Among the topics regularly discussed in this blog are connectivity and “emerging market” opportunities. BusinessWeek magazine recently published an article about Cisco and how it is trying to capture business in emerging markets [“Cisco’s Brave New World,” by Peter Burrows, BusinessWeek, 24 November 2008 print edition]. The article begins in Saudi Arabia where, Burrows tells us, the Saudi King is investing $600 billion to build Saudi infrastructure over the next few years. That is more than the economic stimulus package of $586 billion that Chinese leaders recently announced they were going invest to build infrastructure there. That is a lot of money and companies like Cisco are maneuvering to get some of it. Part of the Saudi infrastructure program involves the construction of entirely new cities like the King Abdullah Economic City.
“King Abdullah Economic City (KAEC) is mostly sand dotted by cranes now. But by 2020 the Saudis expect 2 million people to be living in a futuristic metropolis three times the size of Manhattan, with some of the most advanced technology money can buy.”
The focus of the article is on Cisco Senior Vice-President Paul Mountford, who is one of a number of dignitaries taking part in a KAEC ground breaking ceremony.
“As the black Lexuses arrive, one traveler remarks on the frenzied pace, and Mountford laughs. ‘That was nothing,’ he says. Not with so much at stake. King Abdullah plans to build four brand-new cities and upgrade the country’s infrastructure at a cost of $600 billion over the coming years, and Mountford is chasing scores of similar projects in emerging markets around the world. This goes beyond China and India. Mountford’s mandate is to tap the next tier of emerging nations, from Saudi Arabia and Russia to Brazil and Chile. It’s a sprawling group that Cisco, and companies like it in technology and beyond, is counting on for much of its growth. But as the financial crisis hammers many of these economies, Mountford will have to hustle to deliver. The groundbreaking at KAEC makes clear how hard Cisco is pushing. Its executives form the largest Western contingent by far, and, after the event, the company hosts the king in an adjoining tent for a demonstration of Cisco technology that allows a person elsewhere to appear on stage as a holographic image. All this before the company has won a dime of business for its products.”
Cisco, in fact, is taking an approach very much like the approach we recommend in Enterra Solutions’ Development-in-a-Box™ offering. Emerging market countries can’t waste precious resources reinventing how to connect with the global economy or waste time building trusted business relationships. They need to leapfrog trial-and-error development by investing in state-of-the-art technologies and need to garner trust by adopting best practices and international standards. That’s what we tell our potential customers and that is what Cisco is telling theirs as well.
“Cisco isn’t just selling technology. Mountford’s pitch is that Cisco, more than any other company, can help countries such as Saudi Arabia modernize their economies and become leaders in the Internet Age. The company argues that, by investing in the Internet infrastructure Cisco sells, these governments can better educate their citizens, improve health care, and boost national productivity. They may even be able to create their own tech sectors, giving citizens the opportunity to become well-paid ‘knowledge’ workers like those in Bangalore or Guangdong, China. It’s the promise of the Cisco Effect. ‘This is a chance for Cisco to [influence the world] on a much bigger scale,’ says John T. Chambers, the company’s chief executive. ‘It’s about raising standards of living and creating large middle classes.'”
Chambers has it right. Emerging market companies want to ensure that current and future business activities are mutually beneficial. They understand they have a long way to go to catch up to some Western countries and, at the same time, they are desperate to ensure they are creating good jobs for their citizens and fostering the emergence of a sustainable middle class. Basically, Cisco’s pitch is that it will provide a country with the world’s best equipment and help teach them how to use it as a foundation on which to build future prosperity.
“It sells everything from the million-dollar routers that direct traffic through the Net to $300,000 videoconferencing systems for executive suites to set-top boxes for cable TV. But it does more than peddle gear: Cisco provides consulting services to help government officials figure out how best to use the Internet and pays for training centers to churn out the technicians to make such plans real. All told, the company is investing billions in emerging markets in hopes of snaring future business. ‘Cisco is getting itself designed into the fabric of these countries’ economic plans, because Cisco is helping their leaders imagine the future,’ says tech consultant Geoffrey Moore of TCG Advisors. ‘It’s thought leadership at a level I’ve never seen before.'”
