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Grounds for caution in rapid-growth markets – Ernst & Young
Succeeding in rapid-growth markets is becoming more difficult because costs are rising, competition is becoming more intense and growth, while still rapid compared with that of the developed world, is slowing, according to a new report released by Ernst & Young.
Entitled ‘The World is Bumpy – Globalization and New Strategies for Growth’, the report argues that betting the future on rapid-growth markets just because they have the right economic and demographic conditions is not enough.
“Ongoing problems in the Eurozone and sluggish growth in North America mean that companies are increasingly looking to rapid-growth markets as their primary source of future growth,” it states.
Among its respondents, almost three-quarters say that rapid-growth markets will make a significant contribution to boosting their revenue growth over the next three years.
But there are grounds for caution, the report warns. “Rapid-growth markets can be difficult environments in which to do business, as many multinationals have found: more than half of our respondents think that these investments require much longer time horizons, and almost half think that the cost of entering these markets was much greater than they had expected. A similar proportion thinks that Western executives overestimate the long-term growth potential of investing in these economies.”
A number of factors contribute to the “squeeze” on the ability of multinationals to extract value from rapid-growth markets. “The first is increased competition. Multinationals entering China, India or Brazil must compete against other global firms who all see rapid-growth markets as their future. They also face increasingly stiff competition from local companies that are growing in size and stature. Ten years ago, there were just 21 companies from rapid growth markets on the Fortune 500. Today, that number has risen to 75.
Companies also face the prospect of slowing growth in some rapid-growth markets, although the pace still remains well above the rates seen in much of the developed world. When asked about the key risks that could derail growth in fast-growth markets over the next three years, developed-market respondents point to asset price bubbles as the most likely cause.