f The emerging-brand battle

Jun 22nd 2013 | From the print edition of the Economist

THE past 20 years have seen a massive redistribution of economic power to the emerging world. But so far there has been no comparable redistribution of brand power. Fortune magazine’s 2012 list of the largest 500 companies by sales revenue included 73 Chinese firms, more than from any other country except the United States, with 132. Yet Interbrand’s 2012 list of the 100 “best global brands” included not one Chinese firm.

However, in “Brand Breakout”, a new book, two academics, Nirmalya Kumar and Jan-Benedict Steenkamp, argue that developing-country firms are swiftly learning the art of branding. A few emerging-market brands have already gone global: it is hard to watch a football match in Europe without having “Emirates” burned onto your retina. More are on the way: Haier of China (white goods), Concha y Toro of Chile (wine), and Natura of Brazil (beauty products). Westerners feeling besieged by the rise of the developing world comfort themselves with the thought that they still hold the high ground of premium-priced branded goods. But they should be in no doubt that emerging-market contenders are mounting their warhorses and readying their battering-rams.

The authors argue that emerging-market companies are advancing along eight paths to brand success. All are strewn with obstacles but each offers a possible route to the global heights. The most obvious is the path previously trodden by Japanese firms such as Toyota and Sony, and then South Koreans such as Samsung and Hyundai: first, establish a beachhead in the West by selling a good-enough product cheaply; then relentlessly raise your price and quality. Pearl River of China has become the world’s biggest piano-maker and now rivals Yamaha (itself once an emerging-market challenger) on quality. Haier, having become the world’s biggest white-goods maker, is now out-innovating Western rivals with ideas like a TV powered wirelessly, with no trailing cables. (Its European slogan is “Haier and higher”.)

A second path is to focus on business customers first and then woo consumers. Mahindra & Mahindra of India went from making tractors to producing cars. Huawei, a giant maker of telecoms equipment, is now a rising producer of mobile phones. Another Chinese firm, Galanz, began as a contract manufacturer for Western firms but now sells microwave ovens under its own name.

A third path is to follow diasporas. Reliance MediaWorks of India has launched the BIG Cinemas chain in America, to show Bollywood blockbusters. Jollibee, a fast-food chain from the Philippines, has opened outlets in places, from Qatar to California, with Filipino communities. But breaking into the mainstream can prove hard, as Jollibee’s limited success shows. Perhaps more fruitful is a sort of “reverse diaspora” strategy used by Mandarin Oriental hotels (China) and Corona beer (Mexico): Western businesspeople returning from trips to Asia, and American students returning from spring break in Cancún, have sought out Mandarins and Coronas back home.

A fourth path is to buy Western brands off the shelf, as Tata Motors of India did with Jaguar Land Rover (JLR), and more recently Bright Food of China did with Weetabix. Bright can now use its huge distribution system back home to get Weetabix cereals on China’s breakfast tables while using Weetabix’s distribution system in the West to sell Bright products such as Maling canned meat. However, five years on from Tata’s takeover, JLR’s glamour, and its success in selling to the emerging world’s new rich, have done nothing to lift sales of Tata’s own cars.

The next three paths set out by Messrs Kumar and Steenkamp are ways for emerging-market firms to escape their home country’s reputation for poor quality, or lack of a positive reputation. One is to latch on to some aspect of the national culture that sounds nice: Havaianas, a Brazilian flip-flops maker, taps into the local beach life. Another is to tie the brand’s image to the country’s natural beauty, as Concha y Toro does with Chile’s wine country. A third, more passive strategy is to rely on government efforts to change the country’s image, as with the “Incredible India” campaign and Taiwan’s “innovalue” slogan.

The final path to global brand greatness is to be a pampered national champion. So far this has produced some notable failures—Chinese and Malaysian carmakers come to mind—and just one spectacular success: Emirates. In 2000-12 the Dubai airline enjoyed a compound annual growth in sales of 23.1%. The airline’s growth has in turn helped Dubai become a logistics centre for business and, against all odds, a popular tourist destination.

Never give up, no matter what

Many of the obstacles in emerging-market companies’ paths to global prominence are of their own making. An obsession with market share at all costs can fatally undermine their finances. A habit of pilfering foreigners’ ideas can discourage them from developing distinctive products and brand identities. A reluctance to employ foreigners as managers may make it hard to understand other cultures, and thus to crack new markets.

