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6 A.M.

Emerging Market Businesses Face Significant Trust Deficit

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In a recently published book called “Brand Breakout,” Professor Nirmalya Kumar of London Business School and Jan-Benedict Steenkamp of Kenan-Flagler Business School at University of North Carolina argue that brands from emerging markets will become a serious competitive force in the developed economies. The professors write, “They share weak national images, poor marketing capabilities, low cost as the sole competitive advantage and limited business models… Brand building takes time, sometimes generations… but the pace is accelerating… we believe that some of the emerging market brands will become household names in the West sooner than some may believe.”

This morning, at the World Economic Forum Annual Meeting of the New Champions in Dalian, China, we released the results of our inaugural 2013 Emerging Markets Supplement to the Edelman Trust Barometer. We have researched the challenges facing emerging market companies, in particular the low level of trust in BRIC headquartered companies. There is a 33-point gap between global trust in multinational companies based in developed markets (76 percent) and those in emerging markets (43 percent). Among the BRICs, Chinese and Russian companies face the most profound skepticism in developed markets, with special concern expressed by France, Germany and the U.S. Most BRIC companies do extremely well in their home markets (trust in 60-85 percent range), and substantially better in emerging markets, but there is an evident issue in South Africa, where trust is mired at 34 percent.

There are three primary explanations for these developed market perceptions:

  1. Low Brand Familiarity — Most emerging market brands have low prompted familiarity in developed markets, with the sole exception being consumer-facing Chinese brands, such as Lenovo (disclosure: Edelman client). There is also low awareness of CEOs; fewer than 10 percent of developed market respondents were able to name even the most famous, such as Alexey Miller of Gazprom.
  2. Sensitivity to State Ownership or Control — In Germany, the majority of respondents feel that Chinese and Russian companies are too heavily state controlled. Only 37 percent of respondents in developed markets trust a state-owned company from the emerging markets.
  3. Perceived Poor Performance against Key Trust Drivers — Developed market respondents note huge gaps between what they expect from emerging market companies and how well those companies perform. For Chinese companies, that gap in areas such as being transparent and open (43 points), acting responsibly in a crisis (41 points) and protecting the environment (38 points) is especially severe.

There are important consequences for this lack of trust in emerging market companies, most notably impinging upon their ability to expand through acquisition or investment overseas. In developed markets, only about one-third of respondents would trust a company from any given BRIC to buy an enterprise in their country, buy a minority share or make a major investment in a plant or office. This may explain the slow approval process for the proposed $4.7 billion takeover of U.S.-based Smithfield Foods by Chinese-based Shuanghui.

Professors Kumar and Steenkamp conclude their book as follows: “What was so energizing about our visits to emerging market … was the sheer ambition that they displayed. The best of them are both strategic and entrepreneurial… we do not doubt global brand break-out from these countries.”

Rather than following the Western corporate experience of gradual and grudging acceptance of the need for business to be a force for good in society, we recommend that the leaders of emerging market companies take the lead in establishing a transparent business model that embraces critics and offers proof of performance on integrity of supply chain. Trust will be established by consistent performance and communication, winning the confidence of stakeholders over a period of years.

Richard Edelman is president and CEO.

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