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Facebook UK paid £238,000 in tax last year, according to its accounts.

Its sales were £20.4m, despite an estimate that it actually pulled in £175m from advertising sales in 2011.

Most of the company's income is instead believed to be legally going through its European base in Dublin, where corporation tax is lower than the UK.

Campaign group The Taxpayers' Alliance said the tax system needed changing to encourage companies to pay their tax in the UK, rather than another EU country.

Chief Executive Matthew Sinclair said: "Too many companies can exploit the loopholes in the current tax system to minimise their bills.

"Others do pay their fair share but the system is so complicated.

"Ireland's low corporation tax rate is attracting globalised companies who are highly mobile, while our lumbering tax system simply cannot cope."

Based abroad

Companies operating in the EU are able to base themselves in any member country to take advantage of skilled workers or lower tax rates.

Google also has its EU headquarters in Dublin and earlier this year was criticised for paying £6m tax on UK revenues of £395m.

Facebook's latest accounts also show it made a pre-tax loss of £13.9m in 2011, compared with a £1m profit in 2010.

But the company's figures show that's down to a £15m charge to fund a share scheme for its 90 UK staff.

Facebook said the figures didn't reflect the overall health of the company.

A spokeswoman said: "As is normal for an organisation operating in dozens of countries around the world, we regularly file reports about local operations.

"The information does not necessarily present a full account of overall global financial performance so it would be a mistake to draw any conclusions from these filings."

'Operating legitimately'

Despite reporting £20.4m in UK sales, media research group Enders has estimated Facebook UK brought in £175m in revenues in 2011.

However, some tax experts say the company's figures need to be put in perspective and stress that Facebook isn't doing anything illegal.

Mike Warburton, director at tax experts Grant Thornton, said: "It [Facebook UK] operates legitimately as a service provider to the group."

Mr Warburton also called the £238,000 figure "rather meaningless".

"It just relates to corporation tax on sundry items like investment income," he said.

"Facebook UK made a loss on trading which would have no tax liability, and perhaps some losses to carry over to next year.

"In addition, there was about £15m charge on the employee share options, again fully allowable for corporation tax purposes."

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Facebook criticised for £238,000 UK tax bill last year

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Facebook UK paid £238,000 in tax last year, according to its accounts. Its sales were £20.4m, despite an estimate that it actually pulled in £175m from advertising sales in 2011. Most of the company's income is instead believed to be legally going through its European base in Dublin, where corporation tax is lower than the UK.

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US coffee giant Starbucks reportedly paid just £8.6m in corporation tax in the UK over 14 years.

The four-month investigation by news agency Reuters also found the firm had paid nothing in the last three years.

Starbucks UK reported losses so did not have to pay corporation tax, but told investors that it was "profitable".

"We have paid and will continue to pay our fair share of taxes in full compliance with all UK tax laws, as we always have," Starbucks said.

"There has been no suggestion by any authority that we are anything but compliant and good tax payers.

"We do this in a way that is consistent with the values that have guided us since we were founded more than 40 years ago: balancing our need to operate a profitable business with a social conscience."

Analysis

The real sting in the allegations about Starbucks is that it could be telling such different stories to tax officials and investors.

Investors heard that the UK business was profitable and performance was pleasing, while the tale told to HM Revenue & Customs was that profits were so low that no tax was due.

The Treasury claims that an extra £6bn was brought in last year as a result of the diligent work of the Large Business Service, the department within HMRC which monitors bigger companies.

One wonders how much more they could be collecting if they adopted a different approach to Starbucks, Google and Facebook, who have joined Vodafone and Barclays as targets of tax campaigners.

There is a view within Starbucks that the company does bring in a lot of tax by paying National Insurance for its employees and charging VAT to customers.

But other companies do that as well as paying corporation tax, including small coffee bars who are trying to compete.

But campaigner Richard Murphy from Tax Research UK, who was consulted by the Reuters team as part of its investigation, said: "Starbucks are playing the game here. This is tax avoidance, they're doing nothing illegal. That doesn't mean to say it's right, in my opinion," he told BBC Radio 5 live.

He said it showed that the current rules on tax did not work and it was up to politicians to put it right.

"When we have a tax system that lets very large companies like Starbucks be on our High Street and pay no tax and are competing with small locally owned businesses who are paying tax on all their profits, then there's something very clearly wrong with our tax system."

