The rise of south-south trade

This is a symbolically important year for the global economy. In 2013, the emerging markets’ combined GDP will surpass that of the developed ones, according to estimates from the World Bank, and this is just the start of a trend that will see them dominate future world trade.

It has been a long-heralded ascendance, but less talked about is the fact that a disproportionate part of this trade is going to take place between the emerging economies. HSBC bank’s Chief Economist Stephen King calls this nascent “south-south” trade boom “a revolution in patterns of world trade and in capital flows,” much like the one that the developed economies enjoyed in the 1950s and 1960s.

Dynamic emerging economies that trade with one another are threatening to eclipse the sluggish developed markets.

Tariffs between the emerging markets have been falling and investment in large-scale infrastructure has been under way for some time, but now the first signs of a south-south trade in consumer brands are becoming visible too.

Brand consultancy Trendwatching warns that established brands from the developed world cannot afford to be complacent. “We’re seeing an uptick in examples of this kind of trade,” says David Mattin, the firm’s Lead Strategist, citing examples such as Yogoberry, a Brazilian frozen yoghurt chain. “Yogoberry could have pushed into Europe or the US, but instead they pushed into the Middle East, starting in Teheran and from there striking deals to push out across the UAE.”

Other examples include Brazilian sandals maker Amazonas, which has chosen to push into China as its first export market. Chinese voice and messaging service WeChat (formerly called Weixin), meanwhile, is focusing on expanding into India and Brazil.

“It’s a really interesting and surprising emerging market activity,” says Mattin. “We know this is a tipping-point year in terms of world trade, and the scales are continuing to tip. In 2005, Asia was 14% of the global middle class, but by 2030, that’s expected to be 50% to 60%.”

Emerging market brands have every chance of outcompeting developed world competitors. In developing nations, companies that produce cheaper products are more likely to sell into other emerging markets than rivals with pricier goods aimed at richer consumers.

Trade into other emerging markets could well be the springboard, ultimately, for a global presence, says Mattin. “If you are going to have an increasing amount of emerging market activity, then it seems likely the big global powerhouses of the future will come from emerging markets.”

Mattin cites expansion by Lenovo, now China’s second-largest smartphone manufacturer, into Indonesia as one example to watch.

How should brand owners in the developed economies respond? New brands from the developed world may have to consider establishing themselves in the developing economies first, says Mattin. “Emerging markets, especially Asian ones, will have the lion’s share of consumer spending in the not-too-distant future. These are huge new potential marketplaces.”

But all is not lost for traders in the West. Mattin says that strategic partnerships could help expanding brands from developed economies secure more business in emerging markets. “It may be worth seeking partners with an emerging market mindset because they understand the logistics and the difference and costs of emerging markets, which are not to be underestimated.”

Established brands from the West should also banish assumptions that they have any inherent superiority, adds Mattin, as emerging market consumers increasingly desire other emerging market products and services. “The old picture of a Chinese middleclass person lusting after Western brands is dying away. The old paradigm that the West is best is gone.”

The article was written by:

  • Andrew Stone

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