The U.S. economy is weakening, and from Wall Street to Wal-Mart, there are plenty who are feeling the pinch. But at a surprising number of the world's biggest businesses, the mood these days is strangely buoyant. First there was IBM, the iconic computer business, which wowed financial analysts last month by posting an impressive 24 percent rise in profits and $1 billion more in revenue than predicted for the last quarter of 2007. A few weeks later, household-goods maker Procter & Gamble assured investors that despite the gathering gloom, its upmarket brands like Pampers and Tide were still trumping cheaper generic labels. On Feb. 19, sweets and beverage giant Cadbury Schweppes announced a 7 percent hike in revenue and share gains in eight of its 12 key markets last year. And these businesses are hardly alone. Sales are well up at Coca-Cola, helicopter-maker Sikorsky, tractor-pusher John Deere, and General Electric, among others. "I'm not trying to gloat in the face of recession," says Mike Mack, chairman of the Switzerland-based agricultural seed and chemicals combine Syngenta, who forecasts double-digit sales growth through 2010. "But we're feeling pretty good."
Apart from a healthy bottom line, these disparate companies have little in common—with one key exception. All have a huge presence in emerging-market nations. And not only are these emerging markets holding their own in the face of strong headwinds from the United States, but they are contributing ever larger portions of revenue, profits and market share to businesses in the developed world. This is not to say that the much discussed economic "decoupling"—the sunny notion that developing nations can still flourish even as the rich world is stalling out—is suddenly a done deal. As Morgan Stanley Asia head Stephen Roach often reminds the world, "Chindia" (that annoying and omnipresent new acronym for the two most important emerging markets) still consumes only one sixth of what the U.S. does. "It's mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians," Roach recently wrote in these pages. Still, for the savviest Western companies, the emergence of a more prosperous middle class and even newly enfranchised low-income customers in the developing world is not only buoying profits and revenues, but also forcing a rethink of what it means to be a 21st-century multinational.
Behind the bullish numbers is an octave change in perceptions about risk and opportunity in some of the world's most powerful boardrooms. Western blue chips used to mainly source parts and cheap labor in developing nations. Increasingly, they're selling a large portion of their finished goods and services there too. Big retailers like Carrefour, Unilever and Costco are catering to low-income customers eager to join the consumer economy, and wooing a rising middle class that wants high-end goods from filet mignon to digital cameras to brand-name beer. Corporations as varied as Japanese-owned Hitachi (mining excavators) and 7-Eleven (convenience stores), Finland's Nokia (mobile phones), Banco Santander of Spain (banking), and Canada's Bombardier (executive jets) are getting on the bandwagon, too. Developing countries have of course spawned their own multinationals like Brazil's midsize aircraft maker Embraer and Taiwan's electronics giant Hon Hai to capture a portion of the growing pie. But emerging markets are also priority No. 1 for a new generation of First World firms whose future prospects lay to the south and to the east.
After years of globalization, it's hardly surprising that the biggest U.S. corporations now look to overseas markets for at least half of their revenue, but more and more boardrooms are seeing the developing world become their fastest growing breadwinner. At last count, avid consumers in emerging markets kicked in 40 percent of sales for Colgate and 27 percent of sales for Procter & Gamble (with P&G CEO Robert McDonald forecasting a rise to 30 percent by 2010). Coca-Cola recently reported that thirsty Latin Americans and Eurasians have been out-drinking North American buyers two to one in 2008, and now United Technologies expects to see its developing-country business expand at double the rate of developed markets this year. European and Japanese firms are no exception. Last year U.K.-based Cadbury Schweppes announced plans to close 10 plants and idle 7,800 workers by 2011. But you wouldn't know it from the red-hot balance sheets in places like Brazil, China, India and Mexico, from which the company drew a third of its revenues and 60 percent of its growth last year. Syngenta, a company specializing in biotech crop seeds and pesticides, is doing well across the map, but nowhere better than in Latin America, where revenue jumped 37 percent last year, thanks to burgeoning agricultural production. For three years running, Canon has clocked 30 percent annual growth in sales of cameras, copiers and fax machines to China. And while Japan's Hitachi, which makes mining machines, reported a slump in the U.S. revenues last quarter, business in China is booming, with $10 billion in sales to the Mainland projected for this year "Growth may be collapsing domestically and softening outside the U.S.," says Alberto Ramos, emerging-market strategist for Goldman Sachs. "But the companies that have more overseas exposure are doing much better. Diversification is survival."
Many firms began casting their nets more widely after the U.S. recession in 2000-01. As the tech bubble burst and 9/11 cast a pall over the markets, scores of companies gutted domestic payrolls and mothballed factories, but many—think IBM and Unilever, among big Western companies— reinvented themselves by going abroad, to China and India. Those investments are now paying off. "The nice thing about the world economy right now [is that] not all the business cycles correlate with one another," says Marc Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School of Business.
The fact that GDP in China and India are still expanding by 10 and 8.4 percent respectively is great for a company like Starbucks, which has taken a beating in the U.S. recently as recession-wary consumers forgo the $4 latte in favor of cheaper alternatives. The franchise started pushing frappuccinos to the rest of the world a few years back; now foreign market sales are up 31 percent from 2006 to 2007, against 19 percent in the U.S.
That's not to say that emerging markets are an easy place to make a dollar, yen or euro. Guillen cautions that currency fluctuations have distorted balance sheets, inflating multinationals' foreign earnings when reported in dollars. And for all the buzz over hypergrowth, developing nations still account for about 14 percent of world GDP, a statistic that drives home decoupling critics' point. Foreign businesses in developing markets also have all the usual problems with crumbling infrastructure, rigid labor laws and opaque regulations. Then there's the challenge of developing entirely new product categories for less prosperous markets. Uniliver is now famous for selling one-pack soap sachets in India, and Cadbury has catered to penny-paying customers in Mexico City and São Paulo by offering pieces rather than packs of Trident and Bubbaloo chewing gum. But more complex products have been tougher to tweak. Big high-technology vendors are often stymied by the task of serving a galaxy of low-budget businesses. One solution has been the Internet; instead of flogging fancy and expensive corporate management software, companies like Google and Microsoft are offering cheaper Web-based services that retailers and companies can call up through their browsers for a far more modest fee. Spending on IT research and development in emerging markets is growing at 7 percent a year—twice the U.S. rate—and many firms have shifted entire R&D divisions there.
R&D isn't the only thing moving. IBM now deploys two thirds of its staff outside the U.S., and is pumping $8 billion into India alone in a plan to double its earnings from emerging markets to around $9 billion by 2010. GE just transferred its growing hydroelectric power division, GE Hydro, from Canada to Brazil and shifted headquarters of its consumer-finance business, GE Money, from Connecticut to London, in large part to be closer to growth markets in the East. "The days when you go into a country like a ghost, drop off a piece of equipment and then walk away again are gone," says Ferdinando Beccalli-Falco, chairman of GE International, the worldwide arm of General Electric. "Now you have to dig in, get involved with governments and local companies, and become a partner for development." In these new partnerships, profits clearly flow both ways.