Investing in emerging market stocks used to be simple. The local oil company, the local bank, and the local phone company each would be a pure play in its own (usually small) domestic market. But the rules of the game have changed during 2006. Developing countries today are producing global players who are rapidly catching up to big rival U.S. and European multinationals. Today, these companies are using their home countries as mere springboards to build global empires. Twenty years ago, when the Berlin Wall still was standing and the Soviet Union still was intact, who could have imagined that a Russian oil company, Lukoil, would one day have a gas station in the heart of Washington, D.C.?

Boston Consulting Group recently named the Top 100 emerging global multinationals from developing countries. Last year, this group had $715 billion in revenues, and generated $145 billion in profits. The revenues alone are equivalent to 18 Microsofts. But unlike Microsoft, however, this group has recorded 24% annual growth over the past four years. Of the Top 25, 20 are from the fast-growth BRIC countries. Four are from Brazil, three from Russia, six from India, and seven from China.

Like Making a Good Wine

Japanese and Korean household names such as Sony and Samsung got their start in developing, protected domestic markets where they could reap big profits. Others such as Nokia grew out of developed European markets whose small size forced them to look abroad.

The new champions are emerging differently. They remind me of how grapes are produced at the Robert Mondavi vineyard in Napa Valley, where I took a tour last week. It turns out the best grapes are not produced by careful nurturing with water and fertilizer. Instead, Mondavi intentionally deprives his grapes of water, making the vines work hard to spread their roots far and deep to absorb life sustaining moisture from wherever they can. Tough conditions produce the ideal grapes.

It's the same for the emerging global players. With the experience of having to fight hard in brutally competitive home markets, these local champions are able to make profits at unheard of levels. India's generic pharmaceutical companies are profitable selling drugs at 1% to 2% of what customers pay in the United States. Cellular phone companies such as Millicom offer services at pennies a minute in some of the toughest and most challenging African markets, and yet they can make money. This makes them ferocious competitors in the global marketplace.

The New Champions

Some new champions already may be familiar to you. Lenovo, a Chinese company, bought IBM's $11 billion PC business last year, and rapidly is becoming a household name. India's Infosys, Tata Consultancy and Wipro practically founded the outsourcing industry and regularly grace the pages the U.S business press. South Africa's SAB-Miller is a global brand that is challenging Budweiser's leadership in the United States.

Other names are less familiar. America Movil -- a former Global Bull Market Alert pick -- has more than $100 million subscribers and soon may rival Vodafone as the world's biggest cell phone company. Hong Kong's Techtronic Industries fills the shelves of U.S homebuilding outfits with cheap and reliable power tools. Brazil's Embraer has come out from seemingly nowhere to become the world's 3rd-largest aircraft maker -- winning mid-sized jet orders from Airbus and Boeing.

What drives these new contenders? First, they come from some of the world's most dynamic markets. Goldman Sachs estimates that the BRIC countries alone will add 225 million consumers with incomes of more than $15,000 a year within twenty years time. That's a lot of growth just at home. Second, they compete on cost -- both in labor and resources. Cheap labor undercutting domestic production is a familiar story.

But big domestic markets and low costs are neither necessary nor sufficient to make a global champion. Just look at Nokia. Finland is both tiny and expensive. No, the best are simply expertly run companies, good at tapping into global trends and producing better products. Anyone who has flown on Embraer's sleek EMB 190 can attest to its superiority over the puddle jumpers they replaced. The real drivers of change are the one-two punch of globalization and the Internet. With both information and capital fluid across borders, a talented group of Egyptians at cell-phone giant Orascom can outmaneuver U.K. based Vodafone in the world's fastest-growing markets.

The Challenges Ahead

But before you hire a Chinese nanny to make sure the kids speak Mandarin and pack up and move to China -- as global investment maven Jim Rogers has -- it's important to keep perspective. This is not the first time U.S.-based multinationals have faced competition. In the 1960s, it was the Europeans with the likes of Siemens, Phillips and Volkswagen. Then came Sony and Toyota from Japan, followed closely by Hyundai and Samsung from Korea. Stagnant share prices notwithstanding, Citibank, GE, and Wal-Mart are not about to bowl over -- despite the retailer's recent exit from Germany and South Korea. U.S. multinationals often are more adept at expanding internationally than their newly emerging rivals. The Chinese, in particular, have difficulty in taking their businesses global.

Finally, it's paranoia to depict the rise of the new global contenders as a threat. By providing cheap and competitive products -- whether in your local Home Depot or Hyundai showroom -- the new global multinationals are making life better (and cheaper) for all of us. Chinese imports added no less than $70 billion to the U.S. economy last year. They also helped to keep inflation down. Let's not fall into the trap that Europeans have, thinking that business is like a World Cup match, where you're only happy if the local champion wins.

Sincerely,

Nicholas A. Vardy
Editor, The Global Guru

P.S. My Global Bull Market Alert subscribers have reaped double-digit profits from the likes of America Movil and others. Supercharge your portfolio with big profits by investing in tomorrow's global champions. Try Global Bull Market Alert, risk free, for 60 days. You'll like it.

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