Industrial Revolution 2.0

In the corner offices of New York and Tokyo, business leaders cling to the notion that their designs, technologies, and brands are cutting edge. Increasingly, however, that just isn't so. In industries ranging from steel and cement to automobiles and electronics, "Third World companies" are poised to overtake their Western rivals. Get ready for the biggest firms you've never heard of to become household names.

BY ANTOINE VAN AGTMAEL | DECEMBER 27, 2006

For a few minutes, I held the future in my hand. The third-generation cell phone in my palm made a BlackBerry look like a Model T Ford. Looking down at the color video screen, I could see the person on the other end of the line. The gadget, which fit easily into my pocket, could check local traffic, broadcast breaking television news, and play interactive computer games across continents. Internet and e-mail access were a foregone conclusion. So were downloading music and watching video clips.

None of this would be all that surprising were it not for where I was standing. I wasn't visiting Apple Computers in Cupertino, California, or Nokia headquarters outside Helsinki. It was January 2005, and I was in Taiwan, standing in the research lab of High Tech Computer Corporation (HTC). The innovative Taiwanese company employs 1,100 research engineers, invented the iPAQ pocket organizer (which it sold to Hewlett-Packard), and developed a series of advanced handheld phones for companies such as Palm, Verizon, and Vodafone. All around me were young, smart, ambitious engineers. They represented the cream of the crop of Taiwanese universities with, in some cases, years of experience in international firms. They were hard at work testing everything from sound quality in a sophisticated acoustics studio to the scratch resistance of newly developed synthetic materials.

I was being shown not just the prototype of a new smart phone but the prototype of a new kind of company -- savvy, global, and, most important, well ahead of its nearest competitors in the United States and Europe. My experience in Taiwan is not that unusual. From Asia to Latin America, companies that many still regard as "Third World" makers of cheap electronics or producers of raw materials are emerging as competitive firms capable of attaining world-class status. Only a decade ago, the attention of the international business community was focused on a new economy backed by hot tech firms in California and Tokyo. But the reality of the current global dynamic is that, more likely than not, the next Microsoft or General Electric will come from the "new economies" of Asia, Latin America, and Eastern Europe, not the United States, Europe, or Japan.

Today, emerging-market countries account for 85 percent of the world's population but generate just 20 percent of global gross national product. By 2035, however, the combined economies of emerging markets will be larger than (and by the middle of this century, nearly double) the economies of the United States, Western Europe, or Japan. The reality of globalization -- which is only slowly and reluctantly sinking in -- is that outsourcing means more than having "cheap labor" toil away in mines, factories, and call centers on behalf of Western corporations. Yet in the West, business leaders and government officials cling to the notion that their companies lead the world in technology, design, and marketing prowess.

Increasingly, that just isn't so. South Korea's Samsung is now a better recognized brand than is Japan's Sony. Its research and development budget is larger than that of America's Intel. And its 2005 profits exceeded those of Dell, Motorola, Nokia, and Philips. Mexico's CEMEX is now the largest cement company in the United States, the second largest in the United Kingdom, and the third largest in the world. The gas reserves of Russian giant Gazprom are larger than those of all the major oil companies combined, and its market capitalization -- or total stock value -- is larger than that of Microsoft. South Korean engineers are helping U.S. steel companies modernize their outdated plants. New proprietary drugs are being developed in Indian and Slovenian labs, where researchers are no longer content to turn out high volumes of low-cost generics for sale in the United States and Europe. New inventions in consumer electronics and wireless technology are moving from Asia to the United States and Europe, not just the other way around.

The growth in emerging-market companies has been nothing short of astounding. In 1988, there were just 20 companies in emerging markets with sales topping $1 billion. Last year, there were 270, including at least 38 with sales exceeding $10 billion. In 1981, the total value of all stocks listed on stock exchanges in emerging markets was $80 billion. That was less than the market capitalization of the largest emerging-market firm, Samsung, in 2005. Over the past quarter century, the total market capitalization of emerging markets as a group has risen to more than $5 trillion. Twenty-five years ago, portfolio investors had invested less than a few hundred-million dollars in emerging-market firms. Today, annual portfolio investment flows of more than $60 billion constitute the leading edge of a trend. Fifty-eight of the Fortune 500 top global corporations are from emerging markets, and many of them are more profitable than their peers in the West. The era of emerging-market companies being nothing more than unsophisticated makers of low-cost, low-tech products has ended.

 

Antoine van Agtmael, known for coining the term "emerging markets," is founder and chief investment officer of Emerging Markets Management L.L.C. He is the author of The Emerging Markets Century: How a New Breed of World Class Companies is Taking over the World (New York: Free Press, 2007).