A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  At the moment, most of China’s better companies concentrate on subcontracting. Only one mainland Chinese brand—Tsingtao Beer—made it onto a list of the top fifty non-Japanese Asian brands. But mainland firms are beginning to find niches overseas, making things under their own names; and they are not just sticking to products like perfume and beer for which preferences are largely matters of taste. Walk into an American appliance store and you may well find a small refrigerator made by a German-sounding company called Haier; in fact, it is a state-owned Chinese firm that started selling abroad only in 1997 but now claims 20 percent of the American market for small fridges and a smaller share of that for air conditioners, it is now building a factory in South Carolina. Haier’s products will soon be joined on the shelf by those of its local rival, Guangdong Kelon, which already makes and designs Wal-Mart’s Magic Chef refrigerators. Meidi, another Chinese firm, is also pushing into the American air-conditioner market.[10] Legend, a Chinese computer maker, which has managed to fend off companies such as IBM and Compaq at home, might also soon start appearing overseas.

  In fact, there are quite a lot of firms in low-tech industries in emerging markets that have shown that they can surge to the top of world markets, as Mexico’s Cemex has in cement and India’s Reliance and Ispat have in bulk chemicals and steel. Niraj Dawar and Tony Frost, one of the few management teams to consider globalization from the local firm’s perspective, point out that even when local champions are on the defensive, one of their biggest problems could be overestimating the invaders’ strength.[11] When India’s market opened up, Bajaj Auto, India’s leading scooter maker, considered forming an alliance with Honda. But then it realized that many of the supposedly invincible Japanese firm’s strengths, such as its cutting-edge technology, did not matter in India. What Indians wanted were cheap bikes that they could take to a local dealership if anything went wrong. So Bajaj’s nationwide distribution system proved much more valuable than Honda’s mechanical knowledge. Jollibee Foods, a family-owned fast-food company in the Philippines, matched McDonald’s cleanliness and then trumped the invader by localizing its menu more: Jollibee’s hamburger seasoned with garlic and soy sauce, for example, captured three quarters of the country’s burger market. Now Jollibee is establishing restaurants near large expatriate populations in Hong Kong, the Middle East, and California.

  And even if the largest companies in emerging markets have to be on p. 128 their guards, the opportunities that technology and globalization offer for small businesses can be breathtaking. Consider the way that globalization has gradually brought the world to the door of a family business in northern Africa that has barely changed for centuries.

  Entering the Madini family’s tiny perfume shop on rue Sabou in the old town of Tangier, it is hard to think of anything more local. The shop is really no more than a tiny counter with small glass bottles containing the different essences that go into making a perfume. The Madinis grow most of the flowers that are crushed to make the essences themselves. The little cylindrical vials are just wide enough for a few drops to be shaken out each time. (The essences are fairly powerful, so they are not the sort of thing you splash all over.) The skill comes in knowing how to mix them. Bubka and Suleiman Madini are the fourteenth generation of the family to be in the business; they each spent more than a decade learning their art from their father, Sherif Ibrahim Madini.

  Madini means “one from Medina.” For as long as anybody can remember, the members of the Hariri family were perfumers in the city of Medina. When one of them married a Moroccan sultan at the turn of the century, some of the family moved to Tangier and took the name Madini. Sherif Ibrahim Madini soon built up a reputation in Tangier’s expatriate community for being able to copy the favorite scent of the day for a fraction of the going price. Buyers were told to take a walk around the Kasbah, and when they came back the perfume would be ready. In the 1960s and 1970s, hippies discovered the tiny store as a place to buy patchouli and musk. As flights became cheaper and Tangier more accessible, the Madinis’ shop became an occasional stop on some tourist routes. In 1997, after Suleiman had taken over the business, the family opened another, more modern (though less atmospheric) shop in the new part of town.

