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Challenger Companies Based in RDEs Are Continuing  to Strive for Global Leadership Despite the Financial Crisis, According to The Boston Consulting Group

New Study Reveals How the 2009 BCG 100 Global Challengers Are Staying Internationally
Competitive By Aggressively Reshaping Their Businesses for the Postcrisis Global Environment

DALIAN, September 10, 2009—Many of the 100 companies on BCG's 2009 list of global challenger companies¹ are poised to emerge from the financial crisis with an unprecedented degree of influence on their global industries, according to a new BCG White Paper, From Crisis to Opportunity: How Global Challenger Companies Are Seeking Industry Leadership in the Postcrisis World.

Despite the crisis, most of the global challengers have solid financial positions and access to capital.  Of those that are publicly listed, nearly half outperformed their industries in terms of relative total shareholder return (RTSR) from June 2008 to June 2009.

Their strong performance can be attributed to growth in their home markets and global industries, their own financial health, and their strategic responses to the crisis.

These challengers – and others on the list -- are using the crisis as an opportunity, making bold strategic moves to enhance their market positions and gain competitive advantage.

Enterprising initiatives by the challengers include acquiring resources, capabilities, and assets; globalizing through partnerships; capturing more growth in rapidly developing economies (RDEs) and elsewhere; investing in innovation in new product categories; taking advantage of the trading-down phenomenon; and leveraging government stimulus programs. A few examples:

• Huawei Technologies, one of the world's leading providers of telecommunications and systems equipment, based in Shenzhen, China, is employing multiple strategies to expand into developed markets. These include accelerating its transition from a low-cost hardware provider to a service-oriented company, as well as employing innovative pricing mechanisms that base the price of a telecom solution on the revenue to be generated by the network. Huawei is actively seeking acquisition opportunities in developed markets in order to obtain distribution channels there, as well as experienced management talent.
• Tata Motors, based in India, has launched a new premium truck range, which some have dubbed the "world truck." The truck was developed jointly by Tata Motors and its two subsidiaries: Tata Daewoo Commercial Vehicle Company, based in South Korea, and Tata Motors European Technical Centre, in the United Kingdom. The truck will be launched sequentially in markets around the world.
• Perdigão and Sadia, two Brazilian food giants, completed a deal to merge their worldwide operations, creating a combined entity, Brasil Foods (BRF), with much larger global scale.
• Gedeon Richter, a Hungary-based pharmaceutical group, announced that its research and development (R&D) spending in the first half of 2009 was up 44 percent compared with the prior-year period.
• Sabanci Holding, a Turkish conglomerate, announced plans to expand both organically and through acquisitions, in retail as well as in other businesses in its portfolio.
• Sistema Shyam TeleServices, the telecommunications joint venture between Sistema of Russia and the Shyam Group of India, announced plans to invest $70 million in building a mobile communications network in India.

When the crisis first struck, the global challenger companies were severely affected. Historically, they have outperformed the Standard & Poor's 500 Index and the MSCI Emerging Markets Index; but as the crisis unfolded, the 79 publicly traded challengers experienced a deeper initial drop in TSR than either index. Since March 2009, however, both the MSCI Emerging Markets Index and the TSR of these 79 challengers have rebounded faster than the S&P 500.

All this is not to say that the global challengers are relishing the global downturn. Each one has been affected to some degree by the negative impacts of the crisis: precipitously declining demand, shrinking consumer expenditures, collapsing domestic fixed-asset investment, and steeply rising capital costs. Moreover, the deep drop in stock values before the mid-2009 rebound made it difficult for companies to use equity as currency.

At the end of 2008, some 20 percent more challengers (of those for which data are available) were having difficulty meeting their debt obligations than at year-end 2007, as indicated by a decline in their solvency ratios; and some 6 percent more of those challengers had seen their debt-to-equity ratios climb above market medians. Those that incurred heavy debt to pursue M&A activities before the crisis, as well as those in highly cyclical industries, will face a particularly daunting recovery. Many are cutting costs, restructuring debt, selling off assets, and even divesting businesses to improve cash flow.

But as the global economy recovers, the competitive advantages the challengers derive from their RDE origins – low costs, abundant talent, and fast-growing markets – will be ever more valuable in their quest to become internationally competitive.

For incumbent multinational companies, the lesson is clear: do not underestimate the challengers' postcrisis performance and do not retreat to home countries. RDE markets, though highly challenging, provide enormous growth potential and are key battlegrounds on which to confront global challengers. The activities of the challenger companies should be monitored closely. And some multinationals may see opportunities to partner with or acquire companies in RDEs, particularly China and India, or to partner with challengers in acquisitions and divestments.

According to David Michael, a BCG Senior Partner and Managing Director based in Beijing and an author of the paper, "The ascent of the companies on BCG's Global Challengers list toward positions of global leadership will soon become the dominant dynamic within their respective industries. Multinational companies must take urgent action to anticipate this dynamic and respond to it. It will be their most pressing imperative in the postcrisis world."

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1. The 2009 BCG 100 New Global Challengers are a carefully selected group of companies based in rapidly developing economies that are going global fast. For information about these companies, see The 2009 BCG 100 New Global Challengers: How Companies from Rapidly Developing Economies Are Contending for Global Leadership, BCG report, January 2009, available at www.bcg.com/publications.