How businesses can adopt a sustainable strategy in emerging markets

Updated: Dec 13, 2021

- a perspective on the automotive industry


White Paper - Sustainability



Find the PDF version of this White Paper below.


Franziska Oschmann

Cedric Saba



 

Table of Content

  1. Introduction

  2. Definition of sustainability

  3. Definition of emerging markets

  4. Business sustainability

  5. Importance of developing countries for sustainable development

  6. Analysis of Brazil

  7. Market growth and important sectors

  8. Legal Framework regarding sustainability

  9. Brazilian consumer’s opinion about sustainability

  10. Volkswagen’s sustainable strategy

  11. India Market Analysis

  12. Market growth and important sectors

  13. Conclusion

  14. Resources


 


Introduction


In today’s world, sustainability has become a central topic in society, politics and especially economics. Targeting the markets of developed countries, legal frameworks attempt to make players reduce their environmental impact by financially supporting businesses that are sustainable while sanctioning companies that are not trying to reduce their ecological footprint. Additionally, emerging markets are expected to be aware of their responsibility to develop their economies sustainably. This white paper will look at sustainability, its three pillars and the market situation in both, Brazil and India. Moreover, legal frameworks in these countries will be evaluated and analysed to find whether businesses in these developing countries are following sustainable strategies out of their own intent or due to society’s pressure as well as legal frameworks. In particular, this white paper focuses on the automotive industry, as it is one of the largest markets on the globe with a size of 3.6 trillion Global Car & Automobile Sales in 2021 (Ibis World, 2021).



Definition of sustainability and its three pillars

Defining sustainability in a rigid, single manner is impossible due to its wide variety and range of concepts. Etymologically, sustainability can be divided into three parts “sustain” + “able” + ity, “sustain” means to keep up, to support and the “able” stands for being capable of doing sth. Therefore, sustainability can be defined as the capability of maintaining a defined effort indefinitely. In Today’s world, where one is increasingly facing daily challenges, ranging from environmental to social, sustainability can be the answer, as it plays an important role in improving the quality of one’s everyday life.


Sustainability is built on three main pillars: social, economic, and environmental. In brief, social sustainability focuses on human beings, aiming for an optimally working society. Environmental sustainability works on pollution, climate change and the implementation of renewable energies. And finally, Economic sustainability, which will be the main focus of this report, ensures economic success by decreasing poverty (Youmatter, 11 May 2021).



Definition of emerging markets


According to Dictionary.com (ND), an emerging market is “a market in a less developed country whose economy is just beginning to grow”. This means that the economy is becoming more intertwined with global markets, and it is in process of becoming a developed economy (Investopedia, 2020).



Business sustainability


Business sustainability is frequently established as the management of the triple bottom line. The triple bottom line is a procedure by which businesses manage their financial, social, environmental risks as well as their obligations and opportunities. This definition is being extended to include more than just environmental and social impacts. Businesses that are resilient create economic value, healthy ecosystems, and strong communities. These companies can withstand external shocks because they are inextricably linked to healthy economic, social, and environmental systems. The concept of business sustainability is therefore to guarantee business long term viability through reducing the excess usage of fossil fuels and natural resources for example, as well as work on increasing the profitability and overall product quality (UK Essays, 12 Aug. 2021).



Problems of sustainability and emerging markets


According to the Indian Institute of Management Bangalore (2014), emerging markets are not considered as developed economies regarding the sustainable direction set by companies. Additionally, issues related to data and transparency are still faced on a daily basis in developing countries. These are seen as hurdles for investors to invest into emerging markets (Adamczyk, 2021). Other hurdles that arise when investors wish to integrate the ESG factors into their investments is the financial gap, meaning that businesses need a large amount of capital to achieve their social development aims, such as access to fresh and clean water, education as well as safety.


Importance of developing countries for sustainable development


According to the research of the German Development Institute (DIE) and the New Climate Institute (NCI) (2021), international cooperation is of high importance to be able to stabilize global warming at 1.5 Celsius degree. Additionally, the study highlights the high importance of emerging countries as their emissions are rising fast and currently contribute two thirds of the global greenhouse gas emissions. Therefore, developing countries with low to middle income will play a key role in achieving the goals of the Paris Agreement.


