To understand the significance, consider an MNC that invests US$1 million in fabrication technology in the U.S., versus the same US$1 million in India. One dollar converts to about 40 rupees (Rs. 40) in India at the exchange rate in December 2007. But it takes only Rs. 9 to buy goods in India that would be worth $1 in the United States. A $1 investment in India is thus the purchasing-power equivalent of (or buys the same amount of production as) about $4.40 in the United States. This index, 4.4 to 1, is the investment multiplier for India. Every developing nation has its own investment multiplier. Even when it isn’t noticed, the investment multiplier is operating. That is why it makes far more sense to manufacture products in India for sale in the United States, rather than the other way around.
The investment multiplier in effect represents a final nail in the coffin of the old mercantile ideal of sourcing raw materials from developing nations, manufacturing in industrialized nations, selling the finished products back to an elite group of customers in the developing nations, and bringing the profits back home. It is much more cost-effective for a multinational to source, manufacture, and sell around the world from a global network that includes developing markets. In other words, it makes sense to treat developing nations as an integral part of a global system, transferring profits through products rather than currencies.
Reach and Risk
Executives considering the gateway–hub structure have raised two other objections. Some ask, Can marketing hubs really reach consumers in other nearby nations? Won’t they face the same cultural barriers that block global firms? Experience suggests, however, that hub-based marketers are more likely to find the commonalities that transcend those differences. For example, a children’s food and drink company entering the Chinese market conducted a study that showed that most parents made decisions based on their aspirations for their children’s quality of life, rather than their goals for themselves.
On the basis of this research, the company developed a brand promise that focused on children’s betterment. The products would help children become healthier and more alert, and grow taller and stronger. All of the food and drink contained at least 10 percent of the daily protein requirements suggested for children by nutritionists; the benefits were all clinically proven and endorsed by doctors. The products were also based on natural ingredients such as milk, fruit, cereals, grains, and soya. The food was packaged in a form that could be eaten at home, at school, or on the playground. And it was priced to be affordable for people with very low incomes in developing countries — even while it was marketed with an image of international standards and high quality. Although the specific products varied geographically (ice cream was popular in one country; soya drinks in another), the basic brand identity was universal enough to apply throughout the region, and the idea is now spreading to markets across Asia, Africa, and Latin America.
The second question that skeptical executives raise about the gateway–hub configuration has to do with the risk of changing to this structure. And, to be sure, there are always risks in managing far-flung enterprises, such as the risk of losing access to critical supplies. Indeed, most firms, in making ad hoc decisions to outsource parts of their business processes and manufacturing operations, have already put themselves at risk.
Today, for example, all personal computer manufacturers are sourcing primarily from China. By contrast, in a gateway–hub model, risk can be spread over 10 or more locations, with manufacturing and R&D in multiple hubs. Disruptions in any one location can be compensated for by other parts of a seamless network. The U.S. market may be served from Brazil as well as China. Hubs can also provide multiple centers for innovation, along with the opportunity to learn from one another.