The era of globalization is giving way to a new business environment known as “globality,” and, despite the financial crisis, the demand for commodities is, in the big picture, both increasing and shifting in nature. Globalization was largely driven by multinational companies based in the West and Japan – the “incumbents” – that conducted business in developing economies in order to cut the costs of production and also to sell their goods into large emerging markets.
In globality, these incumbents find themselves up against a whole new set of companies: their former suppliers and partners based in the developing economies that have grown into “global challengers” almost, it seems, overnight. In globality, everyone, from everywhere, is competing for everything.
The “everything” variable of the globality equation refers in part to commodities: the components and raw materials needed to produce the goods that, even in the face of the downturn, are increasingly in demand across the globe. The extraordinary growth of industry in emerging economies is fueling unprecedented competition for oil, labor, natural gas, cotton, food, iron ore, and dozens of other commodities in every market. The need for commodities may not be as visible as other aspects of globality – the competition for customers and talent rivalries – but access to raw materials may be the deciding factor in who can lead their markets, and for how long, in this new economy.
EVERYONE WANTS A PIECE OF IT
Most of the world’s commodities are concentrated in one or more geographic areas. In the age of globalization, the countries that controlled those resources would export them to Western industrial giants and reap healthy profits. Now, however, many successful businesses have emerged in these commodity-rich countries and are vying for the same commodities their home countries used to export.
Brazil, for example, has been one of the world’s greatest exporters throughout the 20th century, providing a range of resources from agricultural feedstock to iron ore. Recently, however, more and more domestic Brazilian companies have emerged to take advantage of the country’s wealth of local resources. Companies in a wide range of industries including aerospace, food and beverage, personal care, energy, mining, paper, and more, have enjoyed tremendous growth, at least in part due to the availability and abundance of commodities.
The same is true in China. Baosteel, the iron and steel conglomerate, is the sixth-largest steel company in the world; yet it imports nearly all of the iron ore used in steel production at significant cost. However, the company has the advantage when it comes to another quantity that might be considered a commodity: labor. Baosteel employs some 112,000 people at any given time, at a cost of compensation low enough to more than offset the high cost of imported iron ore.
In the developing economies, many industries organize into industrial clusters at least in part to better manage commodities. The Pearl River Delta, in Guangdong province in southern China, is a cluster that houses hundreds of companies and millions of employees in businesses ranging from pianos (Pearl River Piano) to electronics (Foxconn). The companies in the Pearl River Delta, and dozens of similar clusters throughout China and around the world, share the advantages of the province’s commodities: low-cost labor, an abundance of suppliers, and access to distribution networks.
In India, the number one commodity must be considered to be talent, particularly English-speaking, service-oriented talent. Since the 1970s, Indian companies have leveraged that commodity, supporting Western businesses that outsourced IT services and engineering activities to India. In the past 15 years or so, however, companies such as Wipro and Tata have begun reinventing their businesses and expanding them – turning to value-added services, innovation, and creating a worldwide presence. Now it is these companies that outsource parts of their business operations to companies in the West. The commodities that they are seeking in doing so include proximity to and knowledge of customers, access to technology, and links to distribution systems.
Russia stands out as an anomaly among the rapidly developing economies. Its primary commodity, energy, is the country’s main source of income. Indeed, Russia exports oil and gas and imports most other commodities. Russia has yet to take significant steps to change this model and may well find itself in jeopardy as the world gradually moves to renewable energy sources and commodities other than fossil fuels become far more valuable in the eyes of the world.
CHANGING THE GAME
The global challengers are changing the commodities game still further as they become more focused on innovation – usually seeking to develop new products that specifically take advantage of locally-sourced commodities.
Natura, of Brazil, for example, has built a globally competitive personal care business based on the use of all-natural, locally-produced, sustainably harvested ingredients. From its roots as a tiny, local company, Natura has leveraged its Brazilian assets to the point that it is challenging the global leaders in its industry.
And consider Zhu Xin Li, who developed a hugely successful business in China based on a commodity that few in the country even realized was a commodity: fruit juice. Some 20 years ago, Zhu was working as a government overseer in Shandong Province in China, when he received orders to plant rice on all the available agricultural land in his jurisdiction. But most of the terrain was not suitable to rice cultivation so Zhu planted apple trees instead. They gave forth a huge harvest and Zhu realized he had an untapped commodity on his hands. He set up a small juice company, now known as Huiyuan, and, because fresh juice was virtually unheard of in China at the time, exported the apple juice worldwide.
In 1994, Zhu built a new, larger juice-processing plant. Shortly thereafter, Huiyuan introduced its first all-juice product and distributed it to local retailers in Shandong Province — and was greeted with almost overwhelming demand. The company stepped up its manufacturing capacity and expanded its line of products. Since then, Huiyuan juice has enjoyed incredible success both at home and abroad. The company went public in early 2007, in an initial public offering that raised $308 million, and is on the brink of selling itself to The Coca-Cola Company for $2.5 billion.
THE MEEK SHALL INHERIT
As the global challengers continue to grow and innovate they will increasingly put pressure on the incumbents’ ability to gain a favored position in the purchase of commodities. So Western companies must consider new strategies and business models to compensate for the increased competition for the raw materials that are essential to their operations. It’s true that the price of some commodities has dropped in recent months, but all companies – both incumbents and challengers – must not expect that these prices will hold and that commodities will always be in ample supply. As we’ve seen with crude oil, prices are subject to sudden and unpredictable shifts.
What’s more, the general, long-term trend in most commodities prices is up, not down, except for, perhaps, electrons and photons. That’s because there is pent-up demand – despite the financial crisis – in the rapidly developing economies for commodities that are essential to infrastructure improvements and basic consumer products. That demand cannot help but drive up the price of oil, food, iron ore, and many other key raw materials over the long term.
Although the world’s attention is more focused on glamorous goods such as aircraft, autos, computers, fashion, and mobile communications, it may well be that the deciding success factor in the era of globality will be the relatively humble commodity.
Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG) and global leader of the firm’s Operations practice. James W. Hemerling is a San Francisco-based senior partner and co-leader of the firm’s Global Advantage practice. Both are authors, with Arindam K. Bhattacharya, of GLOBALITY: Competing with Everyone from Everywhere for Everything (Business Plus, June 2008).