Why size and growth rates are not the only factors to consider when exploring new markets.
China and India often dominate the conversation about emerging markets but there are other star players of the global economy that are also growing apace.
Philippines and Kenya both look set to rival India’s GDP growth in 2015. Indonesia is expected to grow at over 5% this year and the economies of Peru and Nigeria are also both performing well above average.
With China and Russia both slowing down, other fast growing economies are racing ahead of the pack in terms of GDP growth. These include countries such as Nigeria and Peru that may not yet be on the radar of companies looking for new markets.
Are they worth considering as new markets for your business? This article will explore why size and growth rates are not the only factors to consider when exploring new markets.
Don’t be fooled by GDP figures
What do GDP growth figures actually mean?
GDP (gross domestic product) is an attempt to measure the size of the economy by totting up the value of all goods and services produced during a specific time period.
GDP is usually measured as a percentage rate in comparison to a previous period of assessment. As GDP is usually seen as a measure of economic health, the growth rate can and does dip into negative figures when things are going badly wrong in an economy such as during times of war.
In unequal societies, dazzling GDP growth figures can be misleading in terms of what they mean for market activity. A huge leap in GDP may only represent a rise in incomes for a very small elite within the country, such as those owning major natural resources.
If you’re selling designer jeans to rich oil barons, an increase in GDP caused by an oil price rise may still be an advantage. But if you’re aiming, like many global businesses, to find a wider market then don’t be deceived by climbs in GDP – it could mean very little for the typical household’s income.
In part that’s the reason why China and India tend to dominate the conversation when we talk about emerging markets. Rising GDP in these markets is helping a large consumer base, elevating many millions of people into the middle class bracket and giving many more consumers a disposable income for the first time.
Whilst the gains certainly aren’t distributed equally, it’s the sheer numbers of consumers that are starting to have disposable incomes for the first time that make these big markets significant targets for businesses.
Difficulties of doing business
The difficulties of operating in China are well documented and whilst this economy may be twice the size of India, it isn’t for the faint-hearted.
Businesses looking for new markets are well advised to look beyond GDP and market size to consider the ease of doing business in the economy they have in mind. An index provided by the World Bank sheds useful light on the situation.
India may be the fastest growing economy but it’s one of the most difficult countries in the world in which to do business, ranking 142nd out of the 189 countries listed in the most recent index.
That puts this rising economic star behind war-ravaged Sierra Leone and Yemen, a country currently being bombarded by air strikes. Businesses wouldn’t even dream of doing business with countries in these dire situations but the size of India’s market is the factor that makes it a prospect for some brave enterprises.
Contrast red-tape laden India with Malaysia; the world’s 7th fastest growing economy according to Bloomberg. Malaysia is considered the 18th easiest country in the world to do business. Whilst it’s not such a huge market as India, the lack of complexities may mean an expanding economy like this one could be a less costly prospect to do business in. It’s also possible that it could also be faster to get your product or service to market in a country like this.
Other countries expanding faster than the global average that still rank well in terms of the ease of doing business there include Thailand and the UAE. Contrast this to China, only the world’s 90th ranked country in terms of ease of doing business. This means it’s easier to do business in nearly half the world’s countries than it is in China. That should be a sobering prospect for companies looking to new markets overseas.
Size isn’t everything
It’s tempting to take on the biggest markets when expanding overseas in the hope of recouping the costs of localising your offering through wider sales volumes.
In practice though, huge markets such as China and India are so large that it’s more practicable to view them as several markets rather than one.
In India there’s the added complication of a multitude of languages; in both India and China there’s the added complexity of fragmentation caused by factors such as the rural/urban divide.
China’s market is so fragmented that it’s usually best practice to split it into tiers that essentially describe the differing levels of consumer sophistication. Engaging with these complex, multilingual markets may be a bigger job than many brands are able to take on. That’s a strong argument in favour of tackling a smaller and more homogenous market.
Take Nigeria for instance. This country is one of the world’s fastest growing economies, with a young and fairly well educated population, expanding middle class and a decade of strong economic growth behind it.
Most significantly, there are very useful similarities between the business and legal practices in Nigeria and those of the UK. English is also the official language in the country.
Whilst it ranks very low down the list in terms of ease of doing business, UK-based businesses may find the language and business environment make it easier to navigate than other rising economic stars. Whilst corruption and poor infrastructure remain significant challenges, exports from the UK to Nigeria have risen significantly in recent years.
When selecting a new market to target, it’s important to consider more than just the vibrancy of the market. Enterprises looking for new audiences overseas are advised to consider not only measures of economic health such as GDP but also factors such as the ease of doing business there. For profit growth, the answer is not always to tackle the biggest available markets.