Treasury Minister Sajid Javid said the government could not comment on individual companies, but was "very focused" on the issue.

"We are looking at all avenues of tax evasion and closing down all avenues for tax avoidance, whether it is companies or individuals.

"That is why we have invested very heavily in the last two years in more resources at HMRC - hundreds of new people to look at just these types of issues."

Royalty fees

According to the Reuters investigation, Starbucks generated £398m in UK sales last year but paid no corporation tax.

It found Starbucks had made over £3bn in UK sales since 1998 but had paid less than 1% in corporation tax.

The company may not be paying much corporation tax but the country will still be making a good profit out of them
John Whiting, Institute of Taxation

It said the coffee giant had reported losses in each of the last five years and therefore did not have to pay any corporation tax, yet executives told analysts that the UK business was "successful", "profitable" and they were "very pleased with the performance".

It identified payments between companies within the group as a factor in reducing its taxable income in the UK.

For instance, Starbucks' UK unit and other overseas operations have to pay a royalty fee to other parts of the business for the use of its intellectual property such as its brand and business processes.

The company also has to allocate some funds generated in the UK to other subsidiaries in its supply chain. Starbucks buys coffee beans for the UK through a Switzerland-based subsidiary and the beans are then roasted at another based in Amsterdam.

Chief financial officer Troy Alstead told Reuters that tax authorities in the Netherlands and Switzerland require Starbucks to allocate some profits from its UK sales to its Dutch roasting and Swiss trading units.

'Extremely unfair'

Starbucks is not alone though, in facing criticism for its low tax bill.

Companies can improve their practices, but ultimately the rules need to change
Jenny Ricks, Head of campaigns, Action Aid

Last week Facebook was criticised for paying just £238,000 in tax last year in the UK despite estimates of making £175m in sales, while earlier this year Google was also criticised for paying just £6m tax on UK revenues of £395m.

In April, a report in the Guardian said that online retailer Amazon had generated sales of more than £7.6bn in the UK over the past three years but had not paid any corporation tax on the profits from those sales.

Labour MP and tax campaigner Michael Meacher said Starbucks' practice was "profoundly against the interests of the countries where they operate and is extremely unfair".

"They are trying to play the taxman, game him. It is disgraceful," he said.

A spokesman for HMRC said: "For legal reasons, we cannot comment on the tax affairs of individual businesses, but we make sure that multinationals pay the right tax to the UK in accordance with UK tax law."

Tax expert John Whiting from the Chartered Institute of Taxation said the HMRC monitored big companies carefully and the government would be looking to close any genuine loopholes. But in terms of tax revenue, he told the BBC it was important to look at the bigger picture.

"In many ways corporation tax is a bit of a bonus - the company should be paying it if it is making profits," he said.

"But in many ways the biggest contribution it makes is in creating employment - [which generates] PAYE, National Insurance, paying business rates, VAT.

"The company may not be paying much corporation tax but the country will still be making a good profit out of them."

Starbucks said it was committed to the UK and pointed out that it plans to create 5,000 new jobs over the next five years.

Action Aid, the development charity which campaigns for multinationals to pay fair taxes in the developing countries they operate in, said government action was key to stop companies "hiding wealth" by moving it to tax havens.

"Companies can improve their practices, but ultimately the rules need to change," Jenny Ricks, head of campaigns at Action Aid, told BBC News.

She called for companies to publish a basic set of accounts for every country they operate in to make it easier for tax authorities to work out how much tax is owed.

"The UK government has the chance to take the lead in tackling tax dodging next year when it chairs the G8," she said.

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US coffee giant Starbucks reportedly paid just £8.6m in corporation tax in the UK over 14 years. The four-month investigation by news agency Reuters also found the firm had paid nothing in the last three years. Starbucks UK reported losses so did not have to pay corporation tax, but told investors that it was "profitable".

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The Idea in Brief

If you're setting out to compete in rapidly developing economies, beware: Smart domestic enterprises are staving off the challenge from global market leaders. And they're seizing new opportunities before multinationals can.

Consider: In China, search engine Baidu is used seven times more than Google China every day. In India, Bharti Airtel has trumped Vodafone as the market leader in cellular telephony. And in Mexico, Grupo Elektra has beaten Wal-Mart as the country's top retailer.

Domestic dynamos like these dominate foreign rivals by applying six strategies. For example, they use their deep understanding of consumers in their countries to create highly customized offerings. They leverage cutting-edge technology to keep operating costs down. And they tap into pools of cheap local labor instead of relying on expensive automation.

