We could be seeing a pick up in mergers and acquisitions activity some time soon. Perhaps not in the developed markets, but in the emerging markets. I have been anticipating something like this to happen for some time, and the recent confluence of events could naturally lead to this.
OPPORTUNITIES FOR THE BIGGER BUT LOCAL COMPANY
As I have previously noted, the companies and businesses that will best weather these uncertain times, and get out of it alive, will be those that are the biggest in their industries. Smaller companies, even those that occupy specific niches, are in for wild times ahead.
To recover and regroup in this turbulent time, multinational companies from the developed world will likely focus more on their home markets, or those markets where they have the greatest competitive advantage. They will probably scale back in emerging markets, leaving wide open opportunities for local companies based in those markets to fill.
Going forward, both developed and developing economies will each become more equally focused on being both consumer and producer economies. However, developing economy companies will have a natural limit to their growth, and again, that limit is what local demand can sustain.
CREATING A BIGGER MARKET
The question therefore is, which of these emerging economy markets vacated by multinationals will have a big enough local demand to sustain a viable local supplier? On a case to case basis, with multinational companies leaving their markets, some local companies bold enough to step up to the plate will finally find the chance to gain market traction without severe competitive pressures from Western firms. And yet, companies located in countries with smaller populations and poorer citizens will still likely remain smaller than those in countries with larger and more prosperous countries. This limitation is also a crucial constraint to how much higher local levels of local wages can increase, which, again, is a crucial function of the rise of a viable local consumer market.
In this new economic reality, the biggest advantages, will go to companies fortunate enough to be located in countries with large domestic populations. Larger economies provide much larger opportunity base for local companies to grow. That’s why we always hear Brazil, Russia, China, and India, large countries with large populations and large markets.
Much smaller countries, therefore, are better off forming into regional trading blocs with their closest neighbours. The European Union is the best model for this. The much bigger common market in which to create demand for their products significantly offsets any reverse growth from a much smaller home market. In the tradition of the EU, I suspect the rise of the regional blocs MENA and ASEAN.
MENA, the acronym for Middle East and North Africa, is the regional commodity and financial powerhouse bloc, now reeling from the drop in oil prices. ASEAN, the association of Southeast Asian nations, is the group of manufacturing and off-shoring centres previously responsible for bringing world consumer goods prices down, until China entered the picture.
In response to the rise of these blocs, previously nationally-based firms and conglomerates in these areas will have to start looking beyond their borders, and MERGE with like companies – to create the scale, the scope, and the size they need to profitably and effectively create a sustainable local market.
Likely, these mergers will be in the consumer staples industries, retail, and in banking, precisely those industries where the largest multinaltionals are currently scaling back the most.
ADJUSTING TO A BIGGER THE MINDSET
The goal of becoming the back-end supplier of finished goods for some other global company is now insufficient to guarantee continued economic prosperity. To maintain economic prosperity for all, countries need to diversify away from focusing on exporting specialized goods to global but narrowly specific sectors into selling a greater array of products and services FOR DOMESTIC CONSUMERS.
The rising pan-Middle Eastern and Pan-Asian emerging economy companies therefore need to be willing to pay better than lowest wage, and focus their business-building efforts on developing niche markets in their new regional economies, rather than simply trying to be the lowest cost global producer for a commoditized and undifferentiated product.
For this mental reorientation to work, change efforts need to be macro in scale. Only in an environment where all businesses are focused on creating greater value for the local consumer, while at the same time creating a local consumer able and willing to buy their goods, will this change work. Macro-scale efforts can only start making sense when small countries stop thinking in terms of just their local economies, and start thinking in terms of creating regional markets.
With regional markets, companies can finally have the scale, the scope, and the size they need to successfully spruce up a big and affluent customer base. After all, Henry Ford could not have done what he did had he been limited in growth opportunity to just Michigan. For him to grow and successfully profit from his innovations, he benefited significantly from having the entire US economy as a platform to roll out his business. Equally, since his competitors, suppliers, and partners also had the entire US economy as their oyster, they too could plan and organize and cost their businesses with that scale in mind.
When the developing world has finally succeeded in getting much of its local wages and standards of living to developing world parity, then maybe globalization can start to work, and we can once again strive to bring down international barriers everywhere else.