Beyond the BRICS

Martina Bozadzhieva

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The role that the BRICS play in multinationals’ market portfolios is changing, with the five countries increasingly seen as new hubs for expansion into the next layer of frontier emerging economies.

Martina Bozadzhieva is Practice Leader for Central and Eastern Europe at Frontier Strategy Group.

Multinationals are under pressure to deliver high growth and profitability in emerging markets. To do so, they are using the BRICS as hubs to expand into countries on their periphery. They are also deepening their presence in the BRICS themselves by entering new regions outside of major cities.

A recent conference, Doing Business with the BRICS, organized by the Eurasia Center in Washington, D.C., discussed the growing importance of the BRICS and the need for closer trade relations between these countries and the United States. Given the slow growth seen across developed markets, seizing business opportunities in emerging and frontier markets remains as important a challenge as ever for businesses.

The role that the BRICS play in multinationals’ market portfolios is changing. The first stage of emerging-markets expansion by multinationals naturally focused on the five countries. Companies were attracted by their fast growth, and the large size of their largely untapped markets. Today, multinationals are facing a different environment – economic growth across the BRICS is slowing, competition from both local players and Western businesses is accelerating, and exceptionally fast growth upon market entry has given way to a more modest pace, as certain industries in these markets mature.

As a result, the BRICS can no longer provide guaranteed high growth with relatively limited investment. To maintain high growth levels in the BRICS and to fully capitalize on the opportunity that these markets present, multinationals increasingly need to make larger, more sophisticated investments that position them as leading players in these markets, while responding to the changing needs of their local customers. This results in two main strategy shifts that many of our clients are pursuing across the BRICS.

Leveraging expansion

As growth in the BRICS slows, multinationals are increasingly looking to smaller but faster-growing markets on the BRICS’ periphery. They then use their established presence in the BRICS to accelerate access to such peripheral markets. For example, multinationals with a presence in South Africa are looking to use the relationships they have in that market, the local teams they have built, and the distributor partnerships they have formed, to expand into the wider region.

Something similar is happening with Russia, where multinationals are increasingly leveraging their local teams to manage distributor relationships and market entry into markets in the Caucasus and Central Asia.

In Brazil, companies are leveraging their regional presence to engage consumers in upcoming markets such as Peru.

These new markets, which are peripheral for the time being, are often too small to warrant a full-fledged local presence, but are difficult to navigate and to manage from Europe or the United States.

Cultural similarities, geographic proximity, local management talent, and established investment all support the case for using the BRICS as hubs for regional expansion into the next layer of frontier emerging markets. Over time, this trend could result in multinationals having more diffused centers of power, with much of their center of gravity shifted to emerging markets and concentrated in the BRICS. This would be the business version of the multi-polar world vision the BRICS governments are so actively promoting.

Deepening presence

The other trend, parallel with a rapid expansion into emerging markets on the periphery of the BRICS, is that of multinationals’ deepening presence within the BRICS themselves. True opportunity within the five countries lies not only in the capital cities or the top two or three richest regions.

For companies to fully realize the potential of the BRICS markets, they need to reach a wide range of potential customers, including those with more limited purchasing power. Not only is this true for consumer goods companies, but also for multinationals selling to local businesses and even to governments.

Having picked the low-hanging fruit of opportunity in the main cities in the BRICS, multinationals need to increasingly regionalize their presence in these markets to gain market share, maintain strong growth, and establish themselves as key market players. Otherwise, they risk plateauing growth and a weakening market position.

In Brazil, multinationals have historically relied on the country’s South and Southeast regions to deliver robust growth, given that these are its most populated, prosperous regions, contributing a combined total of more than 70% of overall GDP. However, multinationals are also looking to grow in lesser-penetrated states in the Northeast and the West.

In Russia, 82% of the population live in cities outside of Saint Petersburg and Moscow. Our clients are looking for ways to tap into the growth potential of Russia’s numerous regions. One senior executive client running Europe, the Middle East and Africa (EMEA) for a large consumer durables multinational says, “I was in Russia recently and visited Novosibirsk. The city struck me as well-developed and large. Back in Moscow, I asked my local staff and our distributor about it, and they all said, ‘There’s no market outside of Moscow.’ Surely there must be demand in a city like Novosibirsk for our products, but how do I find out?”

Setting new questions

In response to these challenges, multinationals are increasingly looking for ways to expand into new provinces and regions in markets like Russia, China, and Brazil. This process, short of being a simple question of adding a few distributors to cover new geographies, poses a whole new set of strategic decisions for executives. How do we reach customers in a cost-effective way given high transportation costs in Russia? Do we invest proactively in expansion into Brazil’s northeast even if the market opportunity there has not fully developed? Do we need to produce locally to reduce transportation and logistics costs and to take advantage of government incentives? These are just a few of the questions that regional expansion raises for multinationals.

In the end, expanding within the BRICS and into markets on their periphery requires long-term commitment and a willingness to invest significant resources even though the return on the investment could take as long as five or more years to realize. This calls for significant risk-taking both by multinationals and the executives who have to make these decisions – but the alternative is stagnation.

Just being in the BRICS is no longer enough. Companies that take advantage of this trend will shape not only tomorrow’s emerging markets landscape, but also the very definition of what it means to be a global multinational.

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