Al Ries (Founder, Ries & Ries Inc)
Price and wage increases will definitely affect Indian products and services traded in the world market. What is happening today in India happened in Japan in the 1990s. In those days, Japan was widely expected to become the leading economic superpower. It never happened. Instead, Japan has stagnated in the last two decades.
Take the Japanese stock market. On the first day of 1990, the Japanese stock market, as represented by the Nikkei 225, stood at 38,916. (On Tuesday morning, the Nikkei 225 was at 13,122, a decline of 66.3%.) On the first day of 1990, the US stock market, as represented by the Dow Jones Industrial Average, stood at 2,753. ...The Dow Jones was at 11,231.96 (at Monday’s close), a gain of 308%. What happened to Japan? As prices and wages went up, Japanese products became less competitive in the world market.
You saw the same thing happening in Korea. As the Korean economy improved, Korean wages and prices went up and Korean products became less competitive in the world market.
Will India and China follow the same pattern? It all depends. They will, if they continue their current policies of marketing products on the basis of low prices. You can’t win this battle on price alone. As the economy improves, the products become less competitive and global business moves to cheaper countries such as Vietnam.
What’s the answer? Building brands. Germany is perhaps the most expensive country in the world to make anything, yet German brands such as Mercedes-Benz, BMW and Porsche do extremely well in the world market. The same holds true for Switzerland and products such as Rolex.
How do you build brands? You have to narrow your focus so your brand stands for something in the mind. The Japanese tried to market a wide range of products under a single brand name (Sony, Toshiba, Fujitsu, etc.) This never works. You wind up selling on price rather than on the value of the brand.
A few Japanese companies have focused brands: Toyota Motor Corp., Honda Motor Co. Ltd, Nissan Motor Co. and especially Nintendo Co. These companies do well in the world market as opposed to the vast majority of Japanese companies that are line-extended to death.
Compare a focused company such as Nintendo with a line-extended company like Sony Corp. In the last 10 years, Sony has had sales of $623.3 billion and net profits of just $10.1 billion, or a net profit margin of just 1.6%. No wonder Sony is run by an Englishman, Sir Howard Stringer.
On the other hand, in the last 10 years, Nintendo had sales of $48.5 billion and net profit after taxes of $7.5 billion, or a net profit margin of 15.5%. Even though Sony is more than 12 times the size of Nintendo, the company is actually worth less on the stock market. Sony is worth $50.8 billion and Nintendo, $89.1 billion.