Microsoft became the global giant in operating systems exactly because it achieved an “early mover” advantage in the marketplace. It essentially ensured that it was built into the fabric of PCs during the formative years of desktop and laptop computing. Fortunately for Microsoft, it didn’t have to create a vision of the future for PC users (that was being done by others — like those at DARPA, Xerox’s PARC, and Apple). It nevertheless took advantage of its early mover position and people have been trying to dislodge it ever since. Cisco is trying to gain a similar early mover position. If you get woven into the information technology fabric of a country it is very difficult to unweave the system and start over. It’s smart business, but a difficult challenge.
“The question is how much these countries will pay for vision, especially in tough economic times. Despite Cisco’s efforts, it lost out on the first major contract from King Abdullah Economic City. The developer of the city gave the $84 million deal for a citywide phone and Internet system to Ericsson after the Swedish equipment maker submitted a bid more than 20% lower than Cisco’s, sources say. ‘I was shocked,’ says Ahmad Al-Yamani, the top technology officer for the Saudi Arabian General Investment Authority, a government group that worked closely with Cisco on the blueprint for the new city. ‘But sometimes dollars talk.'”
Companies need to remember that just because a country is an “emerging” or “developing” market it doesn’t mean that its government or business leaders are backward hicks who can easily be duped into business deals that make no economic sense. In fact, my experience has been that they are very savvy and they appreciate good value. Cisco’s setback has not discouraged the company, because it knows it is on the right track. Government and business leaders appreciate a good vision and strategic plans that can help achieve that vision — more and more that means affordability. Mountford, Burrows reports, has been Cisco’s most avid proponent of emerging market investments.
“In 2005, Mountford started looking for a fresh challenge and began to focus on the nascent rise of emerging markets. Countries such as Saudi Arabia and Chile were thriving with the surge in commodity prices, while Turkey and Poland were developing broader economic strength. Yet Cisco approached these markets in the same simplistic way as most Western companies: It had a few sales offices and distributors but no specialized effort. Chambers tells the story of how Jordanian King Abdullah II promised him Cisco would make money in his country after convincing Chambers that the company should work with the government to create the Jordan Education Initiative in 2003. ‘I said, “With all respect, Your Majesty, I’ll never make money in Jordan and I probably never will in the Middle East, either,”‘ Chambers says. Mountford was convinced otherwise. He believed that a growing coterie of progressive governments recognized the need to invest heavily in technology and other capital improvements. Those in the Middle East, in particular, faced a surge of young people coming of age. Without the creation of good new jobs, there could be a host of problems, including a further rise in Islamic radicalism. So in early 2005, Mountford proposed breaking these hot spots out of the existing business units at Cisco and creating a specialized emerging-markets group, which he would lead. Robert Lloyd, then head of the Europe, Middle East, and Africa operation, helped him hatch the idea. Chambers quickly assented, giving Mountford responsibility for 132 countries in 23 time zones. … Certain markets were rough going at first, particularly in the Middle East. Tensions between the U.S. and Saudi Arabia lingered after September 11, straining business relationships. Cisco’s American employees were hesitant to visit the country. Saudi businesspeople were offended by charges that their nation supported terrorism and by having to wait weeks for visas to the U.S. As Cisco struggled, Chinese companies such as Huawei Technologies were quick to fill the void. ‘You wouldn’t believe how much business Huawei has taken out of Cisco’s mouth,’ says Haitham Abu Aisha, general manager of a Riyadh Internet service provider called Sahara Net. Still, Mountford’s team thrived elsewhere. Particularly in countries such as Russia and Brazil that opened up telecom markets to competition, new carriers were eager to buy Cisco gear. Sales surged for fiscal 2006, to $1.68 billion.”
Beyond selling products, Cisco decided to invest directly in emerging market countries. This is a huge step in gaining local support. As I have repeatedly noted, foreign direct investment is critical for helping foster sustainable development. Governments know that and look favorably on companies that make that commitment.
“In December 2006 [Cisco] took a step deeper into emerging markets. It established a huge campus in Bangalore from which teams of engineers could be dispatched to deliver on promises made by Mountford and other salesmen. The India-based staffers began to create products tailored to specific markets, such as a Web site in Turkey that lets small textile companies bid on a variety of contracts. The customized products are then marketed to potential buyers in other, similar countries.”
Mountford also didn’t give up on the Middle East.
