Senior Partner & Managing Director, Global Leader, Public Sector Practice
Despite economic turmoil in emerging markets, the latest global challengers have maintained both their growth rates and profit margins. (See Exhibits 1 and 2.) The global challengers nearly quintupled their share of overseas revenue from 2005 through 2014. Not surprisingly, this performance has translated into strong total shareholder returns, even with the downturn in 2015. (See Exhibit 3.)
But the numbers tell only part of the story. What are these companies exactly, and where do they come from? (See Exhibit 4.) Outwardly, there has been little shift in the industry or geographic mix of the global challengers. Industrial goods is still the sector with the largest number of challengers; among countries, China and India come out on top. (See Exhibit 5.) This high-level view, however, does not capture many of the undercurrents that are starting to ripple to the surface.
One shift is that resource and commodity companies may have passed their high-water mark. These companies have always made up a healthy share of the global challengers. And they do so in this year’s report as well, accounting for 24% of companies on the list. But between 2014 and 2016, the number of challenger energy companies declined from 13 to 10. And none of the new challengers is solely in the resource or commodity business. (The new challenger Grupo México is also active in railroads.) Moreover, as noted earlier, the effect of the drop in commodity prices that occurred in 2015 is not reflected in the composition of this year’s list.
Another trend is the rise of a new breed of consumer companies. The consumer-oriented challengers on this year’s list are moving beyond advantages based on cost and access to raw materials such as palm oil. They include Dalian Wanda, a luxury hotel and resort developer from China, and Discovery, a financial services firm from South Africa.
The new challengers are also appealing to the digital needs of the expanding middle class in emerging markets. Two prime examples are Axiata, a leading regional telecom operator, and Xiaomi, a maker of smartphones. Remarkably, the revenues of device makers from emerging markets grew eightfold from 2005 through 2014, reaching $211 billion. While many device makers are winning with low-cost products, others are increasingly investing in innovation and R&D.
Several other new challengers are likewise emblematic of larger themes. The emergence of China Eastern Airlines and Pegasus Airlines as challengers reflects the rise of air carriers in emerging markets. From 2005 through 2014, the revenues of such airlines tripled, and their global market share rose from one-fifth to one-third. Seven airlines based in emerging markets are now global challengers, compared with none ten years ago. (See Exhibit 6.)
Pharmaceutical companies based in emerging markets have also grown rapidly, from $8 billion in revenues in 2005 to $80 billion in 2014. This growth reflects both inroads in mature markets and rising health care spending in emerging markets. Lupin Pharmaceuticals and Sun Pharmaceuticals, both of India, have completed acquisitions to round out their product portfolios. Indian companies now have a 20% global market share for generic drugs and own 22% of pharmaceutical plants approved by the US Food and Drug Administration. (See “The Sun Machine.”)
Just a decade ago, Sun Pharmaceuticals was a successful, midsized company in India with $300 million in sales. But like so many other challengers, the company was restless and eager to expand. Powered largely by both overseas and domestic mergers and acquisitions, Sun recorded sales of $4.4 billion in fiscal year 2015 and has a portfolio of more than 2,000 products.
Since 2005, Sun has nearly doubled its percentage of overseas sales, from 39% to 74%. It has established manufacturing facilities on five continents and in 14 countries, including Bangladesh, Hungary, Malaysia, Nigeria, and the US. In fact, the US accounts for half of Sun’s sales, while other emerging markets account for 14% of revenues.
Since 2010, Sun has completed 11 acquisitions to achieve both geographic reach and portfolio expansion. Its 2015 acquisition of the US company InSite Vision, for example, strengthened its ophthalmic portfolio, while its acquisition of Ranbaxy the same year strengthened its generics footprint in emerging markets.
While Sun remains primarily a generics manufacturer, it is increasing investments in specialty and complex products with higher margins.
Few global media companies have launched from emerging markets, although that may be starting to change. China’s Alibaba has investments in several online media properties, and Dalian Wanda is buying a majority stake in Legendary Entertainment, a Hollywood studio.
Emerging markets continue to play a significant role in supplying the world’s raw materials and meeting the infrastructure needs of both emerging and mature economies. That role is in flux, however, and most of the new challengers in this category are emphasizing integration, value-added services, and other higher-end capabilities. The name of the game is no longer simply low cost.
Many emerging markets are relatively young countries with a rapidly expanding middle class. This generation of consumers is optimistic, with the disposable income required to spend on goods and services.
Eight of the new challengers are serving the needs of these consumers, although only three of them are traditional fast-moving-consumer-goods companies.
The three companies below are tapping into the insatiable demand of consumers to be connected at all times.