However, the fat margins enjoyed by globally recognised brands are a powerful incentive for emerging-market firms to shift from quantity to quality, and to venture outside their comfort zones in search of universal appeal. Acer, a Taiwanese electronics firm still on its way to worldwide prominence, last year had a margin of just 0.4% (on sales of $16 billion) whereas well-established Samsung of South Korea made about 10% (on sales of over $150 billion). The new breed of emerging-market firms is packed with smart people who are determined to conquer the globe. Messrs Kumar and Steenkamp asked managers at Midea, a Chinese domestic-appliance maker, to describe their corporate culture. They replied: “Never give up, no matter what.” The West’s great brands should listen to those words and tremble.
4g

The entrepreneurial state

A new book points out the big role governments play in creating innovative businesses

Aug 31st 2013 | From the print edition of the Economist

APPLE is generally regarded as an embodiment of everything that is best about innovative businesses. It was started in a garage. For years it played a cool David to Microsoft’s lumbering Goliath. Then it disrupted itself, and the entire entertainment industry, by shifting its focus from computers to mobile devices. But there is something missing from this story, argues Mariana Mazzucato of Sussex University in England, in her book, “The Entrepreneurial State”. Steve Jobs was undoubtedly a genius who understood both engineering and design. Apple was undoubtedly a nimble innovator. But Apple’s success would have been impossible without the active role of the state, the unacknowledged enabler of today’s consumer-electronics revolution.

Consider the technologies that put the smart into Apple’s smartphones. The armed forces pioneered the internet, GPS positioning and voice-activated “virtual assistants”. They also provided much of the early funding for Silicon Valley. Academic scientists in publicly funded universities and labs developed the touchscreen and the HTML language. An obscure government body even lent Apple $500,000 before it went public. Ms Mazzucato considers it a travesty of justice that a company that owes so much to public investment devotes so much energy to reducing its tax burden by shifting its money offshore and assigning its intellectual property to low-tax jurisdictions such as Ireland.

Likewise, the research that produced Google’s search algorithm, the fount of its wealth, was financed by a grant from the National Science Foundation. As for pharmaceutical companies, they are even bigger beneficiaries of state research than internet and electronics firms. America’s National Institutes of Health, with an annual budget of more than $30 billion, finances studies that lead to many of the most revolutionary new drugs.

Economists have long recognised that the state has a role in promoting innovation. It can correct market failures by investing directly in public goods such as research, or by using the tax system to nudge businesses towards doing so. But Ms Mazzucato argues that the entrepreneurial state does far more than just make up for the private sector’s shortcomings: through the big bets it makes on new technologies, such as aircraft or the internet, it creates and shapes the markets of the future. At its best the state is nothing less than the ultimate Schumpeterian innovator—generating the gales of creative destruction that provide strong tailwinds for private firms like Apple.

Ms Mazzucato says that the most successful entrepreneurial state can be found in the most unlikely place: the United States. Americans have traditionally been divided between Jeffersonians (who think that he governs best who governs least) and Hamiltonians (who favour active government). The secret of the country’s success lies, she thinks, in talking like Jeffersonians but acting like Hamiltonians. Whatever their rhetoric, governments have always invested heavily in promoting the spread of existing technologies such as the railways (by giving the rail barons free land) and in seeking potentially lucrative scientific breakthroughs (by financing almost 60% of basic research).

So far, so good. However, Ms Mazzucato omits to acknowledge how often would-be entrepreneurial states end up pouring money down ratholes. The world is littered with imitation Silicon Valleys that produce nothing but debt. Yes, private-sector ventures also frequently fail, but their investors know when to stop: their own money runs out. Governments can keep on throwing taxpayers’ money away. It was once fashionable to praise Japan as an entrepreneurial state being guided to world-domination by the enlightened thinkers in its mighty industry ministry. Nowadays it is clearer that the ministry has been a dead hand holding back innovation and entrepreneurship.

Ms Mazzucato laments that private businesses are too short-termist. But governments also routinely make investments on the basis of short-run political calculations rather than long-term pay-offs. She worries that anti-statist ideology is reducing the state’s ability to make important investments for the future. In fact, the explosion of entitlement spending, which is allocating ever more of the country’s income to the old, is doing more to undermine the entrepreneurial state than the tea party. She is also too hard on business: putting all those different state-funded technologies together into user-friendly iPads and iPhones required rare genius that deserves rare rewards.

The book offers only hints, rather than a complete answer, to the central practical question in all this: why are some states successful entrepreneurs while others are failures? Successful states are obsessed by competition; they make scientists compete for research grants, and businesses compete for start-up funds—and leave the decisions to experts, rather than politicians or bureaucrats. They also foster networks of innovation that stretch from universities to profit-maximising companies, keeping their own role to a minimum. The Jeffersonian-Hamiltonian paradox is important here: the more governments think in terms of mighty “entrepreneurial states” the less successful they are likely to be.

