Emerging markets provide a huge opportunity for many companies to grow in volumes and offer business continuity. However, the past decades have shown that stimulating growth by entering new markets is a challenging endeavour that has to be thoroughly planned and flawlessly executed. A usually adopted strategy for successful market development in the emerging markets is to leverage the network and knowledge of a well-established local partner. However, while such partnerships often lead to short-term market traction, over the long run, these partnerships can become the source of the biggest threat for the company. Why is the OEM then needed?

An Original Equipment Manufacturer or OEM is a company that manufactures and sells products or parts of a product that its buyer (which is another company), sells to its own customers, while putting the products under its own branding. In their home countries, many companies are very successful. They understand the customer, usually enjoy a great deal of brand recognition, and are able to establish favourable channel partnerships. In emerging markets, the business and regulatory environments are often very different and these companies, logically enough, decide to work with in-market experts, who usually end up being local distributors who know the market, have existing relationships, and, most importantly, have boots on the ground. The local partners have the eyes and ears closer to the customers.

In the short- to medium-term these partnerships are often crucial as they help to counterbalance the company’s lack of knowledge and market expertise. However, counterintuitively, these partnerships, which lead to success in the short term, threaten OEMs' business in the long term. Many of the OEMs have sales and marketing teams in these emerging markets, but their role is focused on winning big deals, while the smaller deals are left to the partners. Over time, the partners acquire the knowledge and know-how which makes them go after the bigger prize and as a result, an indirect competition starts setting up between their local sales teams and the partner sales teams.

*Brand Paradox

This distribution arrangement often becomes a "catalyst" for the local partner's brand. Attributes that were historically associated with the OEM’s brand become connected to the local partner’s brand. This puts local partners in a unique position to market a very competitive product offering by leveraging their (a) original capabilities – local network, cost advantages and (b) newly developed intangible assets (strengthened brand promise).

Over time, with increased competition, the differentiation doesn’t necessarily come from technology, but rather from the speed and reliability of the service provided to the customer. It is at this time that the (bargaining) power shifts to the local partners. These local partners are able to go further and improve upon the globally produced one-size-fits-all products which don’t meet the needs of the local market fully. In some cases, the local partners develop their own products and, others, start offering support services required by the local market. Often, they do both.

This leads to the Brand Paradox. When customers are asked about the brand of products they prefer, they usually respond – “we follow local retailer / brand’s recommendations.” The OEM’s brand becomes less important with most of the market power flowing to the local partner.

We have seen this phenomenon of the local partner going rogue play out multiple times. Global OEMs often worry about the reality in the market but find themselves in a catch-22 situation. Can they dare to alienate one of the largest retailers in the country to build their own channels? Can they compete against their own distributor, who knows more about them, than they know the newer market? Well, this phenomenon is not a new one. The e-commerce scale up is increasing the scale of the impact and accelerating this conundrum. Platforms like Amazon and Flipkart (in India) white-label just about any product that begins selling well and has consumer traction. This is expected to put pressures on OEMs, and make them have a competitive strategy.

*Resolving the Paradox

There is no easy way to resolve this Paradox. Original Equipment Manufacturers want to grow into new geographies and will need to rely on local partners. What are they to do?

*Be Deliberate

Original Equipment Manufacturers enter newer markets with ambitions to grow but don’t necessarily think about their long-term partnership approach. Importantly, they don’t have a transition plan to move from partnership into a formal structure of becoming a local brand themselves. The ones that have succeeded have demonstrated three key elements:

a. Partner Reputation – the goal should be to select partners who have a track record of good behaviour, who have demonstrated that they can be trusted over several years across a variety of product categories.

b. Scope of Partnership – while incentivising for sales is necessary, it’s important to ensure that partners are incentivised and required to share customer information and feedback, and consults with the OEM before offering any other services to the customer base. In short, any promise to the consumers has to be with the acceptance of both the partners.

c. Timeline – OEMs should build a milestone-based roadmap laying out when they will develop certain capabilities such as customer research, etc. in-house, and focused on developing it as per plan.

*Be a Good Partner

Much like any other relationship, distributor partnerships need to be nurtured. Original Equipment Manufacturers should strive to ensure that their distributors succeed as businesses and not treat them simply as channels. Global OEMs have decades of experience, deep functional expertise, relationships, and other capabilities which could help their distributors succeed creating true win:win partnerships. Distributors feel threatened by OEMs who are constantly pushing volume targets and asking for discounts. They branch out into making white-label products and offering additional services not as an offensive measure, but a defensive one. The most successful OEMs don't put their distributors in a position where they feel a need to attack.

*It’s About The Customer

Original Equipment Manufacturers that struggle, tend to focus all their efforts on sales through the newly established distributor challenge and fail to establish any sort of meaningful relationship with customers. One firm, a large industrial products manufacturer, took a very innovative approach to manage the quantum of investment required. The firm tiered its customers according to value and developed a strategy for each tier separately, investing more and meeting its most valuable customers one-on-one and taking more of a mass-market, lower touch approach with the lower value customers. This allowed the firm to keep a pulse on the market and provide input to its product development, resulting in more market-appropriate products, and allowing it to capitalise on a trend towards automation which its competitors missed. The answer lies in getting closer to the customer.

*Listen to the local voices

One of the biggest frustrations for local leaders of OEMs and the local partners is the lack of attention and consistent local market strategy from the global HQ. Since these markets are not as profitable (in the initial stages) as the bigger markets in the west, there is not enough focus and attention given in terms of product development for these markets. With the power now shifting towards these emerging markets and with the rise of industrial B2B and digital platforms, suddenly, there is increased attention. It is never too late and the starting point of a transformation is to start listening to the local voices.

There are no easy answers to the brand paradox. The most successful companies take a deliberate approach, are themselves good partners, strive to be customer centric and most importantly, they listen to the local stakeholders. As consumers get to be more choosy and expect more from products / services, brands that want to profitably serve them, have to constantly understand more about the consumers.

The author:

Srinath Sridharan, Corporate Advisor (Twitter : @ssmumbai )

Vijay Raju, Co-Founder - The Propel Labs

Dheeraj Batra, Serial healthcare entrepreneur

Why Global Partnerships Have To Resolve OEM Brand Paradox