To prevail over local winners on their turf, set aside your tried-and-true strategies, advise Bhattacharya and Michael. Instead, understand-and emulate-domestic players' tactics.

The Idea in Practice

Bhattacharya and Michael identify a blend of six strategies domestic winners use to succeed in emerging markets.

Create Customized Offerings

Simple customization techniques, based on intimate knowledge of local consumers, have sparked major success for homegrown champions.

India's CavinKare packages shampoo in single-use sachets, making the product affordable for Indians who can't afford big bottles and regard shampoo as a luxury. CavinKare is the largest local player in India's $500 million shampoo industry.

Develop Business Models to Overcome Obstacles

Smart local companies identify key challenges posed by domestic markets, then design business models to overcome them.

Shanda has avoided the software piracy problem plaguing global video-game leaders in China by developing highly popular multiplayer online role-playing games. These are impossible to pirate, because they're live experiences created by many players over the Internet.

Deploy Cutting-Edge Technologies

Local winners use new technology to control operating costs and deliver quality offerings.

Brazil's Gol Linhas Aereas Inteligentes (Gol), South America's first low-cost airline, uses the latest model Boeing 737 in its single-model fleet. The young fleet requires less maintenance, so Gol manages quick turnarounds, which lowers cost per available seat. Gol's use of e-tickets and unmanned check-in kiosks has further driven down costs.

Tap Low-Cost Labor

Local champions leverage cheap labor pools rather than relying on automation.

China's largest outdoor advertising firm, Focus Media, has installed LCD screens in 130,000 locations in 90 cities. Instead of linking the screens electronically through expensive technology, it uses employees who go from building to building on bicycles to replace advertisement DVDs. This decreases operating costs, enabling the company to offer advertisers immense flexibility cheaply.

Build Scale Quickly

Successful local companies fend off multinationals and other regional players by rapidly expanding their reach.

Focus Media initially faced many rivals across China. To gain nationwide reach, it pursued an aggressive acquisition-led strategy. Its national coverage attracted advertisers, diminished regional rivals' competitiveness, and vaulted it past two global leaders involved in China's outdoor advertising industry.

Use Management Talent to Sustain Growth

To avoid the problems that can come with high growth, domestic dynamos put the right management talent in place.

Russia's Wimm-Bill-Dann Foods, founded by five entrepreneurs with borrowed funds, changed its management structure when multinationals began encroaching on its local dairy and fruit-juice markets. The founders hired a new CEO with extensive industry experience and gave him free rein. They also brought in seasoned managers from multinational companies. WBD now has 34% of the Russian market for packaged dairy products.

Since the late 1970s, governments on every continent have allowed the winds of global competition to blow through their economies. As policy makers have lowered tariff barriers and permitted foreign investments, multinational companies have rushed into those countries. U.S., European, and Japanese giants, it initially appeared, would quickly overrun local rivals and grab the market for almost every product or service. After all, they possessed state-of-the-art technologies and products, enormous financial resources, powerful brands, and the world's best management talent and systems. Poor nations such as Brazil, China, India, and Mexico, often under pressure from developed countries, let in transnational companies, but they did so slowly, almost reluctantly. They were convinced that global Goliaths would wipe out local enterprises in one fell swoop.

That hasn't happened, according to our research. Over the past three years, we have been studying companies in 10 rapidly developing economies: Brazil, China, India, Indonesia, Malaysia, Mexico, Poland, Russia, Slovakia, and Thailand. In those countries, smart domestic enterprises are more than holding their own in the face of foreign competition. They have staved off challenges from multinational corporations in their core businesses, have become market leaders or are catching up with them, and have often seized new opportunities before foreign players could. Many of them dominate the market today not because of protectionist economic policies, but because of their strategies and execution. When we drew up a list of 50 homegrown champions, we found that 21 had revenues exceeding US$1 billion in 2006 and that the entire group's sales had risen by about 50% between 2005 and 2006 (see the exhibit "Fifty Homegrown Champions"). The skeptics should have remembered that David slew Goliath-not the other way around.

Consider a few local companies that have fended off foreign competition during the past five years or more:

In Brazil, Grupo Positivo has a larger share of the PC market than either Dell or Hewlett-Packard, and Totvs is the enterprise resource planning (ERP) software leader in the small- and midsize-company market, ahead of the world's largest business software provider, SAP.

