Global Economic Trends and International Business

Prof. Tamer CavusgilPLEASE DO NOT DISTRIBUTE WITHOUT PERMISSION

Agenda

1: Global Economic Trends 2. Implications for Business

3. IT & Communications Sector Trends

3

Key Global Trends

Global growth persistently slow Uncertainty in Eurozone and U.S. fiscal policy Dynamism in Emerging Markets

Growing interdependencies

Ever changing technology

Natural resources & energy a premium

Increasing role of government

Role of family conglomerates, state-owned companies & Sovereign Wealth Funds

Source: “The long road to recovery”. The Economist 2012 in charts, December.

Source: “The long road to recovery”. The Economist 2012 in charts, December.

= BRICs + Mexico, S. Korea, Turkey & Indonesia

Source: Goldman Sachs, March 2012

Developing economies accounted for some 80% of global growth in 2011.World GDP will grow 3.3% in 2012 and 3.6% next year.

What Fuels the Dynamism in EMs?

Market liberalization, industrialization, modernization, urbanization, privatization

… have led to rapid economic development and transformation in

EMs…

causing a boom in consumer and business markets …

Fastest-growing economies: Next five years

0 1 2 3 4 5 6 7 8 9

Real GDP, average annual % change, 2012-2016Source: Economist Intelligence Unit

BRICs

CIVETS

Other EMs

G7

Other important economies worth watching:Saudi Arabia and Peru.

Italy

FranceGermany

UKJapan

CanadaUS

South Africa

MexicoSouth Korea

RussiaBrazil

TurkeyEgypt

ColombiaIndonesiaVietnamNigeria

IndiaChina

EM Firms in Fortune Global 500(2012)

Brazil: 8

Russia: 7

India: 8

China: 73Turkey: 1

S. Korea: 13

Taiwan: 6

Malaysia: 1

Mexico: 3Thailand: 1

Poland: 1

Colombia: 1 Venezuela: 1

Hungary: 1

2011 2012 Change

China 61 73 +12

BRICs 83 96 +13

All EMs 114 125 +11

Emerging Markets

• China is the world’s largest market for: cars, personal computers, smartphones

• Middle Class: 18.2% of the population (households spend $10-$100 / day)

“Chasing China’s Shoppers,” WSJ, June 14, 2012

Emerging Markets

• China– Automobile sales increased 74% from

2011• Chinese government cut sales tax on

smaller-engine vehicles– Ex: GM’s sales in China rose 67% from

2010

“China Passes U.S. as World’s Top Car Market”WSJ, Jan. 12, 2010

Local and global car manufacturers are targeting : “people who are just getting affluent enough to afford a car”

“GM Looks to Rev Up Chinese Exports” WSJ, Feb. 16, 2011

Emerging Markets

• China– 2nd-largest market for luxury brands

• $101 billion sales expected by 2020

– Dolce & Gabbana opening 15 new stores in China

– Luxottica developing sunglasses in China made specifically for Chinese consumers

“China’s “Web Takes on a Luxury Look” WSJ, Dec. 2, 2010

“Dolce & Gabbana Expanding in China” WSJ, March 22, 2011

“China’s Luxury Market Shifts Upscale” WSJ, Oct. 8, 2012

Emerging Markets

• Starbucks– Plans to increase

presence in China– Plans to expand from

406 stores to > 1,500 by 2015

“Starbucks Plans Major China Expansion” WSJ, April 13, 2010“Starbucks Plays to Local Chinese Tastes”

WSJ, Nov. 26, 2012

Emerging Markets

• Taco Bell in India– Young population with improving

standards of living and an enthusiasm for Western brands

– Yum Brands plan to quadruple Pizza Hut, KFC and Taco Bell stores in next 5 yrs

• McDonald’s in China– China is McDonald’s fastest growing

market– Double presence in China over next few

years– First McDonald’s Hamburger University

opened in China

“Novelty Proves a Hit for Taco Bell in India,” WSJ, March 29, 2010

“McDonald’s to Double Restaurants in China,” WSJ, March 29, 2010

Emerging Markets

• McDonald’s & KFC delivery in China• KFC opening 450 new restaurants in China per year

“Asia Delivers for McDonald’s,” WSJ, Dec. 13, 2011

What Makes Emerging Markets Attractive?