  The Madinis’ first attempt to go global came through Dulce Roppenecker, a Cuban-born housewife-cum-entrepreneur who had come across the store in 1969 and become a friend of the family. When her husband’s employer sent him to New York State, Roppenecker was “appointed” the family’s international agent and set up a small shop called Talisman to sell the oils in Woodstock. The shop was fairly popular with hippies, but most of the business was either mail-order or wholesale, with an increasing number of customers coming from overseas. So in 1997, when her husband was transferred to Seattle, Roppenecker closed down the shop to concentrate on the wholesale business, mail-order, and the Internet. A slightly rudimentary website had been set up a year before in lieu of rent by David McCarthy, a student of Tibetan Buddhism who lived in a cottage owned by the Roppeneckers.

  p. 129 This pleasantly serendipitous approach to expansion has worked a treat. The Madinis have an aversion to precise numbers, but they say that their cottage industry is shipping tens of thousands of bottles every year. Around 40 percent of their bottles are exported (in all, they serve one hundred countries), and a fifth of their customers order their oils via the Internet. One of the Internet’s charms for a small business is that, compared with other distribution systems, it costs so little to set up. Another particular saving is in marketing. Rather than shipping a catalog, the Madinis can simply ask their customers to download it. There are fiddly things to do with customs and so on, but as Roppenecker says, “We now realize that we can reach and sell to just about anyone.”

  None of this has changed life greatly on rue Sabou. The two brothers are still reluctant to use the Internet themselves. They prefer to talk about the fact that they have just discovered that their rose oil is used to perfume the shroud of the Kaaba stone in Mecca. Ask about future plans and you are told, “We can never know what we cannot see around the corner.” And already they are concentrating on training the fifteenth generation. Even though he can barely see over the counter, Bubka’s young son, Aman, is already beginning to serve his apprenticeship.

  To the Finland (Base) Station

  If the Madinis represent an almost accidental success story of globalization, then Nokia is a much more determined example of how a local company can convert itself into a global industry leader. In 1998, the Finnish company roared past Motorola to become the world’s biggest manufacturer of mobile phones, selling 41 million of the 163 million phones sold around the world.[12] This success has made it far the biggest company in Finland, accounting for about 10 percent of the country’s GDP and more than half the value of its stock exchange. How on earth has a small Scandinavian conglomerate—previously known only for its skill at making things such as toilet paper and rubber boots in a country where the top tax rate is a distinctly unentrepreneurial 60 percent—beaten the world in one of the most competitive high-tech areas around?

  The answer is really a story of how clever management exploited what at first seems to be a relatively small cultural advantage. Finland’s low population density has long made telephony popular there. The Finns were using telephones only a year after Alexander Graham Bell tested the first one in 1876. Some even argue that the telephone has a psychological allure. “For Finns, it is easier to talk on a mobile phone than face-to-face,” says Janne p. 130 Vainio, vice president of mobile communications for Sonera, Finland’s largest telephone company, an observation that is amply confirmed in restaurants by the groups of diners who break their collective silence only to answer calls on their mobile phones.

  This natural affinity for such devices has been strengthened enormously by benign regulation. The Finnish national telephone company never had a monopoly in the way that, say, British Telecom had: There were more than 850 private telephone companies battling for survival in
the 1930s. Then, in the early 1980s, Finland made the farsighted decision, along with Denmark, Norway, and Sweden, to form the Nordic Mobile Telephone Group, an alliance that then helped turn GSM into the common standard for Europe and much of the rest of the world. From the very beginning, Nordic telephone companies were thinking internationally.

  Nokia was fairly late to spot this advantage. In the late 1970s, the conglomerate bought a couple of telephone companies as part of a general diversification strategy. In 1982, it manufactured its first “portable” phone. (The Nokia Senator weighed twenty-two pounds.) But until the mid-1980s, the mobile division was nothing more than an outer satellite of the Nokia empire. Then three things happened. The company’s boss, Kari Kairamo, committed suicide; the Soviet Union collapsed, taking a big chunk of the Finnish economy (and Nokia’s business) with it; and Jorma Ollila, the hard-driving head of the company’s mobile-phone division, was appointed to run the company.

