Japan has shown that with successful national brands even the global market can be conquered. The rise of emerging market consumers is giving strength to an array of new brands that are enjoying success. These emerging brands are also likely to be successful in the West.
Brands have a crucial function in today's markets of abundance and overwhelming choice as they guide consumers towards the expected quality and reduce seeking costs. In addition, they allow consumers to make a statement about themselves, which is arguably a key feature of brands in today's society. In return for this service, brands can sometimes charge their clients a substantial premium. A brand name is hence an important asset for a company, and is usually the result of a long-term development process; for instance, current brand names of US, European and Japanese companies such as Coca Cola, Daimler or Sony. With the trend toward a multi-polar world and the rise of the emerging markets consumer, we are now seeing the appearance of new brands that have their origins in emerging markets. The research unit at Credit Suisse categorizes them into one of the two following models:
The Domestic Market Model
The domestic market model: A strong domestic market, often additionally protected from foreign competition through, for instance, prohibitive import taxes, will support local brands. As economic growth enables higher salaries and thus greater domestic consumption, some local companies will profit from the domestic development, achieve economies of scale, build up a high brand recognition thanks to exclusivity and price competitiveness. This was observed in the US between the Civil War and World War II, a period during which the US was protected from foreign competition when its industry was still in its infancy. It was also seen in Europe in the 1950s and 1960s. Companies benefiting from a growing domestic market are often mirror companies of similar firms located in larger countries or countries at a more advanced stage of development, and focus on a population's rising spending for staples, discretionary items, etc., as well as benefit from a still lower cost base.
The Export Model
The export model: Companies with insufficient domestic markets choose to specialize in specific niches and focus on exporting value-added products. These companies are often backed by their government and touted as export champions. This was the case in European countries such as Sweden, Denmark, Switzerland or the Netherlands, where domestic markets soon appeared to be limited but companies had some competitive advantages in terms of resources, educated workforce, research or management. This model was also used in recent decades by countries such as Singapore, Korea or Taiwan, where companies often additionally benefited from a lower cost base.
The Japanese Model
The development we are now witnessing in emerging markets can be compared with what happened a few decades ago with Japanese brands: Japan started its dynamic economic development in the 1960s. In the 1950s, companies in the USA and Europe used Japan as a source of low-cost manufacturing to feed their own distribution chains. In the 1960s, Japanese companies turned the tables, building up their own brands and distribution systems. They developed innovative products and production processes at such a pace that by the mid-1970s, they were dominating American and European companies in sectors from automotives to consumer electronics, with brands from recognized export champions such as Toyota and Sony and mirror companies such as Nomura becoming world leaders from a zero base. Japan accounted for only 1.5 percent of world exports in 1953 but by 1978 its export share had jumped to 7.5 percent. Looking forward, we observe that many EM domestic brands are developing rapidly, but it will only gradually become apparent which of these have the potential to follow in the footsteps of the success of companies such as Sony, Toyota or Nomura. A number of firms have the potential to emerge as new global brand leaders. With the financial crisis, the cards have been reshuffled and the likely winners of the race to successfully build up a new brand will be the companies that match the new reality.
Broad Middle Class as Motor for Growth
The financial crisis has had a major impact on consumers in developed markets: Low savings and pressure on salaries make it harder for Western households to replace debt-financed discretionary spending (as was the case before the crisis) with cash spending. As a result, consumers in highly leveraged countries such as the US need to deleverage their balance sheets to bring down their level of indebtedness, possibly over a period of several years. This has started to put a dent in consumer spending, including spending on products from EM exporters. On the other hand, consumers from emerging markets are increasingly taking over the lead from developed-market consumers. Indeed, EM are looking for a new sustainable engine of growth to rely less on exports. In order to help the local population switch from saving to spending, several countries are now trying to address the traditional barrier to consumption: a threadbare social safety net, which forces a large share of the population to save in case of unemployment or illness. In addition, the wealth effect in EM continues to be supported by resilient economic growth, and an increasing number of individuals are passing the income thresholds triggering discretionary spending. Long term, this process will likely lead to the emergence of a large middle class in EM; the World Bank predicts the number of EM middle-class consumers will increase by 800 million by 2030.
Brands Must Offer Genuine Added Value
Given these substantial changes in the economic landscape, emerging brands are likely to be more successful if they focus on consumers in growth markets. The "mirror company" model is hence more promising than the model of export champions to developed market consumers. Nevertheless, export champions with outstanding innovation capabilities and products that truly offer added value to consumers will continue to record success and weather the storm of lower consumer demand in Western countries. As highlighted by the Toyota or Sony examples, two companies that thrived in the midst of the early 1980s crisis, key competitive advantage can enable major market share gains against peers. Credit Suisse estimates that corporations such as Sasol, the South African energy company which owns a patent for coal-to-liquid processing, is likely to keep recording further success in this alternative energy field, offsetting the impact of temporary weaker energy demand.
Opportunity for Export Champions
Export champions with access to scarce resources also have a key competitive advantage and can weather the storm of lower Western demand. Energy companies such as Petrobras and Gazprom have huge reserves at their disposal, particularly compared to competitors, and are in our view emerging as global majors, joining the league of ExxonMobil and BP. Industries Qatar, a petrochemical company, is rapidly gaining market share in Liquefied Natural Gas production thanks to Qatar's large natural gas reserves and the Qatari government's efforts to boost local LNG production. Finally, export champions focused on emerging markets consumers and less on Western consumers are likely to benefit from rising demand from this consumer base. These export champions are likely to display similar growth rates as local mirror companies.
New Brands Close to a Breakthrough
Accelerating consumption trends in emerging markets and access to scarce resources are two key drivers for emerging market companies to fuel their rise to become global brands. Many companies are already well positioned in emerging markets, but have still some way to go in order to become well-established global brands. Anta Sports, a Chinese sportswear producer, for instance, is already experiencing rapid sales growth mainly by Chinese consumers. But Anta has also entered the global stage with sponsorships for international athletes in basketball and tennis. In the future, we may well see Anta flagship stores opening in several developed market cities as the brand becomes a real global competitor to established brands such as Adidas or Nike. Other emerging brands in consumer electronics or household appliances are steadily increasing their footing in developed markets. So, as the world is increasingly becoming multi-polar, this is also likely to be reflected in the brands that we rely on in our daily shopping and business decisions.
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