Poor Countries Yield Big Profits

Many firms began casting their nets more widely after the U.S. recession in 2000-01. As the tech bubble burst and 9/11 cast a pall over the markets, scores of companies gutted domestic payrolls and mothballed factories, but many—think IBM and Unilever, among big Western companies— reinvented themselves by going abroad, to China and India. Those investments are now paying off. "The nice thing about the world economy right now [is that] not all the business cycles correlate with one another," says Marc Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School of Business.

The fact that GDP in China and India are still expanding by 10 and 8.4 percent respectively is great for a company like Starbucks, which has taken a beating in the U.S. recently as recession-wary consumers forgo the $4 latte in favor of cheaper alternatives. The franchise started pushing frappuccinos to the rest of the world a few years back; now foreign market sales are up 31 percent from 2006 to 2007, against 19 percent in the U.S.

That's not to say that emerging markets are an easy place to make a dollar, yen or euro. Guillen cautions that currency fluctuations have distorted balance sheets, inflating multinationals' foreign earnings when reported in dollars. And for all the buzz over hypergrowth, developing nations still account for about 14 percent of world GDP, a statistic that drives home decoupling critics' point. Foreign businesses in developing markets also have all the usual problems with crumbling infrastructure, rigid labor laws and opaque regulations. Then there's the challenge of developing entirely new product categories for less prosperous markets. Uniliver is now famous for selling one-pack soap sachets in India, and Cadbury has catered to penny-paying customers in Mexico City and São Paulo by offering pieces rather than packs of Trident and Bubbaloo chewing gum. But more complex products have been tougher to tweak. Big high-technology vendors are often stymied by the task of serving a galaxy of low-budget businesses. One solution has been the Internet; instead of flogging fancy and expensive corporate management software, companies like Google and Microsoft are offering cheaper Web-based services that retailers and companies can call up through their browsers for a far more modest fee. Spending on IT research and development in emerging markets is growing at 7 percent a year—twice the U.S. rate—and many firms have shifted entire R&D divisions there.

R&D isn't the only thing moving. IBM now deploys two thirds of its staff outside the U.S., and is pumping $8 billion into India alone in a plan to double its earnings from emerging markets to around $9 billion by 2010. GE just transferred its growing hydroelectric power division, GE Hydro, from Canada to Brazil and shifted headquarters of its consumer-finance business, GE Money, from Connecticut to London, in large part to be closer to growth markets in the East. "The days when you go into a country like a ghost, drop off a piece of equipment and then walk away again are gone," says Ferdinando Beccalli-Falco, chairman of GE International, the worldwide arm of General Electric. "Now you have to dig in, get involved with governments and local companies, and become a partner for development." In these new partnerships, profits clearly flow both ways.

© 2008