Hot Companies Are Rising From Poor Countries

Street-tough multinationals from poor nations are growing far faster than Western rivals, signaling a major shift in wealth and power.
By Mac Margolis and Rana Foroohar
Newsweek International

Oct. 8, 2007 issue - Not so long ago, big companies from poor nations were generally dismissed as second-rate, run by fat family dynasties or profligate autocrats. Then from the shadows came Samsung, born when South Korea was still considered a poor nation, and now more famous than Sony of Japan—and, since last year, when market cap surged to $103 billion, richer too. In 2004, a Chinese company called Lenovo surprised the world by buying IBM's computer business, and the glass ceiling over emerging-market multinationals started to lift.

Last year Brazil's Embraer overtook Canada's august Bombardier to become the world leader in midsize passenger jets, and Mexican construction-materials maker CEMEX is closing in on titans Holcim of Switzerland and France's LaFarge.

And so the rush is on. Sixty-one of the Fortune 500 companies now come from developing countries, up from 28 two decades ago. These are the new blue chips from poor countries, combining a corporate street savvy, picked up in hardscrabble home markets, with cutting-edge techniques to beat rich-nation multinationals—and grab a growing share of global wealth and power. The total value of emerging-market shares on world stock exchanges surged from $80 billion a quarter century ago to $1.2 trillion in 2000, and has now topped $6.4 trillion on Morgan Stanley's 26-country Emerging Markets Index.

Strikingly, even with the recent market turbulence triggered by the global credit crunch, the new blue chips are proving more stable than the old ones. Antoine van Agtmael, who coined the term "emerging markets" in 1981 and is chairman of Emerging Markets Management LLC (which manages more than $25 billion for institutional investors) cautions that there is froth in emerging markets following the six-year bull run (particularly in China). But the top stocks are still faring well. Consider that this year the S&P 500 is up only 7.98 percent, while the key emerging-market stocks van Agtmael tracks are up 55.37 percent (and emerging markets overall are up 31.85 percent). What's more, the turbulence isn't emanating from the East, as it did during the Asian financial crisis 10 years ago, but from the West. "This time around, the financial indiscipline and lack of respect for risk is not coming from inexperienced emerging institutions, but so-called experienced institutions losing their head," says van Agtmael. "The overborrowing, overconsuming and underinvestment is now in the U.S., while emerging markets are accumulating reserves, building their infrastructure and, to some extent, bailing the world economy out because of their strong demand growth."

Only the smart money has noticed. Though emerging-market stocks represent only a modest 10 percent of world market capitalization, they are gaining ground fast. Together the top 100 companies from the world's fastest-growing economies had combined revenues of $715 billion in 2005, and they are growing 10 times faster than their U.S. counterparts, 24 times faster than Japan's and 34 times faster than Germany's, according to the Boston Consulting Group. Their total shareholder return has jumped 150 percent in the past six years, while the Standard & Poor's 500 Index has declined. "Most people are still oblivious to this new reality," says van Agtmael. "The economic balance of power is shifting to emerging markets, and these new multinationals are becoming the powerhouses of the future."

Though Western investors have been pouring billions of dollars into emerging markets for some 20 years, most still think of the success stories in terms of countries—plays on the rise of China or oil in Russia—not companies. It is long past time, however, to start naming corporate names. So, at NEWSWEEK's request, van Agtmael winnowed down the roster of 25 new multinationals from his recent book "The Emerging Markets Century" (Free Press) to a killer class of 10 from Brazil, China, India, Mexico, South Korea and Taiwan.

Many of the new blue chips were yesterday's sleepers. A few got their start in countries like Taiwan and South Korea, which are no longer fully fledged members of the "developing" class. Others are still nearly invisible, working like ghostwriters for famous brands; Taiwan's Hon Hai (No. 4 on our top 10 list), the world's largest electronics contractor, makes the main components for Dell laptops and iPods for Apple. Others are now global market leaders, like Grupo Modelo (No. 10) of Mexico, whose long-necked Corona beer became a cult brand worldwide and the fastest-growing beer import ever in the United States. And if only an exceptional few like Samsung (No. 1) and Hyundai (No. 2) are household names today, keep watching. "New companies and new brands are appearing all over the world. They now contest the longstanding competitive supremacy of industrialized nations," says Stéphane Garelli, chief economist of the International Institute for Management and Development (IMD), a Switzerland-based business school that measures international competitiveness. "We are moving from the phase of emerging markets to emerging powers."

