Building Global Brands from Emerging Economies

Nirmalya_KumarBig ideas often come out of small conversations. This seems to be the case with marketing guru Nirmalya Kumar’s latest book Brand Breakout: How Emerging Market Brands Will Go Global, which he has co-authored with Jan-Benedict EM Steenkamp.
“This book started one evening in my apartment [in London] when I was sitting with my friend JB [Jan-Benedict]. The latest Interbrand [a brand consultancy] 100 global brands list had come out. Not a single brand from the emerging markets was on it,” says Kumar, a professor of marketing and co-director at the Aditya Birla India Centre at London Business School.
“JB and I started talking about why things are the way they are. First we came up with reasons why there were no emerging market brands on the Interbrand list. Then we started to figure out how, if emerging market brands had to go global, they would need to go about it.”
Kumar and Steenkamp found one part of the answer in the list of the top 500 companies in the world. China has 73 companies on it—the second largest after the US. And here’s the nub: Most of these are business-to-business [B2B] companies, or those in the business of extracting natural resources, or those like China Mobile that are monopolies in their local markets.
“In B2B marketing, brands play a very small role,” says Kumar. “You go to the man on the street and ask him to name any of the top B2B brands. Chances are he won’t be able to name any. You ask people about ABB, nobody knows about ABB. Before it became Sony-Ericsson, nobody knew of Ericsson either.”
Nevertheless, there are some B2B companies that have been able to build big brands. But they are exceptions. “General Electric gets a branding because of being in washing machines and other electronic goods. Shell gets a name because of gas stations. IBM has a brand name that is consumer-oriented because they were in PCs and they have been around for 100 years or more. Otherwise IBM would not be a known brand,” says Kumar. “There are companies like Tetra Pak in packaging or Intel with its ‘Intel Inside’ campaign, which have been able to build brands.”
Companies from emerging markets don’t need to build global brands because most of them are not in consumer-facing businesses. Take Indian IT companies, for instance. They have concentrated on IT services, and not built products where they would have needed to create brands. “I suspect that the logic of a product company is very different from the logic of a service company,” says Kumar.
This is precisely why contract manufacturers in emerging markets haven’t developed brands. “Their existing business model is very successful. To evolve into a new business model with uncertain chances of success and doubtful profitability is unlikely,” he says.
Kumar cites the example of contract manufacturers in Bangladesh. “No country owns contract manufacturing like Bangladesh. When I was in Bangladesh, they told me, we have to have our own brands; we are tired of manufacturing for others. But their existing business model is so profitable, the question is do they need to develop brands?”
Also, to build a global brand in the business-to-consumer (B2C) space, companies need to create awareness among Western consumers through advertising and marketing—that may be an expensive proposition for emerging market countries. “The United States, Europe and Japan are probably the three most expensive places in the world to advertise. Given that, no emerging market can rationally make a case for advertising investment,” says Kumar.
Besides this, the country-of-origin effect [a psychological effect on customers when they are unfamiliar with a product] is also at play. “All Western consumers, when asked what they think of a brand that comes from India or China or any other emerging market, say it will be of poor quality,” says Kumar.
The irony, of course, is that consumers from emerging markets think the same about brands from their own countries. “Even Indian and Chinese consumers would say that brands coming from emerging markets, including their own, are of poorer quality than Western and Japanese ones.”
The dearth of global brands from emerging markets can be corrected in the time to come. There are a number of strategies that companies in these countries can follow in order to build brands in the West.
One is to use the diaspora route. “This strategy involves companies targeting immigrants from their own country and building enough scale and sales to support a brand push. You see a lot of brands doing that, including Pran [Foods] from Bangladesh, Dabur, ICICI Bank and, to some extent, SBI, Nando’s from South Africa, and Corona from Mexico,” says Kumar.
The second is the cultural resources route. Even though brands from emerging markets are considered to be of inferior quality by Western consumers, there are certain things that are regarded positively. “Even though Brazil has a poor image for any brand that comes out of it, nobody questions Brazil for fun, beach, sun and sand. That’s why they have a brand called Havaianas that sells flip-flops,” says Kumar.
Similarly, China is known for its ancient medicine and silk. India is known for ayurveda, a culture of history, yoga and religion. If a brand from an emerging market country positions itself around these things, it has a good chance of being accepted.
Another route, which is very important for India, is through branding commodities. India has several such opportunities from Darjeeling tea and Mysore coffee to Basmati rice and Alphonso mango.
Once countries are able to brand commodities, they are able to get a price premium on that. “We have shown it with Columbian coffee (in our book). Even when coffee prices dip, Columbian coffee prices don’t dip as much. And Columbia is not even the largest producer of coffee. It is Brazil,” says Kumar.
First, the geographical region where a particular commodity is produced needs to be defined properly. “I have not seen any effort on this front in India. I know there is a Tea Board [of India] but there is a need for a Darjeeling tea board that authenticates things,” says Kumar.