To illustrate how businesses in emerging markets adopt sustainable methods, we will be evaluating the sustainability strategy of two car manufacturers in India and Brazil. To conduct the analysis, we will be looking at the current economic growth of both countries with their most important sectors. The legal framework will also be assessed to check future possibilities that the businesses might possess. The car industry, particularly motor vehicles, is responsible for over 75% of the carbon monoxide pollution (Rinkesh, 2021). Additionally, it is a market that is shaped by transformation as sales of electric vehicles have exponentially increased in the last years from 0.58 million units sold in 2015 to an estimate of 3.1 million in 2020 (Statista, 2021) and that is thus interesting to analyse.


Brazil and India are the two most-watched emerging markets in today’s world. Before going in depth into the topic, below is a quick table of comparison between the two countries on different levels (GDP, economy, sustainability, etc.).




Analysis of Brazil


Market growth and important sectors

Brazil is the tenth-largest economy in the world and the biggest in Latin America. According to Statista (2021), in the last 10 years Brazil’s GDP grew steadily every year with an average of 1.98% except for in 2015 and 2016 due to increased unemployment, a weakening currency and a rising inflation (Jelmayer and Magalhaes, 2015) as well as 2020 due to the worldwide COVID - 19 pandemic. Nevertheless, the country’s economy increased by 12.4% in Q2 2021 compared to Q2 2020. In Q2 the industrial sectors expanded 17.8% of which manufacturing, such as the manufacturing of automotive vehicles, other transport equipment as well machinery and metallurgy (Trading Economics, 2021) mainly contributed (25.8%). Brazil’s GDP is mostly composed out of the service sector (63%), the industrial sector with 18% and the production accounts for 11% while the agricultural sector contributes 5% (Trading Economics, 2021).


Legal Framework regarding sustainability

Brazil is one of the countries with the highest biodiversity thanks to its large rainforests, its resources and its biodiverse savannah region (Casali and Caravlho, 2020). Nevertheless, the two Brazilians Casali and Caravlho (2020) state that the legislation of Brazil lacks to provide incentives, such as financial support, to companies regarding investments with a positive impact. This is because Brazil's public law determines only a few business structures and thus, there is space for innovative mechanisms and creative solutions. Nevertheless, the Brazilian state of Rio de Janeiro has issued the Decree 8571/2019 that establishes a legal framework for investments and businesses with a positive effect by determining definitions and regulations for a receptive environment in the field (Casali and Caravlho, 2020).


On 1 June 2021, a complementary law 18/2021, a legal framework for start-ups, was issued and received the sanction of the president. The main aim of the new law is the promotion of innovative entrepreneurship in Brazil. The law will concentrate on economic, social and ecological development as well as the modernization of the Brazilian businesses' environment. Besides that, the new law encourages the interaction between the public and the private sector, between the business environment and the public sector as well as between businesses. It will serve as the basic relationship for a development of an innovative entrepreneurship ecosystem (Amaral, Mello and Uelze, 2021).


Brazilian consumer’s opinion about sustainability related to the environment

Additionally, not only the Government starts moving towards a more eco-friendly economy, but also consumers are more aware of climate change as environmental issues become more obvious in daily life (McKinsey, 2020). For example, 95% of the Brazilian population think that environmental issues will be even more important in the following years (McKinsey, 2020). The study of Tetra Pak (2020) adds that 67% of consumers believe that the world is going in the direction of an environmental disaster unless habits are being changed. This increased awareness of consumers about climate change is also reflected in their expectations towards businesses and brands.

As McKinsey (2020) indicates, 85% of Brazilian consumers state to be better when they purchase products that they know are sustainable. Additionally, approximately 80% of customers include sustainable packaging, while the vast majority of Gen Z does not buy products from businesses involved in controversial scandals. Therefore, as consumers expect from the companies they purchase their goods and services to implement a sustainable strategy to reduce their ecological footprint. This is especially of high importance for car manufacturers located in Brazil, as car manufacturing is responsible for pollution.