  Ollila set about doing two things: focusing Nokia ruthlessly on mobile phones and turning it into a global company. The result was a startling transformation that has lifted Nokia’s market value 200-fold. Ten years ago, telecommunications accounted for only 10 percent of Nokia’s net sales of 2.3 billion Euros. Now, phones account for virtually all its 13.3 billion Euros. Ten years ago, Finland accounted for 30 percent of the company’s net sales; today it accounts for just 4 percent of the company’s much larger net sales.[13] Altogether, Nokia is now in 140 markets—about the same number as McDonald’s. The company’s expansion has been so fast that the trickiest management problem facing it is handling its own growth, as well as recruiting large numbers of people without losing its distinctive identity.

  This explosion in value can be explained partly by the popularity of mobile phones in general and by Nokia’s devotion to technology; its managers never seem happier than when they are pulling mock-ups of new products like videophones out of their briefcases. But Nokia has also succeeded plainly because it has thought about globalization much more deeply than p. 131 its opponents have. Nokia’s roots in a country where three quarters of the population have mobile phones—the highest percentage in the world—help it to keep on the cutting edge of fashion. But it is also constantly looking for input from elsewhere. Advised by a British advertising agency, it has developed a “segmentation model” of its target customers. The four most important groups are “poseurs,” “trendsetters,” “social contact seekers,” and “highfliers”; once you have conquered these, argues Nokia, then the phones spread inexorably to the rest of the population. Nokia is the antithesis of the ugly multinational. It is a company that bends over backward to tailor its products to every local quirk, from the Chinese need to have long-lasting batteries (because the phone system eats up power) to the Japanese enthusiasm for dialing by voice. Indeed, one of the keys to Nokia’s success is that it was the first phone company to think like a consumer-products manufacturer, introducing several new models every year, changing colors according to fashion—two-tone and aluminum have been particular favorites recently—and encouraging people to customize their phones with clip-on covers.

  Almost as important as how it has tailored its products is how Nokia has tailored its people by relentlessly preaching the virtues of transparency and humility. Visitors to the firm’s modernist headquarters are reminded constantly that “there are no dark corridors in Nokia.” To prove the point, the building is transparent to the sky and nearby water and covered with twenty-six thousand panes of glass.

  Finland still supplies about half the company’s forty-four thousand workers and the majority of its senior management. But Jorma Ollila has gone to unusual lengths to encourage a resolutely global mind-set, from making English the company’s official language, to naming meeting rooms after the world’s greatest cities, to expecting senior managers to spend some time working abroad. Moreover, Nokia does more than half its research and development outside its home country—something that immediately sets it apart from its rivals. That may be simply a matter of necessity (Nokia employs far more engineers than Finland can train), but the company also makes a point of consulting knowledgeable outsiders—particularly people from the media and information sciences—about the future direction of markets. The R and D division has a system of “internal start-ups”: People who come up with a good idea are expected to produce a business model and then move from the laboratory to a business unit to try to turn it into reality.

  This willingness to deal with outsiders is becoming increasingly important as the wireless and computer industries converge. For several years, the Holy Grail of the wireless industry has been an omnipurpose handheld dep. 132vice that can combine the qualities of a personal computer, a personal organizer, and a phone. But creating such a device forced the phone companies to learn how to handle something that they had not needed to handle before: data. They were also confronted with a series of daunting problems: How do you get access to the Internet without all the palaver about wires and complicated protocols? How do you create an operating system that is sophisticated enough to work like a computer but robust enough to provide phone users with reliable service? How do you get PCs and smart phones to communicate with each other so that people can synchronize vital information such as address books? All this required a formidable amount of cooperation not just between different companies but also between different industries.