Indeed, the shift is already well underway. From wardrobes to the workplace, developing-world industries are shaping our everyday lives. The soul of Dell computers is Taiwanese-made microprocessors. Your iPod sings thanks to memory cards by Samsung, whose cell phones and flat-panel televisions also outsell Sony's. The label on the running shoes in your closet may carry a big-ticket logo, but 30 percent of Adidas shoes, 25 percent of Nikes and 20 percent of Reeboks are now made by shadow brand Yue Yuen, the largest footwear maker in the world. White goods maker Haier was little known outside China at the start of the decade; now its wine coolers and mini-refrigerators are staples of college dorm rooms, and in 2004 it made World Brand Laboratory's coveted top 100-brands list. Concha y Toro of Chile, a pioneer in South American wines, has become one of the world's top-selling brands and is the No. 2 import in the United States.

In many ways, the rise of the new blue chips contradicts the clichés about "Third World" business. The lingering conceit is that aside from the famous exceptions, businesses from outside the United States, Western Europe and Japan are still in the infant stages of development, relying on cut-rate labor, the price bonanza for simple commodities like oil, home markets protected by high tariff walls or fast copycatting of more-advanced consumer goods first designed and built in rich nations. None of the companies on our top 10 list made it that old-fashioned way. Instead, they are employing brainpower, winning design, clever management and leading-edge technology that owe nothing to—and increasingly trump—the rich world's legacy brands and corporations.

Interestingly, of van Agtmael's latest top 25, none is from Russia and there's only one from Southeast Asia, while 10 hail from Latin America. The reason has something to do with legacy—Latin America has a fairly long history of capitalism, while other parts of the world have been at it only a couple of decades.

But necessity, not geography, is the true connective tissue—most of the firms have had to overcome some real hardship to get where they are. The currency crises that hit Mexico in 1994, Asia in 1997 and Russia in 1998 killed off weak companies and forced political leaders to push through free-market reforms, selling off state companies, paring corporate debt, eliminating subsidies. But the crucial changes came company by company within emerging markets, which is why they slipped under the global radar. Businesses that had flourished by selling to captive consumers in bell-jar economies folded. Only three of the companies on van Agtmael's list from 1990 still make the cut today. (Remember Daewoo?) The most able learned from dominant multinationals, copied and in some cases surpassed the enemy in ways international markets have yet to fully understand. "What most of these world-class companies have in common is that they survived brutal, sometimes life-threatening crises, which instead of bringing them down made them stronger," says van Agtmael.

Consider Aracruz, a paper company in Brazil, which the World Bank still rates as one of the least friendly business environments on the planet. In the mid-'90s Aracruz was forced to cut its work force by two thirds when a radical economic-stabilization plan caused the country's currency to spike, crippling exports. The company mechanizing tree cutting, outsourcing planting and pouring money into genetic research to boost wood yields, doubling its output per hectare in 10 years. Formerly a bit player in the paper business, it is now the world's largest and most cost-efficient producer of wood pulp for tissue, print and photographic paper.

For many of the new blue chips, poverty is the mother of invention. While many poor nations have failed to build strong energy businesses despite rich hoards of oil and gas, Sasol of South Africa did it in a nation with no petroleum at all. Sasol retrieved a neglected technique to conjure liquid fuel from coal, then figured out how to "scrub" out polluting carbons, and is now the world's largest commercial producer of clean-burning synfuels.

Others succeed by challenging the rich world's rules. For decades, most Third World companies did not invest or borrow abroad because lenders charged them extra interest for hailing from countries considered credit risks. But in 2005, the newly privatized Brazilian mining combine Companhia Vale do Rio Doce (CVRD, No. 8 on our list) took on the ratings agencies, and after months of haggling CEO Roger Agnelli convinced Moody's International that its superlative balance sheet deserved an investment-grade rating. CVRD was the first company ever to reach this milestone before its home country did. Many more have followed.

Hyundai's reincarnation is a symbol of the revival of South Korea, which has left its fellow "tiger" nations in the dust since the 1997 Asian crisis. After flopping in the U.S. car market with its shoddy subcompacts in the '80s and then barely surviving the Asian debt crisis, the company started over. Taking a cue from the Japanese auto titans, it poured money into quality control and design—including the $30 million Hyundai-Kia Design and Technical Center in Irvine, California. Once the butt of American talk-show jokes for its defect-riddled cars, Hyundai this year led a car-owner quality survey and saw its sleek Santa Fe SUV top international models like Toyota's FJ Cruiser and the Jeep Wrangler four-door.