Volkswagen’s sustainable strategy

According to Statista (2021) The German car manufacturer Volkswagen has gained market share in the car manufacturing market from 11% in 2016 to almost 18% in 2020 in Brazil. Volkswagen (ND) states on its corporate website that it invests in an increasingly sustainable production process and products, while developing and supporting initiatives for employee and community benefits. On the annual sustainability report of Volkswagen in Brazil (2020), it was stated that Volkswagen reached 1.63 MWh per vehicle produced (vs. commitment of 0,88 MWh per vehicle) and this was a result due to a reduction in production volume caused by the COVID-19 pandemic (Volkswagen, 2020). Nevertheless, the company claims to have implemented a large amount of actions with focus on the energy efficiency in factories. Another commitment that Volkswagen made in 2012 was to produce 89 kilos of CO2 per manufactured vehicle by 2025. Nevertheless, also this obligation was not met and Volkswagen argues that the COVID-19 pandemic and the associated reduction of the production volume are responsible for the higher amount of CO2 per vehicle produced (Volkswagen, 2020). At least, as reported by Volkswagen, the company gets all of its electricity from renewable energies. Besides that, Volkswagens Part and Accessories Distribution Center (PAC) was the businesses first unit to operate with 100% renewable energy.


Additionally, Volkswagen adds in its report that in March 2021, it has turned its strategy “ACCELERATE” into reality. It deals with future topics such as digitization, new business models and autonomous vehicles, and includes Volkswagen’s aim to become an attractive brand for sustainable mobility.

One of the aspects in which Volkswagen aims to be as environmentally friendly as possible are the factories that are supposed to become “zero impact factories” (Volkswagen, 2020). The new environmental programs aim to achieve climate neutrality by 2030 and are supposed to be achieved by 3 stages: the first stage indicates the design of new and more efficient processes. The second stage includes the use of sustainable energy and recycled materials. Lastly, the third stage is characterized by the offset of the impacts caused to the environment by CO2 emissions. As the “Anchieta” factory was in the Top 5 of the most efficient production sites in the world, it can be seen that Volkswagen indeed wishes to reduce its emissions. Additionally, it is expected that in the next 5 years that Volkswagen will benefit significantly (40%) from a reduction in the electricity consumption and a significant reduction of ecological damage (Volkswagen, 2020). Furthermore, for Brazil, Volkswagen’s goal is to reduce the environmental impact of production by 30% by 2025 (compared to 2010). As analysed in the last section, Volkswagen does not only aim to reduce the environmental impact of vehicles, but also from factories and production facilities.


India Market Analysis

Market growth and important sectors

Backed by its vigorous autonomy, democracy and strong partnerships, India has come out as the fastest growing major economy in the world. Over the next ten to fifteen years, it is anticipated to be part of the top three economic powers in the world (India Brand Equity Foundation, 2021). Despite a second wave of COVID-19 infections and localized lockdowns in 2021, the Indian economy expanded at a record 20.1% year-on-year in Q2 2021, slightly higher than market forecasts of 20%. It compares to a 24.4% drop a year ago, when the Coronavirus crisis wreaked havoc on the economies. Increases in construction, manufacturing, trade, hotels, transportation, and many other fields were noticed (Ministry of Statistics and Programme Implementation MOSPI, 2020).



Legal Framework regarding sustainability

One of the reasons for the fast growth of the Indian economy is the rapid expansion of the Indian middle class. During the 1990s, in India, the ignition of middle-class consumption power was taking shape, after the trade liberalization post-1991, that had an increase in Foreign Direct Investment (FDI) as well as the escalation of exports related to information technology. Trade liberalization affects aggregate income, stimulates income growth and hence sustainability and the environment. Rising average income levels will lead to a change in consumer behaviour, people will look for better quality products, better service but also better healthcare. As we can see in the graph below, India is going to surpass China and the US by 2030 with its biggest middle class consumer market (Deloitte, 2020).


India’s consumer’s opinion about sustainability related to the environment

Sustainability is today’s most important concern, and maintaining sustainable development is largely accepted, but we usually see it reported in advanced and more developed economies where big corporations reside. The western countries often neglect the fact that the situation also affects emerging countries and that everyone should take similar initiatives to solve this worldwide issue. Sustainability can be just as important in developing markets as it is in advanced markets, demonstrating that it is not a trend or a luxury, but a requirement for business survival anywhere in the entire planet.

