The New Global Champions: Road to Glory Leads to Emerging Markets

By Norbert Jorek and Dr. Fritz Kröger

The most successful companies know how to reap the rich harvest of globalization—and for them, the past five years have been bountiful indeed. The A.T. Kearney Global Champions 2008, identified from the world’s 2,500 largest companies operating internationally, have not only successfully balanced global expansion and value growth, they’ve also clearly outperformed their peers and the market. On average, their compound annual growth rate in value creation—47%—more than doubled that of the entire sample for that period. Taken together, the 25 Global Champions are valued at more than US$2 trillion.

Representing 11 different industries, from beverages to transportation, many of these companies are thriving in high growth emerging markets. About half the Global Champions are actually headquartered in emerging countries, while others, such as ArcelorMittal and Inbev, have substantial exposure to those dynamic environments. It is therefore not surprising that just 3 of the world’s 100 largest companies have emerged as Global Champions. Growing twice as fast as companies in the OECD, expect many players from the BRICs and other countries of the economic South to move into the Top 100, ushering in the transformation of the global corporate sector (see figure 1).

And the Winner Is: ArcelorMittal
The world’s largest and most integrated steel company, ArcelorMittal tops the A.T. Kearney Global Champions list. The company generated 2007 revenues of $105 billion and its market capitalization stood at $110 billion at year-end 2007, Moreover, from 2003 to 2007 the ArcelorMittal’s compound annual revenue growth was 29 percent, while its value growth reached an impressive 159 percent. ArcelorMittal’s strategy of global consolidation, becoming the number one producer of crude steel, with output reaching more than 3 times that of the second largest producer, Nippon Steel, has paid off handsomely for its shareholders, not least the Mittal family which holds over 40% of ArcelorMittal shares.

The steel giant is not only performing well in absolute terms, but also relative to its competitors. For example, Nippon Steel from Japan, ranking second in terms of crude steel output (see figure 2), was not able to outperform its industry peers. Meanwhile, smaller industry players, such as Russia’s Severstal (15th in crude steel output) and Germany’s Salzgitter (36th in output) have emerged as Global Champions.

Forged from the 2006 merger of Arcelor and Mittal Steel, ArcelorMittal is the quintessential global company: With a presence in more than 60 countries and customers in nearly 170, the company is listed on stock exchanges in Paris, New York and Amsterdam, among other financial centers. ArcelorMittal has benefited from visionary leadership that, early on, saw rising demand in emerging markets as well as the wisdom of scaling its business to a level at which it can negotiate on equal terms with suppliers and customers.

Runner-up: Apple
Following ArcelorMittal, Apple ranks second on the A.T. Kearney Global Champions list. In 2007, the company’s sales were approximately $25 billion, its market capitalization $179 billion. With a compound annual growth rate in sales of 33 percent and in value growth of 103 percent from 2003 to 2007, Apple has been a star performer.-and with sales outside of the United States accounting for 41 percent of its total sales, the company’s success has clearly stretched beyond the U.S. borders.

Apple, however, followed a very different path to value building growth than did ArcelorMittal. While ArcelorMittal pursued a strategy of consolidation and integration, Apple’s rapid, organic growth is the result of the company’s dedication to continuous innovation: between 2003 and 2007, Apple increased its research-and-development spending by 66 percent. This allowed Apple to continuously offer products with cutting-edge technologies to sophisticated consumers. In particular, there has been high praise for Apple’s ability to integrate a user-friendly interface in personal computers, iPods, iPhone—indeed, throughout its product line. Apple’s success is proof that a company need not be in a particular industry or the largest company in that industry to be a Global Champion, and through constant, consistent innovation any company can become a value builder.

Strong Presence of Natural Resource Companies
Natural-resource companies are prominent among the Global Champions, thanks to the strong performance of the sector. Collectively, the energy, steel, mining and metals industries represent nearly 19 percent of the sample’s market capitalization. The sharp increase in commodities prices, much of it resulting from China and India placing considerable pressure on world markets, is well known. However, a close look at the change in two benchmarks—MSCI World and MSCI Emerging Markets—compared with the change in resource commodities reveals that industrial-metals prices have not outpaced the MSCI Emerging Markets Index (see figure 3).

Indeed, natural-resource companies based or operating in emerging markets have seen solid growth in revenue and value creation. Intensified merger-and-acquisition activity has further fueled this development. However, not all players have benefitted equally from the benign market conditions in the resources sectors. In mining, companies like Xstrata and Vale have outperformed larger established rivals, partly due to vigorous global consolidation strategies. Similarly, in the energy sector, none of the oil majors representing six out of the 10 largest companies in the world has produced a performance worthy of a spot on the Global Champions list.

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Non-Resource Industry Leaders
While the prominence of resource industry companies in this year’s Global Champions ranking reflects the overall attractiveness of the sector over the last five years, it should not cloud the extraordinary achievements of other leading global companies operating in industries that are not necessarily beneficiaries of the boom in natural resource prices. Rather, these firms successfully executed strategies that took full advantage of globalization.

Looking outside the Global Champions at the non-resource industries with the most significant contribution to World GDP, the five industry leaders (see figure 4) have exploited global trends in various ways. For example, some are benefitting from increased consumer demand and wealth creation as middle classes expand around the world. Standard Chartered’s longstanding presence in emerging Asia has helped it grow rapidly in a mature industry. Equally, Daihatsu has succeeded by remaining focused on affordable and fuel-efficient cars for the new middle class and establishing plants in several developing countries in Asia and South America. Iberdrola, the world’s 9th largest power utility by sales, is a leading producer of renewable energy in Europe, but also in the United States and Latin America. It has new investments planned in excess of $15 billion in clean energy and in improving energy efficiency for conventional power.

These leaders prove that one doesn’t require the windfalls from favorable macroeconomic or industryspecific conditions to achieve value-building growth and outperform one’s competitors. Value-building growth is possible in any industry and at any phase of the business cycle: it’s not an art—it’s a craft that can be learned.

Outlook
The World Bank forecasts global growth at 2.7 percent in 2008 rising to 3.4 percent in 2010. However, growth in developing countries will again outpace growth in high-income countries, at 6.4 percent versus 2.5 percent. It is instructive to note that in 2002 the G7 nations represented 47 percent of World GDP at purchasing power parity, but by 2007 that figure had dropped to 43 percent. According to the Economist Intelligence Unit, the G7 nations are forecast to account for barely 39 percent of the world economy in another five years.

As emerging markets continue to grow more rapidly than developed markets, the world order will see significant upheaval in the years to come. The Global Champions of the future will not only have to display state-of-the-art strategic thinking, they need to develop a sophisticated and rigorous global radar capability providing foresight on macro trends in order to excel in an ever faster changing and more complex global business environment, filled with ample opportunity for those who can anticipate disruptive change and prepare for the inevitable tectonic shifts. An in-depth study of the corporate DNA of the Global Champions 2008 will provide invaluable lessons on how to prepare for—and succeed in— the future.

A.T. Kearney Partners Norbert Jorek and Fritz Kröger are based in New York and Berlin, respectively.

For more information, please contact the authors.