Ram Sarvepalli, Leader- Advisory Services, India and Partner – Emerging Markets Center, shares upcoming trends in Emerging Markets (EMs) and how companies can grow in the changing business environment.
At the beginning of the 21st century, Emerging Markets were positioned as shining stars, driven by buoyant global trade and easy financing. However, their fate has proven to be dynamic over time. Their annual GDP growth rate went up from 3.8% in 2001 to 8.7% in 2007 and then down to 4.7% in 2013. As a result, companies are relying on a new set of drivers to rebound their growth in these markets.
Rapid urbanization leading to “smart cities”
Fast-growing population and improving labor productivity have led to the emergence of smart cities across many EMs. This is prompting companies to shift strategic focus from countries to cities and furthermore to urban areas. However, the lack of proper infrastructure and logistics facilities would hinder smooth operations. Companies can collaborate with local municipal authorities to understand real-time concerns for decision making.
Smart cities offer opportunities in health,education, consumer products, financial services and real estate. To create investment strategies, companies will have to understand the dynamics of new cities.
Green technology for sustainable energy solutions
Rising population and urbanization has fueled demand for energy. Fuel price volatility, regulatory pressures and high capital requirements for new projects are putting stress on EM economies. Customers and stakeholders are already raising concerns over the environmental impact of doing business.
Investment in green and sustainable technologies could pose as the key differentiator for companies. They could enter into public-private partnerships for developing clean energy projects. In addition, they can offset risks related to rising energy costs by directly sourcing clean energy or creating renewable energy-generating assets.
Lower-middle class to fuel demand
Lower-middle class households having some disposable income are expected to cross 30 million by 2030 in Africa and South Asia as per EY’s RGM Forecast July 2014 edition. This trend stands for all EMs. People in these markets are aspiring toward a western lifestyle, creating a sharp rise in demand for goods and services.
However, demand patterns vary across EMs due to disparity in income levels. Therefore, companies will need to offer localized products to gain acceptance in EMs.
Therefore, companies will need to offer localized products to gain acceptance in EMs.
Reforms in EMs to create business opportunities
Many EMs are rolling out structural reforms to improve infrastructure, refine the banking system, promote sustainable technologies, reform tax policies and simplify business setup. Tracking such reforms would help companies identify upcoming business opportunities.
For instance, China has initiated reforms for State Owned Enterprises to drive investments. This has created opportunities for public-private partnerships. Similarly, India has launched a scheme for financial inclusion. Financial services companies can leverage this opportunity to promote their services and increase customer base in the country.
Spillover risks, Geo-political tensions and High inflation to impact growth
Volatility in the geo-political relationships of EMs threatens businesses. For instance, the conflict between Russia and Ukraine has affected emerging economies in Europe and other trade partners. Many EMs such as India, Indonesia, Turkey and Brazil are undergoing major political changes. This could create ripples in their respective economies and add to uncertainties in the business environment.
The spillover effects of monetary tightening in advanced economies are affecting the inflow of foreign capital and trade in EMs. In addition, continued high inflation in many EMs has prompted central banks to keep interest rates high, thus increasing the cost of financing. Companies need to make sure that they have hedged their debts against rising interest rate.
Doing business in EMs is at its most challenging stage. All EMs differ in terms of the risks they pose and the opportunities they offer. Therefore, applicability of a single business model across EMs is no longer possible.
Companies will have to adapt to the changing scenario and realign their strategies accordingly.
Also read, six global trends shaping the business world- Emerging Markets increase their global power