills to become more active in wind-farm development, forming agreements with local partners in the UK, Japan, India, China, and Australia. This strategy has diverted financial and managerial resources from R&D and manufacturing, but it has boosted Gamesa’s growth abroad. About 20% of Gamesa’s installed capacity and 60% of its new installations are now outside Spain. In 2009 Gamesa ranked fourth in the world in cumulative wind-power turbine installations. It is the biggest foreign wind company (as measured by cumulative installations) in China, its largest market.

The Execution Edge

• One of Spanish enterprises’ most potent global weapons has been project execution-specifically, the ability to set up plants or complex facilities quickly and at low cost.
• Telefónica exemplifies this capability. It was a state monopoly until the deregulation that followed Spain’s entry into the European Economic Community. At that point, competition from new entrants forced the company to rapidly improve its service and meet demand that had gone unsatisfied for years. Between 1986 and 1999, Telefónica installed about 10 million new residential and business lines in Spain, more than doubling its infrastructure.
• The company was quick to target Latin America for expansion. It established operations in Chile first and, by the end of the 1990s, had entered Argentina, Venezuela, Puerto Rico, Peru, and Brazil. Telefónica’s project-execution skills served it well in its new markets. As it took over privatized and acquired companies, Telefónica knew how to make rapid and cost-effective investments in infrastructure, fill unmet demand, and improve service, just as it had done in Spain. Its competitors from North America, accustomed to a more mature market, were less prepared to take advantage of these opportunities.
• “When it comes to installing a million access lines in record time, no one can beat us,” former Telefónica Internacional chief executive Iñaki Santillana once told the New York Times. “We have the best ditch-digging technology around.”
• Once it had established a solid base in Latin America, Telefónica expanded throughout Europe, eventually becoming the fifth-largest telecom operator in the world. Through an equity stake in China Netcom (now China Unicom, after a 2008 merger), it has become a player in China as well.

Achieving Efficiency with Vertical Integration

• In the area of operational organization, Spanish multinationals have demonstrated an uncanny ability to integrate vertically and deliver a wide variety of new products quickly to global markets. The Spanish retail chain Zara is a well-known example of a business that combines innovative design, manufacturing flexibility, seamless distribution logistics, and marketing savvy.
• Another apparel company, Pronovias, likewise illustrates the advantages of vertical integration. Founded in Barcelona in 1922, the company languished until the 1960s, when the success of its first prêt-à-porter wedding collections encouraged it to position itself as a global player. With annual sales of 480,000 gowns, it now leads the market, ahead of U.S. firms Mori Lee and Alfred Angelo and the French firm Pronuptia. Flexibility, responsiveness, and innovation were crucial to Pronovias’ success. As the company went global, it had to factor in national differences in customs, tastes, marriage age, and body shapes.
• A staff of about 70 designers comes up with as many as 650 wedding and party dresses and some 2,000 accessories each year. Although the manufacture of accessories and intimate apparel is outsourced to China, most branded items are made in a factory outside Barcelona. Pronovias distributes through a network of 150 company-owned stores-it arguably created the world’s first chain of bridal shops-and 3,800 other points of sale in 75 countries. It has franchised stores in Spain, Portugal, Greece, Turkey, Saudi Arabia, Egypt, Mexico, and Japan. Controlling the value chain from design and production through distribution allows Pronovias to swiftly address changing fashion trends and speed new products to customers, as well as lower its operating expenses so that it can offer sophisticated dresses-with all manner of laces and flounces-at affordable prices, despite Spain’s high labor costs.
• Another outstanding example of the benefits of integration is Freixenet, the Spanish sparkling-wine maker. This family-owned firm overcame its prestige and quality disadvantage relative to French champagne producers by focusing on the middle segment of the market, where prices are relatively low but volumes are high. To make money, it needed to produce more than 100 million bottles annually and sell half of them outside Spain. So it had to internally develop and manufacture equipment that would allow it to produce in large quantities. To control costs but maintain quality, Freixenet automated the daily task of turning each bottle to shake the yeast sediment that accumulates in the neck. Without such an innovation, the company would have found it difficult to become the world’s largest sparkling-wine maker.
• Viscofan, too, used vertical integration to operate efficiently on a global scale and become the world leader in its industry-artificial casings for meat. Among the firm’s many advantages are its capital-intensive extrusion and labor-intensive finishing operations, which it has built in the optimal locations for labor costs. Its proprietary operations also have given Viscofan an understanding of the intricacies of the overall manufacturing process that its competitors cannot match. Nowadays, roughly two of every three frankfurters manufactured in the United States use Viscofan’s cellulose casings.

Full Speed Ahead

• Speed was once denounced as a sure way to ruin a company attempting to internationalize. According to a conceptual framework developed by experts at Uppsala University, well-managed multinationals thought carefully about foreign market entry and built their presence gradually. Spanish multinationals, however, have demonstrated the value of moving quickly on more than one front.
• Entering developing countries helps a company gain size and operational experience and generate profits, while expansion in developed markets contributes primarily to its capability-upgrading process. Santander understood this principle better than most. It adopted an orientation toward learning in the U.S. and Europe and toward acquisitions in Latin America, and started buying banks in developed markets only after it became large in size and rich in experience.
• Companies with overseas ambitions should attain scale quickly, gaining invaluable experience and building stronger competitive capabilities. In a fast-paced international economy, the risks of falling behind or failing by waiting too long to break out of the home market exceed the hazards inherent in any process of globalization.