How not to spend it

Quibbles aside, Ms Mazzucato is right to argue that the state has played a central role in producing game-changing breakthroughs, and that its contribution to the success of technology-based businesses should not be underestimated. She is also right to point out that the “profligate” countries that are suffering the most from the current crisis (such as Greece and Italy) are those that have spent the least on R&D and education. There are many reasons why policymakers must modernise the state and bring entitlements under control. But one of the most important is that a well-run state is a vital part of a successful innovation system.

Jul 27th 2013 | From the print edition of the Economist

Makers of high-tech products such as smartphones can opt to add whizzy new features and push up prices. In the case of luxury goods, their exclusivity is a large part of their appeal, and this in turn is a function of their price, so firms usually have scope for limiting supply and charging more: Ferrari, a sports-car maker, and Mulberry, a purveyor of posh bags, have both recently signalled that they plan to do just that. But raising prices by making products better or more exclusive is a strategic decision, open to only a few types of business. For all sorts of mundane goods and services there is much that can be done tactically, the consultants say, to charge more for the same thing.

First, firms should simply take pricing more seriously: have a clear policy and make everyone stick to it. Obvious? At a recent conference organised by Simon-Kucher, the 100 or so delegates were asked to put their hands up if their company had a written pricing policy. Just two did so. Setting prices, promotions and discounts is often left to junior people and local sales offices. Even where a policy is set from the top, the salespeople may ignore it because they are still being rewarded for maximising sales and keeping customers. Neil Hampson, a pricing expert at PWC, says he sometimes starts his client meetings by asking: “When was the last time you congratulated a salesman for walking away from a client?” Most have never done so.

Second, companies need to remember that, as the late Peter Drucker, a management guru, once put it, customers do not buy products, they buy the benefits that these products and their suppliers offer to them. So, businesses that fail to identify what benefits they are offering each type of customer are likely to be undercharging some of them. Equipment-makers who sell to other businesses can be especially prone to a “cost-plus” mentality, in which they charge the same margin to everyone instead of identifying those that are less price-sensitive and finding ways to earn more from them. Oil companies, for example, can suffer huge costs in lost drilling time if a pump goes down, so pump-makers could charge them a premium for guaranteed same-day dispatch of spares.

Airlines have learned to “unbundle” their product, charging separately for baggage and meals and increasing their overall takings. But industrial suppliers may still charge the same to customers who never call their technical helpline as to those who ring it daily. Makers of everything from aircraft engines to lorry tyres have gone further in selling benefits rather than products, by offering “power by the hour” contracts in which customers only pay when they use their goods. The suppliers earn more overall, while their customers preserve scarce capital.

A third route to charging more is to manage customers’ expectations better. In the early 2000s executives at General Motors were told to wear badges with “29” on their lapels, as part of a disastrous plan to get back to a 29% market share in America. This merely reinforced car-buyers’ assumption that GM would offer them whatever discounts it took to shift its metal off the forecourts, putting the firm on the road to bankruptcy. (Last year its market share fell to 17.5%, its lowest since the 1920s.) Once customers know that a firm’s price list is a work of fiction and that it will resort to discounts as soon as sales dip, it will be a long haul to get them used to paying full price, let alone accepting increases. Simon-Kucher’s consultants praise DHL, a logistics firm, which spent years drilling into its customers that whatever the economic conditions there will be a rate rise each year.

You’ve been framed

Fourth, there are lots of simple presentational tricks that almost everyone is wise to but which still, miraculously, work. Restaurants add some overpriced wines lower down the menu to make the ones at the top seem reasonable. Makers of ice cream offer “33% extra free” rather than “25% off” the cost of the regular size, even though these are arithmetically the same thing. Buyers at big industrial firms are just as susceptible to such “framing” when reviewing a list of widget prices.

The pricing experts make it sound so easy. But there are of course limits to how far firms can go in tailoring their prices to the customer without appearing sneaky. Last year Orbitz, an online travel agency, was criticised for offering a costlier selection of hotels to people browsing its site on an Apple Mac because it assumed they were richer than PC users. Although a firm’s customers may not notice the odd price rise slipped in here and there, they will eventually notice if their overall bill starts to swell: Tesco, Britain’s biggest grocer, is now having to offer expensive discounts to win back a damaged reputation for value.

And sticking to a pricing strategy takes guts. The irony, confides a senior management consultant, is that firms like his have such a taboo against letting go of a client that they are the worst at taking their own advice to be fearless in asking for more, and walking away if they do not get it.