Energy and carbon are the two things that have the biggest focus on sustainability in India. It is actually an important issue because energy is expensive and there is a reduction in fuel subsidiaries and manufacturers have to possess back up generators. Therefore, the usage of renewable energy is necessary and the reduction of energy consumption is imperative. Like a lot of countries, India placed a policy (India’s climate change policy) whose goal is to shrink the emissions of carbon by putting in place wind farms as well as solar panels for instance (Ivey Business Journal, 2015).


Mahindra’s sustainable strategy

As the car industry in India contributes a lot to pollution and thus needs to transform its strategy, Mahindra, a car manufacturer, will be analysed. Mahindra is one of those companies that gained recognition for bringing sustainability initiatives into their business. Mahindra group’s main priority is the duty it has towards the environment, and it applies across all its businesses and other initiatives. The group is striving to make the planet a carbon-neutral, greener, and great place to live, from cleaner engines to securing sustainable transactions at its channel partners. A positive impact that the COVID-19 crisis had on Mahindra group is helping them figure out the need for businesses to secure our environment by preventing risks and future pandemics, etc. A lot of events are taking place within the company and other partners to spread awareness and educate the employees on the importance of this topic, especially being part of an automobile company where pollution plays an important role. During lockdown, Mahindra actually designed an application and every time someone uses the app, a tree is planted. This initiative helped to plant trees in Araku Valley that is full of forests. Signing a joint declaration with the UN Global Compact, pleading governments to align Covid-19 recovery efforts with the climate trends, Tech Mahindra points out to governments “prioritizing smooth transitions from a grey to a green economy”. C P Gurnani, MD and CEO, Tech Mahindra said: “COVID-19 has allowed all of us to reconfigure our priorities and understand the importance of building a sustainable world by focusing on healthcare and leveraging technology to enable new ways of working. We are committed towards building a sustainable business with responsibility, while also keeping in mind the long-term impacts on the environment” (Mahindra & Mahindra Ltd, 2021).


Conclusion

Sustainability is one of the most important recurrent topics, and by reading our paper, we conclude that its implementation is of equal importance in emerging markets, such as Brazil and India, as it is in developed economies.


Responding to a highly complicated engaging social, environmental, and economic context, sustainable development expands on existing business management techniques and applies them in a bigger framework. It builds on traditional business management practices, such as key indicators, but relates them with a triple bottom line and life cycle focus placed. It necessitates a comprehensive and holistic approach to incorporating non-financial, long-term performance measures into an organization's traditional reporting.


The main challenge of sustainability in emerging countries is to balance sustainable development with economic growth (Investopedia, 2021). Nevertheless, businesses in emerging countries transform their strategies to be more sustainable, for example the German car producer Volkswagen, operating in Brazil, has started implementing sustainable strategies These do not only concern the production process and the vehicles itself, but also the factories also called “zero impact factories” as well as the aim to reduce their impact significantly in the near future. Nonetheless, it seems like some of these aims are vague and thus can be interpreted differently. It is interesting to note that a Brazilian legal framework has been created for more sustainable business practices in recent years, meaning that it provides more incentives for businesses to reduce their ecological footprint, while providing a base for SMEs. Additionally, Brazilian consumers are more aware of climate change and want to see a change in the behaviour of the businesses they are purchasing from.


Moreover, Mahindra, a car manufacturer based in India, is aware of its responsibility towards the globe. Meaning that the group aims to reduce its ecological footprint by educating employees, planting trees and even signing a joint declaration with the UN Global Compact. Therefore, it can be argued that companies in emerging markets do wish to contribute to a better world, yet they are “forced” by the law as well as by societal standards, to take more actions and reduce their ecological footprint.

Some suggestions to accelerate sustainable development in India and Brazil include governmental interventions, whereby executives take the COVID-19 crisis as an opportunity to disrupt outdated strategies by implementing new ones. An example for that could be the Next Generation EU, a recovery plan for Europe that aims to financially support European Businesses within a sustainable framework. Additionally, investors have the ability to choose what to invest in, such as investing in businesses that fulfil the ESG criteria, which might increase their inclination towards funding greener economies. The road towards total sustainability is long, but it is our job to create a plan, a starting point.




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