“U.S. Companies Race to Catch Up in Africa,” WSJ, June 6, 2011

• Africa– Opportunities:

• Economy forecast to grow to $2.6 trillion in 2020 from $1.6 trillion in 2008

• Growth in: mining, agriculture, development of ports, roads, and other infrastructure

• From 2000 to 2009, FDI increased sixfoldto $58.56 billion

– Challenges:• Poverty• Africa ranks low on World Bank’s Ease of

Doing Business survey

“A Continent of New Consumers Beckons,” WSJ, January 13, 2011

• Coca-Cola in Africa– Present in all African countries– Africa’s largest employer

• 65,000 employees• 160 plants

– New juice plants to capture growing middle-class demand for orange, mango, and other tropical fruit beverages

– Spend $12 billion in Africa during thenext 10 years

“Africa: Coke’s Last Frontier,” BusinessWeek, Oct. 28, 2010

• Q: Which country has the largest per capita consumption of Coca-Cola?

“Coca-Cola Ups Its Bet on Growth in India,” WSJ, June 26, 2012

• Q: Which country has the largest per capita consumption of Coca-Cola?

“Coca-Cola Ups Its Bet on Growth in India,” WSJ, June 26, 2012

• YUM Brands Inc. in Africa– Double KFC outlets in Africa to 1,200

by 2014

“KFC Savors Potential in Africa,” WSJ, Dec. 7, 2010

Invest $500 million in expansion

Expect to more than double operating profit to $120 million by 2014

• Wal-MartPurchased 51% of South African retailer Massmart Holdings Ltd.

“Wal-Mart Targets Africa,” WSJ, Sep. 26, 2010

“Wal-Mart Sets African Offer,” WSJ, Nov. 30, 2010

China - Markets within markets. One province in China is larger than many national markets; much variation across regions

The Euro Area Economies

Triggers of the EU Crisis - 1

Triggers of the EU Crisis - 2

Triggers of the EU Crisis -3

Government Debt as % of GDP, Annual Averages

Triggers of the EU Crisis - 4

Source: The Market Oracle 2011, October 10

Source: Economist 2012, May 10

Current Situation in EU - 1

Unemployment in the 17-nation Eurozone stood at 11.6 % in

September 2012, the highest it has ever been.

18.5 million people are out of work in the Eurozone.

Source: Economist 2012, May 10

Current Situation in EU - 2

If Greece, Portugal, Spain & Italy exit the Euro ...

Source: Spiegel 2012, October 19

Source: Spiegel 2012, October 19

If Greece, Portugal, Spain & Italy exit the Euro

1: Global Economic Trends

2. Implications for Business3. IT & Communications Sector Trends

39

Trends of Interest to Business

EM customer takes center stage

Learning how to do business in EMs

The rise of the Middle Class in EMs

Concentration in Megacities & urban areas

Talent shortage

Cost of doing business still high – due to corruption, excessive regulation, conflicts …

McKinsey Estimates…

Global Middle Class includes almost two billion people,

spending a total of $6.9 trillion/year

This figure will rise to $20 trillion during the next decade—

about twice the current consumption in the U. S.

Emerging Market Consumers

• Have disposal income => consumption

• Enjoy shopping centers and malls

• Use credit and store cards to boost spending

• Luxury markets developing fast

• Convenience gaining importance for time-stripped consumers

• Seek recreation & take vacations

Real Annual Disposable Income in BRIC Countries

Source: Euromonitor International 2012 „Top 10 Consumer Trends of 2012“, March 20

Source: Ali, S. and Dadush, U. (2012) “The global middle class is bigger than we thought”, Foreign Policy: May.

Source: Ali, S. and Dadush, U. (2012) “The global middle class is bigger than we thought”, Foreign Policy: May.

