This post is also available in: French, Spanish
New Reality #3: Emerging market companies have leapfrogged established models through innovation and technology.
Emerging market economies won’t necessarily follow the same evolutionary pattern as developed markets—but that can be a good thing, in our view. For example, emerging market governments and companies may not have had legacy physical or technology infrastructure that would need to be upgraded. Instead, in many cases they can move straight in next-generation infrastructure, which can enable new innovations and business models. For example, private banks in India have used digital capabilities to gain customers living in rural areas with little or no access to banking services.
As we continue to shift towards a knowledge-based global economy, we are seeing a rise in the importance of intangible assets. In fact, several emerging markets are now leading in terms of innovation and leapfrogging the West in areas such as e-commerce, digital payment and the aforementioned mobile banking. We think this trend is likely to continue.
Emerging markets have overtaken the United States and Japan in terms of patent applications, as shown in the chart below. Likewise, the chart shows how growth in China’s spending on research and development (R&D) has recently largely exceeded that of developed economies. Extending this edge, the costs of building and maintaining technology software tend to be lower in emerging markets. Many lenders have also constructed nimble digital platforms from the ground up, while their developed market peers struggle with migrating from legacy systems. Local access to strong expertise in artificial intelligence has also helped lenders develop their own capabilities in digitally booming countries.
Becoming Global Leaders
China has over four million fourth-generation (4G) base stations, which is over half of the total number of 4G base stations globally and 15 times more than in the United States.1 As a result, mobile phone signal coverage in China ranks high among major economies. And, China is also leading the way in the rollout of 5G technology.
In addition, data in China comes at a fraction of the cost in the West, so technology is embraced by a broader proportion of the population.
Amid the COVID-19 epidemic, such technology is being viewed as essential as more people have to work and study from home.
China will be a frontrunner in the 5G arena and is expected to have some 600 million 5G subscribers by 2025, or about 40% of the forecasted 1.6 billion subscribers globally.2 Together with artificial intelligence (AI) and robotics, this will help drive growth in China’s new economy as it strives to become less reliant on the United States.
Demand for greater technology is likely going to have a knock-on effect within the semiconductor industry in South Korea and Taiwan, which have become two of the world largest semiconductor manufacturers in the world.
South Korea-based Samsung Electronics, for example, evolved from producing televisions in the 1970s to gaining global dominance in memory chips. Meanwhile, some of the most sophisticated chips powering a range of devices such as smartphones and servers come from Taiwan Semiconductor Manufacturing Company (TSMC).
Moving Online in COVID Times
In times of crisis, businesses often need to quickly adapt, which can lead to the adoption of new technologies. For example, when the coronavirus outbreak first occurred in China, New Oriental, one of the country’s leading after-school tutoring companies, was able to convert every single learning course they offered in physical learning centers across 100 cities to an online platform.
Effectively, that meant two million students had been transitioned—and this is just one example. We expect further acceleration in the penetration of online tutoring in China in the medium to long run.
The Alibaba group, commonly known for its e-commerce platform, has diversified its business and expanded into new sectors over the years. During lockdown, Alibaba gave free access to its communication app which allowed 600,000 teachers to teach remotely.
The company also increased the number of live-streaming sessions on its e-commerce platforms while millions of people were confined to their homes in lockdown. Live-streaming hosts offered a range of rewards, discounts and games to interact with potential consumers in a modern-day teleshopping experience. In the West, streaming platforms are generally focused on games and entertainment. In China, live streaming has become a key option for Chinese consumers looking for new products and discounts. For merchants, live streaming has become a key tool to not only offset the decline in offline business but also to encourage creativity in marketing and customer relationship development.
We have seen the COVID-19 pandemic accelerate technological developments across the globe—perhaps changing how we shop, learn and receive health care services permanently. Companies in emerging markets appeared to be relatively solid going into this crisis, and we believe that their ability to deal with this crisis is a lot greater than in similar crisis periods
To get insights from Franklin Templeton delivered to your inbox, subscribe to the Investment Adventures in Emerging Markets blog.
For timely investing tidbits, follow us on Twitter @FTI_emerging and on LinkedIn.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity.
1. CEIC, WIND, CICC Research, June 2019.
2. Source: GSMA Intelligence. As of October 2019. There is no assurance that any forecast, estimate or projection will be realized.