“The Big Mac Mirage”: America is actually terrible at globalization; U.S. companies derived less than 10% of their overall revenues from emerging markets

“The Big Mac Mirage”: America is actually terrible at globalization

By Tim Fernholz — 6 hours ago

Coke is so prevalent around the world that non-profits look to its supply chain for help on distributing aid. McDonalds, in 122 different countries, is so widespread that there’s a foreign relations theory that no two countries hosting the burger franchise will go to war, although the strong version of that theory is well dead. And Wal-Mart is the world’s third largest global employer, after the American and Chinese militaries, respectively.

The US must be great at globalization, right?

Unfortunately, no, according to Bhaskar Chakravorti, the director of Tufts’ University’s Institute for Business in the Global Context. He says all these examples represent “the myth of American global market power”—they are outliers that disguise the real failing of American multinationals to succeed around the world, and especially in fast-growing emerging markets. Despite what you might hear, he says “we are extremely under globalized.” Here’s an excerpt from a forthcoming paper he’s written with fellow economist Gita Rao (emphasis mine):

In 2010, emerging markets represented 36% of global GDP; these markets already account for the majority of the world’s oil and steel consumption, 46% of world retail sales, 52% of all purchases of motor vehicles and 82% of mobile phone subscriptions. With two-thirds of global growth coming from these markets, in a decade they will account for the majority of the world’s economic value. Yet U.S. companies derived less than 10% of their overall revenues from emerging markets: about as little as 7%, according to HSBC estimates for 2010. The 100 largest companies from the developed world overall made 17% of their revenues from emerging markets, according to a McKinsey report; in other words, the U.S. lags not only emerging market firms in capturing share in emerging markets, but it lags the developed world overall. By considering the difference between the “absolute potential” represented by the 36% number or, to take a much more conservative benchmark, the global peer average of 17% and the U.S. share of 7%, we derive two measures of the gap – and the degree to which U.S. industry has not participated in global growth.

There are several reasons the US is being held back. Some are the intrinsic challenges of doing business abroad: Besides language and cultural barriers, there are underdeveloped supply chains, incomplete capital markets, corruption, etc. But European companies earn 25% of their revenues from emerging markets, so these must be surmountable. What’s America’s problem?

America doesn’t have a legacy of colonization. Despite a hefty history of foreign interference, the US didn’t set up the same deep linkages that Spanish and Portuguese companies did in South America or European countries have in Africa or South Asia. Chakravorti, who was a McKinsey executive for many years, recalls European competitors in Africa asking, ”What are you doing in Africa? Africa belongs to us.” Meanwhile, he says, ”the executives I was working with had no understanding of the socio-cultural context of the continent.”

America is actually pretty insular. Because it’s a big country, and has had many decades of consumer-driven growth, US businesses haven’t necessarily had to look over the horizon for new opportunities. After the 9/11 attacks, Chakravorti says, things got even worse, and most businesses stayed home. It doesn’t help that less than 20% of Americans speak a language other than English, while 56% of Europeans speak a second language.

American business is all about standardization. Companies get economies of scale from selling the same product, but many emerging markets are stratified and require different products and price-points in the same country; while American executives want a  ”Brazil strategy,” what they really need is a strategy for Sao Paulo state and another for more rural areas.

Chakravorti argues that American companies do have what it takes to surmount these challenges, and they’ll need to if they want to bring more growth back to the US.

His strategy starts with a focus on sectors where America can compete abroad but isn’t taking full advantage of the opportunities, particularly in consumer products and large-scale services such as education, elder- and child-care. American companies need to start thinking about tailoring their strategies to demand abroad—particularly at the bottom of the pyramid— but the market can’t do it alone: The government needs to work more closely to tailor its foreign policy to America’s commercial needs while opening education to a more international view.

“That gap has been closed completely in China, because the most powerful companies are state-owned,” Chakravorti says. “We are still talking about the Asia pivot as though it is something dramatic and new, while China has been pivoting for a while.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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