GSU-CIBER Middle Class Scorecard

Indicators

Income Pyramidof Middle Income HH

2010

* The circles represent the number of households for

chosen income deciles

Expenditure Pyramid of Middle Income HH

2010

* The circles represent the number of households for chosen income deciles

Household Annual Disposable Income (US $ per household)

© Cavusgil/Kardes 2012

GSU-CIBER

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thousands $

CHILE Decile 10

Decile 9

Decile 8

Decile 7

Decile 6

Decile 5

Decile 4

Decile 3

Decile 2

Decile 1

Decile 10

Decile 9

Decile 8

Decile 7

Deciles

6, 5, 4,

3, 2, 1

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thousands $

INDONESIA Decile 10

Decile 9

Decile 8

Decile 7

Decile 6

Decile 5

Decile 4

Decile 3

Decile 2

Decile 1

Decile 10

Decile 9

Decile 8

Decile 7

Deciles

6, 5, 4,

3, 2, 1

0

20

40

60

80

100

120

140

160

180

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thousands $

SOUTH KOREA

Decile 10

Decile 9

Decile 8

Decile 7

Decile 6

Decile 5

Decile 4

Decile 3

Decile 2

Decile 1

Decile 10

Decile 9

Decile 8

Decile 7

Deciles

6, 5, 4,

3, 2, 1

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Thousands $

VENEZUELA

Decile 10

Decile 9

Decile 8

Decile 7

Decile 6

Decile 5

Decile 4

Decile 3

Decile 2

Decile 1

Decile 10

Decile 9

Decile 8

Decile 7

Deciles

6, 5, 4,

3, 2, 1

Mass MC Index vs. World Bank’s Doing Business Indicators

0"

5"

10"

15"

20"

25"

30"

0" 5" 10" 15" 20" 25" 30"

Taiwan

South Korea

Chile

South Africa Israel

Malaysia Thailand

Peru Hungary

Czech Republic

Vietnam

Pakistan Egypt

Philippines

Colombia

Poland

Venezuela

Argentina

Indonesia India

Brazil

Russia

Turkey

Mexico

China

© Cavusgil/Kardes 2012

GSU-CIBER (Mass) Middle Class Index (2011)

Ease of Doing Business Index

(World Bank, 2011-2012)

MOST

FAVORABLE

LEAST FAVORABLE

MODERATE

LEAST FAVORABLE MODERATE MOST FAVORABLE LOW MEDIUM

HIGH

Source: Financial Times, “A case of rise and sprawl,” Nov 7, 2011

Source: McKinsey, Sep 2012, „Unlocking the potential of emerging-market cities “

Consumer Trends of 2012City Living Reigns

• In 2012: 3.7 b. urban residents worldwide. • Urban dwellers in new hubs such as Chongqing and

Guadalajara. • A whole mass of new arrivals to cities; less disposable income

but higher consumption • New and established ethnic groups and culture, older people

with trend-sensitive lifestyles, students, highly skilled and low income migrant workers, consumers on city breaks, and cross-generational households.

Consumer Vigilantes Speak up!

• On and offline protest: power of social networking, viral videos• Willingness to try brands with greater accountability and

genuine innovation by consumers• Less brand loyalty because of income inequality and price

increases

Source: Euromonitor International 2012 „Top 10 Consumer Trends of 2012“, March 20

1: Global Economic Trends

2. Implications for Business

3. Trends in IT & Communications

Sector Trends - 1

• The global digital economy comes of age. Mobility, cloud

computing, business intelligence and social media -- in both

advanced and developing economies.

• Industries undergo digital transformation. With maturing

digital economy, companies will need to contend with the twin

forces of technology and globalization. Many sectors,

including technology, telecommunications, entertainment,

media, banking, retail and healthcare, will continue to be

reshaped through the application of IT.

• The digital divide reverses. With economic power shifting to

the East, cash-rich companies in the developing world are now

investing heavily in technology—often outpacing their

counterparts in advanced economies. Expect aggressive

technology-charged firms from EMs.