In China, daily use of the search engine Baidu exceeds that of Google China by fourfold; QQ, from instant-message leader Tencent, is ahead of MSN Messenger; and online travel service Ctrip has held off Travelsky, Expedia's eLong.com, and Travelocity's Zuji.com.

In India, Bharti Airtel has taken on Hutchison Telecom, which sold its Indian operations to Vodafone in 2007, and emerged as the leader in the cellular telephone market.

In Mexico, Grupo Elektra, which has created one of the country's biggest retail networks, has taken the battle to Wal-Mart.

In Russia, Wimm-Bill-Dann Foods is the biggest producer of dairy products, ahead of Danone and Coca-Cola.

The local companies' success doesn't augur well for the developed world's corporations, many of which are seeking growth and profits in emerging markets. Two-thirds of respondents to a survey of transnational corporations we conducted in 2006 said they planned to expand their commitments to developing economies over the next five years. That isn't surprising. According to the Economist Intelligence Unit, rapidly developing economies will account for 45% of world GDP and 60% of annual GDP growth by 2010. At the same time, several Western and Japanese corporations have been unable to enter or have retreated from emerging markets. For instance, Yahoo and eBay have pulled out of China, and NEC and Panasonic have withdrawn from the Chinese market for cellular handsets. Other corporations have found it tough to fly down from the premium perches they constructed for themselves, and they no longer appear irresistible to consumers or unbeatable by local companies.

Why don't the strategies of the biggest and brightest corporations work well in developing countries? Part of the problem is that many transnational enterprises mistakenly believe that emerging markets are years behind developed nations' and that the former's markets will eventually look like the latter's. Multinational corporations assume it's merely a matter of time before their existing business models and value propositions start delivering results in developing countries. These misconceptions are deadly-for several reasons.

Developing economies neither are behind developed ones nor show signs of converging with them. The emerging markets are different, behind in some ways and advanced in others. For instance, China's telecommunications infrastructure is newer and better than that in most parts of the United States. At the same time, roughly 300 million Chinese live on less than $1 a day, according to the World Bank. In India, an educated elite who command international wages flourish in a nation with high rates of illiteracy. In Russia, abundant venture capital coexists with murky property rights and intimidating bureaucratic barriers. These disparities aren't likely to disappear soon, and they're creating unique markets.

The obstacles and opportunities that characterize emerging markets render useless most cookie-cutter strategies. A simple example: In India, lack of reliable internet access renders online customer service useless. However, wireless telecommunication networks and widespread use of mobile telephones allow companies to help customers, even in rural areas, through text messages and handset-based internet portals. Only companies that are unfazed by such contradictions are likely to succeed.

Western companies often forget that entrepreneurship has recently exploded in most developing countries because of internal reforms. Governments have slashed red tape, and capital is cheaper than ever-and those changes are stoking competition. Emerging markets have become so volatile that multinational companies can't tackle them with strategies they developed decades ago and have since refined in mature home markets.

Multinational companies should, we believe, borrow a page, or more, from the local champions' playbook. When we analyzed how 50 companies have become winners, we found six common strands-and they aren't all about low-cost structures. One, unlike global companies, local leaders are not constrained by existing products or by preconceived notions about customer needs. They customize products and services to meet different consumer requirements, and they initially go after economies of scope. Two, their business models overcome roadblocks and yield competitive advantages in the process. Three, they turn globalization to their advantage, deploying the latest technologies by developing or buying them. Four, many of the homegrown champions find innovative ways to benefit from low-cost labor pools and to overcome shortages of skilled talent. Five, they go national as soon as possible to prevent regional rivals from challenging them. Finally, the domestic dynamos possess management skills and talent that multinational companies often underestimate.

In the following pages, we explore each of these factors in detail. No single element may seem groundbreaking, but the homegrown champions cleverly weave at least four of them-sometimes all six, as we show-into a tight strategy in order to gain competitive advantage. We also discuss three multinational companies that have followed the six-part path and have tasted success in emerging markets.

A Six-Part Strategy for Success

Many types of local companies have been successful in developing countries. Some are part of old conglomerates owned by business families or tycoons; others are young start-ups spawned by a postreforms generation of entrepreneurs. All the companies we studied face stiff competition from domestic peers or government-owned enterprises. Most of them also face foreign competition at home, even though countries and markets vary in their degree of openness. These domestic private-sector enterprises have outperformed competitors by following several strategies.

