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Business Markets Game Changers
Reenergized Emerging Markets and Renewed Pricing Power

May 2010 Corporate, Pricing

The game in business markets has changed.  The opportunity landscape has shifted from the stalwarts of North American and Europe to the onetime turbulent and unstable emerging markets.  Furthermore, the pricing power that shrank to the ether is returning to the tangible as markets return to growth.

These are bold claims and require bold reengineering of corporate strategy.  Before you the reader consider these to be audacious statements from an ill informed outsider on unimportant and irrelevant industries, let me provide the evidence.

Central Europe:  Poland, Czech Republic, and Slovakia

During the Great Recession, while most of North America and Europe saw real declines in gross domestic product, Poland grew their GDP by 1.8%.  This shift in opportunities has driven Poles that once went to Ireland and the UK for work to return to their homeland with some of their new found Irish friends following them.

Poland’s GDP per capital has risen dramatically from $2000 per year in 1990 to an estimate above $18,000 per year in 2009.  Smaller Central European democracies such as the Czech Republic ($24,000) and Slovakia ($ 22,000) have similarly posted gains squarely placing these markets in the range of their Western European counterparts such as Portugal, and leaving Latin American countries like Mexico or Brazil in their wake.

While Central European countries may lag North America and Europe in stable and transparent government, and they may have a more closed business climate, the opportunity to create and capture profitable customers there is real.

China

From auto sales to chicken feet and even silicone, China is an opportunity.  While Tyson Food and Pilgrim’s Pride may have a challenge selling chicken feet in the US, Chinese see them as a delicacy prompting these food giants to sell breasts domestically and feet internationally.  Similarly, BMWs, Mini Coopers, and Volvos are being snapped up by the emerging Chinese consumer class prompting entrepreneurs like Mark McLarty to invest in the auto distribution and service sector in China.  Even established industrial firms like Dow Corning have found terrific opportunities in China with its slightly altered Xiameter value proposition.

While the average Chinese citizen may live in relative poverty, China is not average.  Large sectors of the Chinese populous enjoy incomes that rival those found in western societies.  As China continues to demonstrate its economic prowess, the opportunity to create and capture profitable customers there will grow.

Commodities

Since December 2009, the producer price index for crude goods, a measure of the average change in selling prices received by domestic producers for their output, has posted sharp year-over-year increases.  Rubber has climbed 74% this year.  Palladium is up 39% this year.  Lumber is up 59% this year.  Crude oil is up 5.5% for the month of April.  Similar gains have been seen for other crude goods such as iron ore, coal, and wheat, though some agricultural products are lagging.  What is driving the cost increase of crude materials?  Emerging markets.

Increases in raw input costs apply pressures across all industries for increasing prices.  Though end consumers in North America and Europe may resist price increases as they come out of the Great Recession, it is almost inevitable that they will soon be seeing them at the gas pumps and grocery aisle as producers weigh their requirements to profit and their opportunities in emerging markets.  Already, Goodyear has responded with a 8% price increase on some tires and competitors have acted likewise.

When input costs go up across the board, producers equally share the need to increase prices.  Individual producers will determine to practice price leadership and increase prices.  As they do so, they should feel somewhat confident in expectations of seeing competitors follow their price moves.  Pricing power is returning.

ArcelorMittal

ArcelorMittal, a global steel giant, has begun the process of raising prices in response to increased input costs of raw iron ore and coal.  Lakshmi Mittal, Chief Executive of ArcelorMittal, expects the price increase “will be difficult, but not impossible” as customers resist.  Yet, the price increases are defensible due to the global increases in input costs and achievable due to the anticipated 10% global growth in demand for steel for 2010.  Mr. Mittal furthermore indicated that demand in China has been stronger than expected.

For ArcelorMittal, emerging markets represent an opportunity for growth, and their growth is driving the opportunity for price increases.

Cummins

Cummins Inc.; the maker of engines or trucks (lorries), construction machinery, and power generators; saw first quarter profits exceeding expectations.  Where did the profit come from?  Revenue increased in Latin America by 70% and Asia by 50% from a year earlier, while shipments to North America fell by 62%.  Tim Solso, Chairman and CEO of Cummins, indicated that these results confirmed their strategy of aggressively expanding overseas.

For Cummins, expansion in emerging markets has represented a strong growth opportunity.

Putting the Pieces Together

As these individual stories indicate, the opportunity landscape has changed.  While firms once looked to the US and Europe for growth opportunities, they are now finding them in China and Central Europe.  While firms just went through the most gut wrenching loss of pricing power in a lifetime, they are now finding renewed opportunities to raise prices and improve the value proposition.

The trends towards emerging markets and the new opportunities to raise prices are game changers.  Do you want to play a new game?

References

  • Jan Cienski, “Poland’s Economy Bests Its Neighbors”, Global Post (5 January 2010);  http://www.globalpost.com/dispatch/poland/100104/poland-economy-economic-growth
  • Aaron Back, “China Adds to Tariffs on US Chicken”, Wall Street Journal (29 April 2010), A14.
  • Norihiko Shirouzu, “Cruising Into China’s Booming Car Market,” Wall Street Journal (29 April 2010) B1.
  • Liam Pleven, “High Costs of Raw Materials – Surging Prices, Fueled by Emerging-Market Demand, Hits Profits and Consumers,” Wall Street Journal (23 April 2010), C1.
  • Liam Pleven, “Sharing the Pain of Higher Input Costs,” Wall Street Journal (22 April 2010), C1.
  • Robert Guy Matthews and Devon Maylie, “ArcelorMittal Gets Tough,” Wall Street Journal (30 April 2010), B2.
  • Bob Tita, “Cummins Benefits from Overseas Sales,” Wall Street Journal (28 April 2010), B7.


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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