Today belongs to the "local" big boys

By now, it’s more or less official. The entire global economy is in a slowdown. From the US and Canada, to Europe, Australia, and the emerging markets of Asia – every single economy is now scaling back.

For the US, the reasons are a credit crunch and property bubble deflation. For Europe and the other developed economies, the slowdown is due to the immediate effects of the US deflation. For much of the emerging markets, it’s either scale back or suffer hyperinflation.

So what does this global slowdown mean for that much-vaunted of all globalization’s creatures – the multinational corporation?

Well, as I mentioned in a previous post, today belongs to the big boys. But as mentioned in another post, the strong influence of these multinationals is likely to be kept within the developed markets. In much of the emerging markets, the results for these multinational giants will be sketchy. In the end, it will boil down to whether the multinational has lower-cost competitors in a particular market.

Being a multinational entails a lot of costs. Being a multinational entails having a large bureaucracy to handle all the complexities and needs of far-flung outposts. Larger human resource support and accounting staffs, larger logistics and infrastructure support costs. (Wasn’t it the cost of maintaining far-flung outposts that brought down the Roman Empire? Just checking)

The small locally-based competitor neither has the luxury nor the need for such bureaucracy. The company president likely knows the office janitor in these firms. Hence, in terms of pricing its end product, an essentially efficient competitor’s product will likely be more affordable than a multinational’s.

In a world besieged by the twin spectres of inflation and job instability, what do you think a hapless consumer is likely going to do? That’s right. He will choose the lower-priced alternative, whenever it is sensible, and all chances he can.

The stagflation environment has had a good effect on the profitability of McDonalds and Walmart in the United States. As more and more consumers trade down to the cheaper alternatives, more expensive competitors lose out and these companies gain.

But are McDonalds and Walmart cheapest in all markets they compete in? Not by a long shot.

In many emerging markets, local food chains exist that trounce Mcdonalds in terms of cost. Ditto for other “high priced” US exports such as KFC, Pizza Hut and Wendy’s. These food chains will lose out to smaller, cheaper alternatives in many countries. Usually, it is in the poorer economies where cheaper alternatives exist. So in a nutshell, what I’m saying is that McDonalds, KFC, and Wendy’s are likely losing business in the emerging markets – right now.

And Walmart? Walmart couldn’t even enter some markets because they have already been outflanked by nimble local competitors who know better where to cut costs, and how to cater to the local clientele. It’s probably now losing the little market share that it already has in those markets that it managed to penetrate. Better for it to just focus its efforts now on the market where it is king, the US.

Dell, Hewlett Packard, Toshiba, Samsung. Great big giant multinationals all. Great big lumbering giants all, as far as some emerging markets are concerned. They simply cannot compete with locally assembled products made by enterprising local producers who essentially use the same components, but only have a tenth of the overhead cost these guys have.

And Procter and Gamble? Unilever? J&J? They’re doing great guns in the developed markets right now. Having greater reach than their smaller competitors, they are able to out-compete everybody else in their category. In the developed markets that is.

In the emerging markets? Sorry to spoil the party for these guys, but cheaper alternatives do exist. At this time and age, there is no such thing as a secret formula that makes their products superior to products made by competitors in emerging markets. Many competitors do produce cheaper products with similar quality.

Now, what these local guys will never have is the reach of P&G, J&J, and Uni-L. That necessarily means that they can never compete head to head with these giants in all the other markets that these multinationals are in. But in the small local country niche that these locals do sell in, these emerging markets competitors are probably now raking it in, as cash-strapped consumers in these economies realize that they don’t need to be as glamorous as the folks shown on the ubiquitous ads produced by these multinationals seem to be. These days, it pays more to be practical.

So what does this over-all trend mean for these multinationals? Not much negative probably in terms of bottom line. What they do lose out in the emerging markets, they gain over competitors without reach in the developed markets. But many of them are probably losing their emerging markets beachhead slowly but surely.

With the financial mess currently holding down the world’s giant financial supermarkets, i.e., UBS, Merrill Lynch, Citigroup, have been scaling back big-time. This is good news for local competitors of these financial firms.

With no giant global bank breathing down their necks and throwing excess global liquidity at all the available deals in their small markets, the financial players in these emerging markets are probably taking advantage of this lull by going out and getting some reach of their own right now. The better to hold out against the CitiGIANTS once they are once again ready to pounce around the world.

How about multinational service providers?

It will probably be a better fate for multinational giants that have decided to partner with a local firm in these markets. The Big 4 accounting firms, for instance. Since their services are provided by local partner firms in the developed world, their pricing tends to be more attuned to local affordability.

But it will be scale back time for service providers that employ US standards in pricing their services. That includes you, McKinsey, Mercer, and IBM. Also you, UBS, Goldman Sachs, and ING.

So do these market changes point to long-term ramifications? Who knows?

If history is any indication, once emerging markets consumers are once again prosperous enough to buy a Levi's Jeans, a Big Mac, and a Pizza Hut Supreme Pizza, they will do so, and these multinationals will be back in the emerging markets with a vengeance.

But for now, these markets will be owned by the local “big boys” in these niche economies.