Jul 27th 2013 | TAIPEI | From the print edition of the Economist

Still going strong

WHEN he founded Taiwan Semiconductor Manufacturing Company (TSMC) in 1987, Morris Chang recalls, “Nobody thought we were going anywhere.” Back then the rule was that semiconductor companies both designed and made chips. TSMC was the first pure “foundry”, making chips for designers with no factories, or “fabs”, of their own. The doubts of others suited TSMC nicely. Mr Chang, at 82 still chairman and in his second stint as chief executive, says that meant it suffered no competition in its first eight years.

These days the idea is more popular. Last year foundries made about half of all logic chips (the ones that carry out computations, as opposed to memory chips, a more commoditised market). United Microelectronics Corporation, a slightly older Taiwanese company, turned itself into a pure-play foundry in 1995. GlobalFoundries, with factories in America, Germany and Singapore, was set up in 2009.

Yet the pioneer still dominates. This year, predicts Samuel Wang of Gartner, a research firm, TSMC’s revenues will exceed those of all other foundries combined. He reckons it has 90% of the world market for advanced 28-nanometre chips, which are essential to smartphones and tablets. TSMC’s sales in the second quarter, reported on July 18th, were NT$156 billion ($5.2 billion), 21% more than a year before. Its net income rose by 24%, to NT$52 billion. That said, growth should slow in the second half of the year, Mr Chang told analysts, because smartphone-makers have been building up their inventories of chips ahead of new-product launches and because sales of PCs and some smartphones have been weaker than expected. Sales could even shrink in the fourth quarter.

TSMC has thrived on a mixture of serendipity and anticipation. “The market moved in the direction in which we were heading,” says Mr Chang. The boom in mobile computing has meant a bonanza for several long-standing customers, which range from Qualcomm, an American firm that dominates the market for smartphones’ application processors, to MediaTek, a Taiwanese neighbour that has burst onto the scene more recently. Sales to Chinese designers such as Allwinner, Rockchip and Spreadtrum, whose chips power inexpensive Android tablets and phones, have doubled in the past year; these all license low-energy chip technology from ARM, a British firm that has been a partner of TSMC’s since 2004.

The “grand alliance” of TSMC and the chip designers, as Mr Chang has called it, has done far better from the shift to mobile devices than Intel, the world’s biggest chipmaker. Intel both designs and makes chips (in industry argot, it is an integrated device manufacturer, or IDM). Its processor chips are the brains of most personal computers, but demand for these has been falling. Although Intel’s newest processors are much less thirsty and the firm is determined to break into the mobile market, it has so far struggled. Its second-quarter revenues fell by 5% and its net income by 29%.

A combination of fabless designers and a pure foundry works well, Mr Chang explains, because the designers “don’t have to worry about the capital-intensive part of the business any more”: the foundry provides the scale. At the same time, fabless companies, of which he reckons there are about 50 with annual revenues of at least $100m, compete with one another and with IDMs. “This diverse group has in total produced more innovation than any single IDM…Just look at the mobile products,” he says.

The battle lines between the alliance and its rivals continue to shift. Intel has entered the foundry business—and recently snaffled a contract with Altera, an American designer that has been a customer of TSMC’s for 20 years. “I really regret that very much,” Mr Chang says. “I had an investigation into why that happened.”

On another front, TSMC is fighting Samsung. The South Korean company makes processors not only for itself but also for Apple, even though the two are deadly rivals in smartphones and tablets. In addition it is the world’s biggest maker of memory chips. Recently the Wall Street Journal reported that TSMC, after years of effort, had won a contract to make chips for iPhones and iPads—a victory that will have stung Samsung. (The Taiwanese company has not commented.) Mr Chang says that he takes neither Intel nor Samsung lightly, but insists: “We have one big advantage: we are a pure foundry. We do not compete with our customers.” No matter how hard Intel and Samsung try, he says, they will not enjoy the same trust.

The big question hanging over TSMC is whether it can find a worthy successor to its octogenarian boss. It has had one false start already: he stood down as chief executive in 2005, but took the helm again in 2009. No handover is planned yet, but last year three men were appointed “co-chief operating officers”. Probably at least two of these, or maybe all three, will end up as joint chief executives. A ménage à trois could prove farcical. But perhaps TSMC’s board thinks its founder is too good an act for one man to follow.

Sep 13th 2014 | From the print edition of the Economist

The advertising industry is going through something akin to the automation of the financial markets in the 1980s. This has helped to make advertising much more precise and personalised. Some advertising agencies and media companies have told their executives to read “Flash Boys” by Michael Lewis, a book about Wall Street’s high-speed traders, to make quite sure they get the message.