Source: PricewaterhouseCoopers 2012

Internet Users Worldwide

• The EM customer takes center stage. EM customers -- the

consumer, business and government - offer huge opportunities

for Western companies that can adapt to their needs.

• Business shifts into hyperdrive. Globalization, fast-growth

economies, and new technology have accelerated the speed of

most business activities. Real-time business intelligence and

predictive analysis will be required not only for faster decision-

making, but to cope with unexpected market risks and

opportunities.

• Firms re-organize to embrace the digital economy. To operate

on the global digital playing field, where new rivals are

unencumbered by rigid policies and thinking, astute Western

firms are moving away from hierarchical decision-making, toward

a network structure that is more market-like and organic.

Source: PricewaterhouseCoopers 2012

Sector Trends -2

Green Thrift

• Smart shopping through the apps that send coupons to mobiles

Lifestyles

• Consumers are revelling in their ability to track and control their health, identity, communication and buying habits.

• In China, entertainment has moved to the internet. Falling theater attendance; young people interact online often via game platforms.

Reality Culture and Consumers

• Ordinary people appearing in reality programming are claiming the spotlight of the 'talented' famous and consumer attention as well as lifestyle aspirations.

• Importance of celebrities more than political or communityleaders

Source: Euromonitor International 2012 „Top 10 Consumer Trends of 2012“, March 20

Consumer Trends of 2012 - 1

Smartphone Universe • Annual smartphone sales surged from US $8.4 billion to US

$83.1 billion between 2005 and 2010, with China surpassing the U.S.

• Global smartphone sales are forecast to reach US $137 billion in 2012.

• For many advanced economy consumers, PCs and laptops are beginning to take a backseat; smartphones are used to surf the Internet and watch TV anywhere.

Youth - Future Imperfect• Young consumers are facing up to a different, less predictable

reality in terms of purchasing aspirations, work, living set-ups, and role models.

• Marketers are focusing on the youth relationship, and expression through tech-led communications to decipher this transient audience segment.

Weight as a hot topic• Good health as the most important determinant of happiness.

Source: Euromonitor International 2012 „Top 10 Consumer Trends of 2012“, March 20

Consumer Trends of 2012 - 2

Tech Lifestyles vs. Slow Living and the Best of Both• Some consumers are embracing an 'always-on' lifestyle

while others are trying to disengage.• There are also some interesting fusions of tech-led and

'slow' lifestyles that are impacting on buying behavior. • For instance, Chinese e-commerce giant Taobao's launch of a

'try-out' home furnishings store in Beijing to overcome thelocal need to examine major purchases in person.

Global Online Retailing in real terms

Source: Euromonitor International 2012 „Top 10 Consumer Trends of 2012“, March 20

Consumer Trends of 2012 - 3

• Consumer health spending: Some 70% of OTC drug sales

growth is expected to come from EMs, half of that from BRICs.

• Consumer behavior and attitudes are changing: Consumers

use the internet to research a broad array of health options –

96% of U.S. adults who use the internet use it to look up health

information- and are open to many different health options,

including ‘alternative’ medicine. The North American market for

alternative medicine is $16.4 billion.

• The business landscape is changing: Retailers across all

industries are expanding into health and wellness. Direct to

consumer products and services are particularly ripe for

disruption. Healthcare players are diversifying their offerings in

consumer health.

Source: McKinsey 2012, May

Consumer Trends 2012 - 4

Opportunities in the Growth Markets

http://www.goldmansachs.com/our-thinking/focus-on/growth-markets/index.html?mediaIndex=video1

Insights on the Growth Markets

http://www.goldmansachs.com/our-thinking/focus-on/growth-markets/index.html?mediaIndex=video2

Empowering Women

http://www.goldmansachs.com/our-thinking/focus-on/growth-markets/index.html?mediaIndex=video3

Source: Goldman Sachs, March 2012

A view from Brazil

http://www.goldmansachs.com/our-thinking/view-from/a-view-from-

brazil/index.html

A view from India

http://www.goldmansachs.com/our-thinking/view-from/a-view-from-

india/index.html

Source: Goldman Sachs, March 2012