Second, the production process needs to be tightened. “There are 14 steps that go into making some kind of wine in France. I bet you that even nine of them are not necessary. But it’s a way to show people that a lot of care is being taken in producing the wine to give it special qualities.
“Also, a very tough enforcement scheme needs to be put in place. If you try to put champagne on any sparkling wine produced anywhere else, it cannot be called champagne. Only sparkling wine from the Champagne region in France can be called champagne,” says Kumar. And any company using ‘champagne’ for sparkling wine gets sued by the French.
“Even the Americans had to remove the word champagne from their California sparkling wine,” says Kumar.
Kumar is of the view that companies in China are better poised than those in other emerging markets when it comes to creating global brands.
“When Japan, South Korea and Taiwan started going down the path of globalisation, their quality of products was poor. Over time they put in R&D investments to improve the quality. China is the only exception as an emerging market; they have world-class manufacturing and nobody questions the quality of Chinese products when they are produced to Western specifics,” he says.
And it is easier to brand a product that is already high on quality. Kumar explains this with a thought experiment from his book. “Assume there are 1,000 Chinese manufacturers on contract for Western product companies and brands. They are manufacturing iPads and iPods for the world. So they can’t be bad. Out of those 1,000, let’s say 100 decide to build their own brand and try to diversify out of the low-margin contract manufacturing business where they are always at the mercy of Western companies. Out of the 100 who decide to do their own thing, 10 succeed. That means you will have 10 global brands coming out of China in the next decade.”
What also aids Chinese companies is that they think long-term. Indian companies don’t.
“Chinese companies have a long-term orientation, which comes from Confucius. They are playing for the next 100 years. They are not playing for the next 10,” says Kumar.
“And there is a reason for that: Indian companies are borrowing at very high rates from the capital markets. The major Chinese companies have state banks that are supporting them to some extent. So they are not paying the same interest rates, and can play the longer game much better,” he adds.
The Chinese government, too, has an eye for the future. “We might complain that the Chinese state is oppressive, but I have to grant one thing to the Chinese government—they do make big bets for the future,” Kumar says.
Take, for instance, their bet on urbanisation: “China knew 30 years ago that urbanisation is going to take place and they needed to have the infrastructure in place. They built that infrastructure. Today you can say that the Shanghai-Beijing train looks half empty. Yes, maybe it does. But they are not building it for today. You have to build the infrastructure for the next 20 years. I am sure it is going to be full some day,” says Kumar.
He adds, “The same thing is true for Shanghai and Beijing airports. They realise that they are building infrastructure for the next 20 years. We can’t be building an airport every two years.”

This interview was done when Nirmalya Kumar was professor of marketing at London Business School. He is now a member of the Group Executive Council, Tata Sons
The interview originally appeared in the India edition of the Forbes Magazine, dated August 23, 2013

Biyani, Mallya, Suzlon, DLF: Easy money screwed up India Inc

Vivek Kaul
George Orwell the author of masterpieces like 1984 and Animal Farm once said “whoever is winning at the moment will always seem to be invincible”. The big Indian businessmen went through this phase between 2003 and 2008. They were invincible and the world seemed to be at their feet.
One impact of this was diversification or entrepreneurs following the age old adage of not having all the eggs in one basket. And so the Indian entrepreneurs went on a diversification spree. Vijay Mallya thought running an airline, a cricket team and an FI team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cake walk after they had created India’s biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel. Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business.
Banks were more than happy to lend money to finance these expansions. And if money couldn’t be raised domestically it could always be raised internationally by issuing foreign currency convertible bonds (FCCBs). The beauty of these bonds was that the rate of interest on these bonds was almost close to zero. Hence, the companies raising money through this route did not see their profits fall because of interest payments.
So everybody lived happily ever after. Or at least that’s how it looked till a few years back.
In the prevailing euphoria these entrepreneurs did not realize that all the money they were raising in the form of debt would have to be returned. Even if they did, they were confident that all these expansions into unrelated territories would soon start making money and would generate enough profits to pay off the debt.
Other than unrelated diversifications companies also borrowed to fund their expansion into their core areas at a very rapid pace. As Nirmalya Kumar, a professor of marketing at the London Business School explained to me in an interview I did for the Daily News and Analysis a few years back “capacity never comes online at the same time as demand because you have to add capacity in chunks, whereas demand goes up as a smooth function. Capacity comes in chunks and people generally add capacity at the top of the cycle, rather than at the bottom of the cycle because at the bottom of the cycle, everybody is hurt and nobody knows when things will turn around.I cannot set up a cement plant every time there is a 100-tonne more demand in the country, because when I set up a cement plant, I set up a 2 million tonne cement plant. There will be times when there will be a shortage and there will be time when there will be lots, right? So this boom and bust always takes place.” (You can read the complete interview here).