Real-time bidding sounds high-tech but straightforward. When a consumer visits a website, his browser communicates with an ad server. The server sends a message to an exchange to provide data about that user, such as his IP address, his location and the website he is visiting. Potential ad buyers send their bids to the exchange. The highest one wins and an ad is served when the website loads. All this typically takes about 150 milliseconds.

In reality, though, the ad-tech ecosystem is stupefyingly complex. Luma Partners, an investment bank, has put together the “Lumascape”, a bafflingly crowded organisational chart showing several hundred firms competing in this market. Sellers of advertising space often go through technology firms: a “supply-side platform” (SSP) helps publishers sell their inventory, and a “demand-side platform” (DSP) gives access to buyers. Many choose a data-management platform (DMP) to store and buy information about users. Ned Brody of Yahoo, an internet company, makes light of all the three-letter acronyms: “It usually ends with WTF,” he quips.

Real-time bidding is a form of “programmatic” buying, which means using computers to sell advertising space. An advertiser can buy a certain number of impressions on a website in advance at an agreed price and execute the order by computer, avoiding the need for paperwork, spreadsheets and faxes. The technique was first used over a decade ago in search advertising, in which advertisers bid for search terms entered by users, and Google and other companies serve relevant ads alongside the search results.
Over the past 18 months real-time bidding has spread across the web. According to IDC, a research firm, around 20% of online display advertisements in America are now sold this way; by 2018 that figure is likely to rise to 50%. Online video and mobile ads, too, are increasingly traded in real time. “Ten years ago you would never have had the information technology cheap enough to do these transactions,” says Mike Driscoll, the boss of Metamarkets, an advertising-analytics platform.

A study by BCG, sponsored by Google, found that advanced behavioural targeting, which uses technology to reach specific users with the desired characteristics, helped advertisers increase their return on investment by 30-50%. One popular tactic is “retargeting”, which allows advertisers to look for people who have visited their website before and show them an ad related to an item they were looking for but did not buy.

So far programmatic buying has taken hold mainly in America, which accounts for around a third of global ad spending, along with Britain and continental western Europe, but it is set to become a global trend. Singapore is already home to several ad-tech firms. China, which will overtake Japan to become the second-largest online-advertising market after America this year, is behind in automated buying because it does not have third-party ad servers or data that advertisers trust. Instead advertisers often rent advertising space by the day, so they can go to websites and check that their ads appear. But even Chinese websites will gradually move to buying by computer.

The automation of media buying has raised all sorts of questions, such as how much ad-sales staff should be paid, and whether they are still needed at all, when machines seem to be doing the work so much more efficiently. Bob Pittman, the boss of Clear Channel, says that automation will “free up very smart people…from grunt work”. But it may also free them up to look for another job.

Advertising agencies that specialise in buying media space for clients have set up their own trading desks to buy digital media on behalf of clients and capture some of the margin for themselves. But some of the world’s largest advertisers, such as Procter & Gamble, are already bringing more of it in-house, causing concern that advertising agencies may lose their edge in the future. Upmarket publishers have been cautious about making their premium ad space available for sale by computer because they think, probably rightly, that it will put pressure on prices. But more of them are testing the market. Some, such as the New York Times, the Wall Street Journal and The Economist, have created private exchanges which limit the number of advertisers who can bid for their ad space or buy it in advance, giving them more control over pricing.

Wait for it

For all its promise, programmatic buying has not yet delivered on greater transparency and efficiency

For all its promise, programmatic buying has not yet delivered greater transparency and efficiency. Advertisers and publishers complain, not without cause, about a “technology tax”, claiming that 60-80% of ad spending is siphoned off by ad-tech firms which take advantage of the market’s opacity.

But these are early days. “We are only where search advertising was in 2001,” says Konrad Feldman of Quantcast, a real-time advertising firm. Over time the system will become more streamlined and sophisticated, just as the finance industry did after it went electronic. Some companies, including AOL and Google, are already trying hard to become the one-stop shop that provides everything needed to buy ads across the web. Venture capitalists are also scouring the terrain. In the meantime advertisers need to watch out. Curtis Houghland, the boss of Attention, a social-media agency, advises clients not to sign contracts for more than six months because technology is changing so fast.

The rise of real-time bidding is important because it offers a glimpse of how other ad-supported media may change over time. As more devices, including television sets, radio and outdoor billboards, become internet-equipped, a market for advertising space that can be bid for will spread to other industries, eventually even to television. And in the longer term the coming “internet of things”, such as connected homes and cars, could be powered by a system similar to programmatic buying. According to John Battelle, an entrepreneur, “media are laying the trace path for how we interact with information-based services in every category of endeavour.”