  Nokia is one of the central players in two of the most important alliances in the wireless industry: the Open Mobile Alliance (OMA) and Bluetooth. The OMA, an alliance of hundreds of companies, has developed common protocols to allow people to get Internet content from their mobile phones. Bluetooth, an alliance of more than five hundred companies, is finding ways to allow various wireless devices to talk to each other via radio waves so that people can synchronize the information stored in their various electronic servants. Nokia is also one of the founding members of Symbian, an alliance that is trying to turn the operating system that runs the Psion personal organizer into the standard operating system for smart mobile phones—something that throws it up against Microsoft’s Windows CE system.

  Taking on Bill Gates is not always sensible. Psion is a slip of a thing compared with Microsoft, and it is losing out badly to Palm Pilots. But Gates is clearly worried: In a memo to employees in 1998, he singled out Symbian as one of the greatest threats to his empire. The fact that Nokia, which thought during the glory days of glasnost that its best hope for the future lay in the Russian toilet-paper market, has become such a thorn in the side of the world’s richest man gives hope to us all.

  The House That Jack Built

  “Ein Nod: Bodlonrwydd Llwyr I Gwsmeriaid” is not perhaps the snappiest business slogan to someone who does not speak Welsh. Nevertheless, the banner hanging inside General Electric’s aircraft engine-servicing department in southern Wales—“Our Goal: Total Customer Satisfaction”—is not a bad description of what GE has been up to in Nantgarw since it bought the engine shop from British Airways in 1991. Back then, nearly all the shop’s $250 million worth of revenues came from the airline, which off-loaded it to p. 133 GE as part of a deal in which it bought various GE engines. Many people in Wales, a nation not known for its optimism, expected the plant to be gradually phased out. Yet in 1999 its sales topped $900 million (with British Airways providing less than half that). Some 98 percent of its 1,600 workers are shareholders in GE. And everywhere you can hear the strange sound of Welsh voices talking in GE-speak, boasting about “delighting customers” or about the fact that the plant now has three hundred green belts and eighteen black belts in GE’s “six sigma” quality-management program.

  Several thousand miles away, on the streets of Tokyo, strange, unmanned “automated loan kiosks” have begun to appear. Looking from the outside like high-tech public lavatories, the kiosks, which are located in shopping districts, allow any Japanese consumer with a driver’s license to have their credit checked, sign a loan contract, and get cash within half an hour; a te
levision camera allows the borrowers to talk to human beings if necessary. The loan kiosks are owned by Lake, a Japanese finance house and one of a score of Asian firms bought by GE Capital, the American firm’s finance unit, in 1998 and 1999. In the early 1990s, GE made a killing on the acquisition trail in (then depressed) Europe. Now it claims to have discovered an even larger gold mine in the East, in the wake of the Asian contagion.

  Wherever you live, the chances are that today you will use a General Electric product. Open your fridge or turn on your lightbulb and you might see GE on them; in some parts of eastern Europe, there are even GE bank branches. But you probably will not notice GE’s generators providing your electricity, its trains taking you to work, or its plastic enclosing your PC. Pay with a store charge card at Harrods or Home Depot, and you are really paying GE Capital. Turn on your television and gaze greedily at the “money honey” on CNBC or chuckle at Friends on NBC, and you are watching GE employees in action.

  If this implies a slight lack of focus, that is because General Electric is a conglomerate, with ten product groups. But this lineup is not entirely random. GE tends to stick to businesses in which size is still important. (It spent one million dollars a day for four and a half years to design the GE 90 aircraft engine.) It is also rigorous about either remaining in one of the top two worldwide slots in each field or getting out. But even though there is more synergy between the different products and services than you might expect, most of them have as little in common as, well, the cast of Friends and your fridge. Nevertheless, the sprawling global conglomerate is held together by a cadre of managers, a pervasive relentlessness, and (at least until he handed over control to Jeff Immelt in 2001) Jack Welch.