Create customized products or services.

The homegrown champions possess a deep understanding of the consumers in their countries. They know people's preferences by region or even city, by income level, by age group, and by gender. These companies also grasp the structures of the raw-materials, components, and finished-goods markets in which they operate. They are therefore able to provide consumers with a low level of customization inexpensively. These local leaders develop offerings tailored to several niche markets and learn to create a large variety of products or services cost-effectively. For example, Goodbaby, the leader in the Chinese market for baby-related products such as strollers, sells as many as 1,600 items in 16 categories. Customization becomes the basis on which companies like Goodbaby differentiate themselves from and get a leg up on multinational rivals.

Some companies develop sophisticated user-generated customization technologies. In China, consumers favor instant messaging on PCs and text messaging on cellular telephones over e-mail. Despite the presence of U.S. heavyweights-such as Microsoft (which launched a Chinese version of MSN Messenger three years ago), Yahoo, and recently MySpace-Shenzhen-based Tencent is the leader in the Chinese market. Its free messenger, QQ, had a market share of 70% to 80% in 2006, compared with 15% for MSN Messenger, according to Shanghai-based iResearch. QQ's cute penguin mascot and ultrasimple interface endear it to China's internet users, 70% of whom are younger than 30. In addition to the free chat program and chat rooms, QQ offers games, virtual pets, and ringtone downloads.

The U.S. players have tried to capitalize on users' desire to form cybercommunities, but Tencent has taken a different route: It taps into the Chinese craving for freedom of expression. QQ offers digital avatars that users can personalize online, from the clothes they wear to the virtual cars they drive. People can choose from a dizzying array of virtual outfits and accessories, each costing just RMB 1 or 2. The Chinese love the idea of customizing their online messengers, and in less than a decade QQ has become the market leader. "QQ" has even become a verb, and the phrase "QQ me" has been used in pop songs. Since its founding in 1998, Tencent has made steady progress: It had 220 million active users (caveat: many Chinese have more than one online identity) and US$375 million in revenues in 2006-and counting.

Other local winners' customization techniques are simple. The companies package products innovatively to make them affordable. In India's $500 million hair care market, the well-entrenched multinational incumbent Hindustan Unilever, which has operated there since 1933, and challengers such as America's Procter & Gamble and France's L'Oréal have been slugging it out in the cities for decades. While Hindustan Unilever and P&G are the leaders with 36% and 27% of the market in 2006, respectively, according to Datamonitor, CavinKare, a local company, is giving them a run for their money with its market share of 16%. The Chennai-based start-up, established in 1983, packs shampoo in sachets-an idea its founder borrowed from his father, who pioneered the use of these pouches, and his brothers, who first launched shampoo sachets in 1979.

CavinKare's single-use plastic sachets are convenient to use and easy to store, and they minimize product waste because people are not tempted to use more than what they need for one wash. The packaging size makes shampoo affordable for many Indians who don't earn enough money to spend on big bottles and who regard the product as an expensive indulgence. CavinKare went after lower-income city dwellers and rural consumers for the first time. For years, it found the going tough; the company had to demonstrate how shampoo cleans hair better than soap and used trade-ins and discounts to get people to try it. Once CavinKare tasted success, Hindustan Unilever and P&G started to package shampoo in sachets as well. Price matters, though, and CavinKare's relatively cheap Chik brand has allowed the company to become the largest local shampoo player in India.

Develop business models to overcome key obstacles.

Multinational corporations often complain about insurmountable problems-structural issues such as a lack of distribution channels, or infrastructural hurdles like limited telecommunications bandwidth-that prevent them from doing business in their usual way. Smart local companies are adept at identifying the key challenges that their markets pose and, from the get-go, at designing strategies to overcome or sidestep those obstacles. Sure, multinational enterprises later copy the same tactics, but by then the local ones have sharpened their first-mover advantage.

For instance, the global leaders in video games, such as Microsoft, Nintendo, and Sony, haven't made much headway in China because of software piracy. Does that mean China doesn't have much of a market for games? Of course not. Chinese companies such as Shanda, which entered the industry in 2001, have developed a thriving game business by developing massively multiplayer online role-playing games (MMORPGs) instead. These products are impossible to pirate since they are live experiences created by technologies that link many players over the internet. China's youth, eager for entertainment options, have warmed to the idea. China's MMORPG industry, which generated revenues of about $600 million in 2005, has been growing at 40% a year since 2003, according to iResearch. Belatedly in 2007, Electronic Arts acquired a 15% equity stake in one of Shanda's competitors, The9, for $167 million.