“Cisco eventually got on track in Saudi Arabia. Mountford hired a well-connected local, Badr Al Badr, to head the business in the country. Badr brought on more salesmen and engineers and got Cisco involved in major government projects. By early 2007, Saudi orders were growing 70% over the previous year. Overall, Mountford’s emerging-markets group boosted sales an average of 65% during 2007 and 2008. In South Africa, Cisco helped build an advanced wireless surveillance system to deter the theft of gold and diamonds off mining-company trucks. In the United Arab Emirates, the company helped design and build a futuristic Dubai Internet City industrial zone. And in Brazil, it helped construct the Internet infrastructure to provide broadband access in parts of the country where it never existed before. For the fiscal year ended this July, Mountford’s group hit sales of $4.5 billion. IBM, Sun Microsystems, and Juniper Networks have all followed Cisco’s lead in the past year and formed specialized emerging-markets units.”
Mountford continues to operate in his Development-in-a-Box-like mode and he’s proving that it works.
“During a short trip to Saudi Arabia over the summer he shuttled around Riyadh and Jeddah in black limos, meeting with a parade of officials. He didn’t spend a moment talking products or prices, though. Instead he talked about ‘country transformations’ and brainstormed big ideas. … Mountford’s meetings tend to drift from employment trends to energy policy. At one point, Tawfig Al-Rabiah, development chief for the country’s industrial zones, told Mountford about a project similar to KAEC, called Sudair City. He wanted Mountford’s help with a new broadband network, but the Cisco exec homed in on the metropolis’ cheap electric rates because of the proximity to rich oilfields. (Electricity costs about 3 cents a kilowatt hour, one-third the price of many U.S. markets.) Why not make Sudair a hub for vast computer data centers? The electric bill is frequently the biggest expense in running these centers, which are increasingly important to Internet companies such as Google and Amazon.com. Al-Rabiah liked the idea, one reason Cisco later landed a $280 million contract to create the underlying fiber-optic network for Sudair City and other projects.”
Emerging market countries offer significant opportunities for visionaries who can see possibilities where others see challenges. The business environment in most emerging market countries requires someone who can think laterally as well as long-term. It also takes someone with a strong stomach for risk and reward.
“Countries such as Saudi Arabia have miles to go to catch up with India or China, never mind the U.S. Only 22% of the Saudi population has Internet access, and 98% of those people have sluggish connections unsuitable for online video and other data-intensive activities. There’s little evidence the country is making progress in building a knowledge economy. Bart Van Ark, chief economist at the Conference Board, says surging oil revenues in recent years have created construction jobs, but almost nothing in the way of better-paying industries. The progress ‘is not sufficient to raise average living standards much,’ he says. Now the global financial crisis is undermining the ability of emerging countries to invest in technology and other infrastructure. … In several of Mountford’s biggest markets, including Russia and Brazil, the local currencies have plummeted, and capital spending has stalled. Oil exporters such as Saudi Arabia have seen prices fall more than 50% since their peak in July. Saudi officials say they’re not planning to cut back on their technology investments. Tawfig Al-Rabiah says the turmoil may lead to larger investments, as foreign companies concentrate on relatively stable economies such as Saudi Arabia. Still, with their economies battered, governments in these markets may well look to cheaper options. That leaves Cisco vulnerable to rivals such as Ericsson and Huawei. Cisco may help governments in places like Saudi Arabia grasp the promise of the Net, only to lose out on the actual business. … Mountford is clear about the challenges. He knows that countries such as Saudi Arabia may not complete every aspect of their grand plans. Even if they do, Cisco may not win the business. Still, he sees huge opportunity for the company and for bettering the lives of millions: ‘That’s why I’m stupid enough to work this hard.’ His father, he says, recalls that his war years, while harrowing and taxing, were also the most special. ‘Well, this is our time,’ he says.”
I can identify with Mountford’s motivations. Profits and idealism are not mutually exclusive concepts. You can make a buck and help change the world for the better. In an interesting sidebar accompanying Burrows article, BusinessWeek published the five things that Cisco believes are necessary to compete for business in emerging markets. First, “win the government, business will follow.” If policymakers catch the vision you are selling, they can help make the dream a reality. Second, “sell more than technology.” The article notes that Cisco executives focus on broad issues. I like to think of this as selling solutions not products. Third, “charity pays.” Cisco has made big points with emerging market governments through its philanthropic efforts such as training programs for the poor. Fourth, “hire well-connected locals.” The article notes that Cisco just doesn’t hire locals it recruits top power-brokers. This is just another confirmation of why I say connectivity matters. Finally, “create jobs.” Almost every emerging market country desperately needs to create jobs for its burgeoning population. If you can promote a vision and present a strategic plan that creates good paying jobs that foster the emergence of a sustainable middle class, your company will do well in frontier economies. At least that is my experience.