How to pick the right business partner in emerging markets
How to pick the right business partner in emerging markets
The decade after the 2008 financial meltdown has been marked by recovery, optimism, and bullish markets, but recent trends indicate that there may soon be a change in the winds. With the ongoing U.S.-China trade war, political uncertainty in major countries like the United Kingdom and Germany, and sluggish growth in the U.S. economy, the global markets are understandably jittery.
According to The Washington Post, surveys in the U.S. indicate that three out of four economists anticipate that a recession is on the horizon. Starting a business in a booming market is already a risky proposition, but small companies and startups are particularly vulnerable to economic downturns, primarily due to lack of resources.
Why emerging markets present an attractive alternative
Those keen on starting a new business at this time should recognize that the immediate future looks uncertain in the U.S. and European Union. With the never-ending Brexit debacle and an upcoming 2020 Presidential election in the U.S., there is potential for some market instability in the West.
Emerging markets present a different picture, however. The Morgan Stanley Emerging Markets Index tracks dozens of these nations across the globe, and on average, its numbers indicate that nations like China, Korea, Brazil, and South Africa are currently experiencing faster GDP growth rates than developed countries. New business, an emerging middle class, and increased purchasing power are all symptoms of emerging markets experiencing accelerated growth.
In the past, where partnerships in emerging markets heavily focused on exports, now see emerging markets growing into bona fide consumer markets. Emerging markets now boast increased accessibility, high growth rates, and unsaturated verticals – and yet, they still possess glaring gaps in consumer access to basic goods and commodities.
In particular, markets like China and India have seen millions of households that have experienced increased purchasing power in recent years. Consequently, there is now a massive potential for growth and expansion in the retail, consumer, and B2B segments in these markets.
Take, for example, Walmart’s $16 billion acquisition of Indian e-retail firm Flipkart in 2018 – a deal that helped the American merchandising giant quickly enter one of the world’s most promising e-commerce markets. In a press statement, Walmart recognized Flipkart’s potential to leverage the American corporation’s experience in merchandising and supply chain management, while acknowledging Flipkart’s “talent, technology, customer insights and agile and innovative culture.”
A local partner is essential for ventures in emerging markets
Recognizing trade potential in an emerging market is only one small piece of the puzzle. Starting a business in a home market is challenging enough, despite familiarity with the local economy, politics, social customs, and consumer audience. Now, imagine trying to sustain a business in a foreign market without knowledge or expertise in these areas. Without help, the likelihood of success reduces drastically.
Instead, a domestic partner can help to provide knowledge of local markets and structures of influence to utilize resources that are beneficial to the new business venture. In doing so, the domestic partner helps to reduce the partnering businesses’ financial burden in the process.
What cannot be ignored, however, are the fundamentals of a business partnership – values like reliability, compatibility, and trust. A lack of these fundamental qualities in the partner firm can result in an early demise for any joint venture in business.
This is where experience and reputation are crucial – a business with a long and proven track record is preferable over a brash new startup with exciting potential. An established local business can be an invaluable asset by providing insight into the conditions of the local market. Sometimes, a firm can bring something unique to the table, something which is not available to other companies in that market. These could be unique technologies, access to licenses and permits, or strong ties to regulators which can be a ‘make it or break it’ skill in markets with tight controls.
If you plan to fly solo, prepare for a crash landing
Emerging markets that possess a growing middle class and an increase in disposable income can be tempting to foreign organizations looking to grow their business. However, the risk can sometimes outweigh the reward.
The experience of San Francisco-based rideshare giant Uber in Southeast Asia is just one example of how a solo venture in an emerging market can go awry. Enticed by India and Southeast Asia’s markets of more than 2 billion consumers each, Uber made an abrupt exit from 8 operating countries in March of 2018 – just five years after entering the market.
Homegrown startups, Grab in Southeast Asia and Didi Chuxing in China, beat the popular Western rideshare service by possessing a better grasp of the local conditions. And the lesson proved to be costly – Uber eventually sold its Southeast Asian operations to the rival Grab.
With the right business partner, however, organizations entering emerging markets can turn into success stories. Just look at the approach taken by Japanese auto manufacturers Honda to gain a foothold in India’s auto consumer market. Initially, Honda entered the market exclusively through a joint venture with the Indian auto manufacturer, Hero MotoCorp. After enjoying excellent growth and profits for more than two decades, Honda and Hero decided to split ways, signifying Honda’s confidence in navigating the Indian market without a local partner.
Avoiding early exits versus planning orderly exits
The experiences of Honda and Uber highlights the importance of having an exit strategy. Although a mutually beneficial partnership between two organizations is crucial in a joint venture, it’s not always necessary that they have the same long term goals. With time, goals change, targets move, and an arrangement that may have worked in the past may not be feasible in the future.
However, when first laying the groundwork for a new partnership, choosing a partner with complementary goals and expectations is essential for a successful business relationship. Both parties need to be fully conscious of the expectations regarding the partnership.
For example, does the partner expect full access to intellectual property owned by your firm? Does your business require any specific returns goals from this venture? Goal compatibility should be a factor to consider when looking for a new partner in an overseas emerging market. Otherwise, your investment might be headed for an early exit.
For example, McDonald’s joint venture with Indian firm CPRL has become a cautionary tale regarding the importance of selecting the right domestic business partner. After emerging in the Indian market in 1996, McDonald’s was able to alter the Indian perception of eating out dramatically, and at its peak, boasted 430 locations on the subcontinent.
However, financial disputes with CPRL’s Vikram Bakshi led the American fast-food giant to become entangled in a six-year-long legal battle in Indian Courts. By August 2017, McDonald’s had announced the early termination of its joint ventures in India and immediately closed 169 of its locations.
The bottom line: complementary, capable, and competent
Emerging markets in Southeast Asia, Africa, and the Americas are some of the most vibrant startup ecosystems in the world. Given the promise of fast and scalable expansion, business partnerships involving tech firms are currently en vogue.
In the past, the flow of technology and IP was largely unidirectional – from the developed markets in the West and Japan to emerging economies. Now, there is considerable disruption in the flow of global knowledge. For instance, China is the world’s leading market for Fintech startups, while nations in Sub-Saharan Africa are experiencing the fastest growth in usage and integration of mobile money. For once, the playing field is beginning to level.
Analyzing a potential business partner for knowledge reciprocity is important in the decision making process. Does the domestic firm shares complementary goals? And what various resources and capabilities can an organization bring to the equation?
Resources such as intellectual property, capital, market assets, existing brands and products, distribution and supply chains, and an established customer base, are all things to consider when selecting a competent domestic partner.
In the words of Michael Gerber, small business guru and New York Times best-selling author of The E-Myth Revisited, “The number of businesses that fold due to bad partnerships is staggering. In some cases, they are charlatans, in others inept business people, and others find themselves unable to scale with any growth.”