Telecom companies raised a lot of debt to establish their presence all over the country only to realize that the consumer had too much choice leading to the telecom companies having to cut calling and smsing rates to ridiculously low levels(I have a sms pack which costs Rs 25 and gives me 15,000 messages free per month. If I exhaust that limit one sms costs one paisa). At one point of time the Mumbai circle had a dozen odd operators competing.
The wind energy company Suzlon raised a lot of money through the FCCB route to expand at a very past pace and became the darling of the stock market. DLF raised a lot of debt to build a land bank.
So during the boom businesses just expanded into related and unrelated areas. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine. It lost a lot of money on it and finally sold out. Even the selling out did not help and the channel has since been shutdown. Peter Mukherjea a successful manager launched News X, which he had to sell off. Satyam, an IT company tried to diversify into real estate and infrastructure as Maytas (Satyam spelt backwards).
With all the easy money going around Biyani soon had major competition in the organized retail space with the Tata group, Birla group, Ambani group and even Sunil Bharti Mittal deciding to enter the organized retail space. Then there was also Subhiksha which expanded so fast that it soon had 1500 stores all over the country. This was also the era where media companies got into the real estate business. They also wanted to set up power and cement plants, and buy coal mines.
And most of this expansion was funded by companies by taking on more and more debt. Banks also got caught on to the euphoria that prevailed and gave out loans left, right and centre. The boom period has now run out. What we are seeing right now is the bust.
Businessmen now seem to be coming around to the realisation that they have ended up raising too much debt too fast and need to bring it down. Some of them like Subhiksha and Kingfisher have had to shut down their operations. Others are facing huge losses. As Sreenivasan Jain wrote in a recent column in DNA: “Last year, Reliance Fresh posted a loss of Rs 247 crore, Bharti posted a loss of Rs 266 crore, and Aditya Birla group, which runs the chain of More supermarkets, posted a loss of Rs 423 crore. Some retail chains have actually shut down, like Subhiksha which at one time had almost 1,500 outlets,” writes Jain. (You can read the complete article here)
The realisation also seems to have come around among businessmen that they need to sell of what they are now calling their “non-core assets”. Deccan Chronicle recently tried selling its Deccan Chargers IPL team but found no buyers willing to pay more than Rs 900 crore. Over the weekend BCCI cancelled its franchise. So all the debt that was raised to get the cricket team up and going has now gone down the drain. There are next to no assets to sell against it. DLF sitting on top of more than Rs 25,000 crore debt has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore.
Hotel Leela has been trying to sell its business park. Vijay Mallya managed to sell a stake in his F1 team to Sahara. Media reports suggest that Mallya has been in talks with the British company Diageo to sell United Spirits. There are also rumors that he is trying to sell real estate that he owns in Bangalore to pay off all the debt on Kingfisher Airlines. In the meanwhile no one seems to be interested in buying Kingfisher Airlines even though the government has allowed up to 49% foreign direct investment in the aviation sector.
Kishore Biyani managed to sell off Pantaloons and Future Capital in order to pare down his debt. The Bharti group got out of the education business by selling Centum Learning to Everonn education. Also some of the big companies that had got into organized retail have either closed their stores or scaled down the level of their operations. Suzlon is in major trouble. Its FCCB loans amounting to $221million(Rs 1,160 crore) are set to mature later this month and the company is in no position to repay. Its request to extend the repayment has been rejected by the bondholders. It is now being speculated that the company will default on these loans and go in for liquidation.
The learning out of all this is that it is easy to expand when the money is easily available and the going is good. But selling out when the tide turns around is not so easy.
But what businesses should have hopefully learnt more than anything is that in this day and age it pays to focus on a few businesses instead of trying to do everything under the sun just because money to expand is easily available.
In the past things did not change in business. An interesting example is that of the Ambassador car. The car had the same engine as of the original Morris Oxford which was made in 1944. And this engine was a part of the Ambassador car sold in India till 1982. The technology did not change for nearly four decades.
Given this lack of change, the businessmen could focus on multiple businesses at the same time. That is not possible anymore with technology and consumer needs and wants changing at a very fast pace. Even focused companies like Nokia missed out on the smart phone revolution in India.
Look at the newer businesses some of the big-older companies have got into over the years. The retail business of Ambanis hasn’t gone anywhere. Same is true with that of the retail business of the Aditya Birla group. The telecom business of the Tatas has lost a lot of money over the years. Though, they finally seem to be getting it right.
Hence it’s becoming more and more essential for businesses to focus on what they know best. To conclude, in the movie English Vinglish one of the characters who goes by the name of Salman Khan says “entrepreneur, shabd na hua poori ghazal ho gayi”. For the Indian entrepreneurs the expansions they thought would be as soulful as ghazals have turned into headache inducing heavy metal. Hopefully they have learnt their lessons.
The article originally appeared on on October 15, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])