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Note: The following post was originally published on NextBillion.net, which is managed by WDI.

By Paul Clyde

Paul Clyde, President of WDI

This past summer, Ghana was selected as the host country for the Secretariat of the African Continental Free Trade Area (AfCFTA), a group of countries with a population of 1.3 billion and a combined income that rivals that of France. These 54 countries will allow free trade between them beginning in July 2020. No company can afford to ignore this market or, more generally, any low- and middle-income country (LMIC). This is especially true for health care companies.

LMIC markets, as categorized by the World Bank, are already large – and they are growing at a much faster pace than high-income countries (HICs). According to the World Bank, total health care expenditures in LMICs were 11% of total health care expenditures in HICs in 2000. By 2015 that percentage had jumped to 25%.^[1] And this understates the change. Twenty countries moved from LMIC to HIC between 2000 and 2015 and were therefore counted in the total health care expenditures for LMICs in 2000, but not in 2015. No countries moved from high income to low or middle income over the same period. If we keep the countries that were in the LMIC category in 2000 in the calculation for 2015, the total health care expenditures for LMICs were 29% of 2015 total health care expenditures in high-income countries. Put differently, while HIC health care expenditures were growing at a fast pace at the beginning of the century, LMIC health care expenditures were growing almost three times as fast, according to World Bank data.

The LMIC data described above lump middle-income countries with low-income countries, so it is tempting to think the growth is coming completely from the middle-income countries. This would be a mistake. Since 2000, 33 countries moved from a low-income country classification to middle income. LMIC income levels and health care expenditures are growing at an increasing rate. It is no longer safe for businesses to assume that operations in low-income countries will not be profitable 10 or even five years from now.

Despite the current size and growth rates of these economies, it is not clear if today’s leading companies will be able to serve them. Take the example of Denver-based DaVita, one of the largest providers of dialysis treatments in the world. In 2018, it pulled out of India – despite the fact that India is already the second largest diabetes market in the world, and is expected to become the largest soon. (Diabetes is a leading cause of chronic kidney disease.) DaVita sold its operations in India to NephroPlus, the largest chain of dialysis centers in India. Headquartered in Hyderabad, NephroPlus is raising capital to enter the Middle East and Southeast Asia, capitalizing on the growth opportunities in emerging markets.

This last point raises the stakes. Many companies, regardless of where they are based, will try to take advantage of the opportunities in LMICs, and while it will be challenging, some will succeed. Those that do can eventually be expected to turn their attention to HICs. Entering HICs may require changing their processes or products, and not all will succeed in this step either. But even if only a handful succeed, the competition will be meaningful. Neglect of LMICs today isn’t just a lost opportunity in those markets. It could also spawn competitors in HICs – competitors who, by the time they reach those markets, have a well-honed service or product that is particularly dangerous to incumbent firms.

The task facing today’s leading companies can be met, and doesn’t require drastic innovations – relatively modest modifications to business processes will often be sufficient. Consider, for example, Brook Fekadu, who became a licensed dealer of GE equipment in Ethiopia about five years ago. A major challenge with imaging equipment is its installation, maintenance and servicing. Fekadu trained his staff to provide those services up to GE’s standards. He also purchased equipment himself, and provides diagnostic services to individual patients. Hospitals that don’t have the volume to support some of the expensive diagnostic equipment refer their patients to Fekadu for a diagnosis. Once the hospital develops the volume, he is happy to sell them the equipment and service it. It is an extremely effective business model that can be expected to be repeated in other countries. GE or any other company can use it to expand their geographic reach into LMICs profitably.

It isn’t really a question of whether or not businesses will end up serving today’s low- and middle-income countries as a major part of their portfolio. The question is only which businesses will do it. It will require an investment – including short-term losses – before a return is realized, just as it did with the automobile companies serving China and India in the 1990s. Most of today’s global health care companies, some of which come from LMICs, are already making those investments. Not all will succeed. However, any company that is not making some investment in these markets is effectively ceding them to competitors or, perhaps more likely, entrants into the market, many of which will come from LMICs. And whoever does succeed in developing a business model that is profitable in LMICs has a huge, and growing, market to serve. They may also be able to take a significant share of the market in HICs from incumbents who have not been subjected to the same trials.

Finally, it is worth commenting on the social consequences of this discussion. Any company that succeeds in serving these markets will have done so by satisfying the local customers and hiring people to provide the good or service. The more successful the company is, the more customers will be satisfied and the more individuals will be employed. And that is just the beginning. Success provides the capital and incentive to grow further – something lacking in the absence of profits. We can’t know whether the company that will tap into these markets will be an existing multinational or an as-yet-unformed entrant. But we can be confident that the individuals in these economies will benefit as consumers, employees and/or owners of the companies that prevail.

^[1] World Bank’s Health Nutrition and Population Statistics as accessed on August 20, 2019. Based on comparison of current health expenditures in current US dollars. Current US dollars were used instead of PPP because the discussion pertains to the market size for outside investors.

Paul Clyde is the president of  WDI and the Tom Lantos Professor of Business Administration at the Ross School of Business at the University of Michigan. 

Photo courtesy of Hush Naidoo.