Lorenzo Zambrano knows what it's like to overcome international disdain, too. When his company, Cementos Mexicanos (CEMEX, No. 7), made a play for two traditional Spanish cement makers in 1992, the business world had a good laugh. Cement was a market for heavyweights, the doubters sniffed, not a family shop from Monterrey, Mexico. The talk of the trade was all about when, not if, Zambrano and CEMEX would fail, and which industry titans would end up with the spoils. Some lenders called in their loans, while others charged scalpers' rates to finance his bids. But the Mexicans prevailed. "They thought we were going to be short, with sombreros and pistols," recounts executive vice president Victor Romo, who is more than 1.85 meters tall. "But instead of pistols, we brought computers."

What Zambrano understood is that the cement business is not just about the right mix of sand and gravel, but about delivering the product on demand, on time, anywhere. CEMEX trumped the muscle-bound cement industry by installing GPS equipment in its trucks to speed ready-mix anywhere in Mexico within 30 minutes (it's now called the Domino's of cement). It also created a single worldwide software platform (CemexNet) to allow company managers anywhere to control inventory and production with a few keystrokes. Wired magazine called it "a case study in transforming a hopelessly low-tech enterprise into a model of info-age efficiency." Since the '90s, CEMEX has scooped up assets in 18 countries to become the world's No. 3 cement maker.

Other emerging-market blue chips have become equally bold corporate raiders. Ranbaxy of India bought out nine international companies last year alone, helping it become one of the top 10 generic-medicine makers. In February, Tata Steel of India paid $12.1 billion to beat out a Brazilian rival for control of Anglo-Dutch Corus, becoming the world's fifth largest metal basher. And over the next five years, company leader Ratan Tata plans a series of mergers that would vault his company to the No. 2 spot, just behind ArcelorMittal, which is run by the Indian-born, London-based billionaire Lakshmi Mittal. The mining world is undergoing similar consolidation, with CVRD of Brazil and Russian rivals winning multibillion-dollar bidding wars for industry giants in Canada and other rich nations.

Takeovers predictably spawn "foreign invasion" headlines. But now it's the First World complaining about carpetbaggers from the poorest latitudes. "We've had takeovers before, but in the past they were by U.S. or European firms," says Richard Haskayne, a former top energy executive and the founder of a business school in Calgary, Canada. "But now it's the Brazilians, the Chinese, the Russians and the Indians. I'm annoyed as hell, and I don't know how to stop it." The U.S. Congress thinks it knows how. Citing hazy national-security concerns, Washington's lawmakers barred China from taking over Unocal, a California oil company, in 2005 and last year forced Dubai port operator DP World to sell its U.S. operations. More recently, there's been political grousing over Borse Dubai's bid for 20 percent of NASDAQ. But it's unlikely that protectionism will stem the tide of suitors. "In the globalization era, there are two categories of companies," says Zhang Ruimin, CEO of China's leading household-appliance maker, Haier, which raised eyebrows by making a play for Maytag in 2005. "One is the international company, and the other is the one taken over by the former group. There isn't a third choice."

Of course, no one is writing off the countries and cultures that have ruled the world since the Industrial Revolution. But they could learn from the challengers. One lesson might be to not overlook the world's poorest consumers. While some Western firms have developed innovative products for the poor (think Unilever's single-use soaps and shampoos, which can be purchased for pennies), the new blue chips are ahead on this score. Telecom mogul Carlos Slim turned América Móvil into Latin America's biggest wireless provider thanks to pay-as-you-go cell-phone cards, allowing millions of low-income users to bypass pricey subscriptions. Indian mogul Tata is heading down-market with the forthcoming People's Car. Retail price: $2,500. And South African beer maker SABMiller patched a daisy chain of money-losing breweries across the developing world into the world's second largest beer company. "Coming from the emerging markets, we knew that you can't judge potential by looking just at the current state of affairs," says chairman Graham Mackay.

Ultimately, creating a winning corporation might boil down to a less tangible asset: attitude. "In the developing world, people want to get ahead and they want to develop their country," says Garelli of IMD. "There's an overlap of corporate culture and national culture. In the West, we've totally lost that. The younger generation couldn't care less about the nation—they want a good job."

Of course, there are still plenty of fields that are completely dominated by the West, like financial services and advertising. But in the future, firms will simply be less defined by national identity. Companies like IBM, Google, CEMEX and Lenovo (No. 5) all share a willingness to move business to wherever it's best done. In that sense, at least, the old and new blue chips aren't so different.

With Joseph Contreras in Monterrey and Quindlen Krovatin in Beijing
© 2007 Newsweek, Inc.

Source: Newsweek
Hot Companies Are Rising From Poor Countries