It's tough to make money on the internet in China because of consumer concerns about online theft and the lack of a credit card culture. Shanda has tackled the online-payment problem by taking transactions off-line. China's gamers purchase prepaid cards from local merchants. When they scratch the film off the card, they get a number that entitles them to a fixed amount of game-playing time online. Shanda keeps adapting its business model. Sensing that Chinese gamers are becoming less willing to pay to play, it now offers free access to old games. It makes money, as Tencent does, by selling virtual merchandise such as weapons and equipment. The company is also moving into mobile gaming, which is set to take off. Later this year, Shanda will launch mobile versions of its popular World of Legend and Magical Land role-playing games on customized Motorola handsets.

Innovative strategies sometimes create new businesses in addition to giving local champions an edge. In Mexico, Grupo Elektra wanted to be a successful retailer, but it created a banking business along the way. The company realized early that to make money, it had to sell big-ticket items such as washing machines and refrigerators. Many middle- and low-income Mexicans could buy consumer durables only by taking loans or paying in installments. They couldn't get credit easily because Mexico's commercial banks didn't consider them creditworthy or know how to evaluate their repayment potential. Grupo Elektra started offering consumer financing and, effectively, selling products on installment plans. Once the company offered credit, its business took off. In 1987 Grupo Elektra operated 59 stores; today it runs more than 1,600, making it one of the largest retailers in Mexico. Imitation is a form of followership: Wal-Mart, which is Mexico's largest retailer by sales, obtained a banking license in November 2006 to offer financial services in all its 997 Mexican stores.

In 2002, Grupo Elektra, which still sells about 60% of its goods on credit, set up a full-fledged bank, Banco Azteca, with branches inside Elektra stores. The bank's business, measured by assets under management, has had a compound annual growth rate of 133% for the past five years. Given that most customers have no credit histories, the bank has developed a novel credit-appraisal system. A corps of 4,000 loan officers uses motorcycles to visit prospective borrowers' homes. These officers on wheels assess whether each applicant's standard of living matches the claimed income level and conduct an on-the-spot credit assessment. Collectively, the corps clears as many as 13,000 new loans a day. This unique system has worked so far: Banco Azteca's repayment rate in 2006 was 90%.

Deploy the latest technologies.

Contrary to popular perceptions, local winners' products and services often incorporate the latest technologies, as the cases of Shanda and Tencent show. New technologies keep operating costs low and enable companies to deliver good-quality products and services. That helps them outperform competitors that believe they can satisfy local consumers with older technologies.

Unburdened by past investments or old processes, younger companies in particular invest in the state of the art to lower costs and offer customers novel features. For example, Brazil's Gol Linhas Aéreas Inteligentes, South America's first low-cost airline, has shaken up the market since it started flying with five aircraft in January 2001. Gol's share of the domestic market, based on revenue passenger-kilometers, grew from 5% in 2001 to 37% in 2006, according to Brazil's civil aviation authority, Agência Nacional de Aviação Civil (ANAC). The world's second-most profitable airline after Ireland's Ryanair, Gol can attribute its success partly to its single-aircraft type of fleet-a model Southwest Airlines pioneered-and to investments in the latest models. In 2007, Gol operated 97 single-class Boeing 737 aircraft, and it had placed orders with Boeing for 64 new 737-800 aircraft that would join the fleet between 2008 and 2010. By buying an aircraft model with a capacity approximately 30% higher than that of its predecessor, Gol will be able to use its landing slots more effectively.

The planes in Gol's fleet were, on average, less than eight years old in December 2006, making it one of the youngest in South America. A young fleet requires less maintenance, so Gol manages quick aircraft turnarounds and operates more flights per day with each plane. In 2006, Gol's aircraft utilization rate (the time between a plane's departure from the gate and arrival at its destination) was 14.2 block hours a day-the highest in South America, according to ANAC-and the airline boasted the lowest cost per available-seat-kilometer. Gol has also reduced costs by using the latest technology in other operational areas. It was the first Brazilian airline to issue e-tickets and promote internet-based sales; in 2006, it sold 82% of its tickets on its website. Customers can check in on the internet or, if they don't have Web access, there are kiosks and attendants with wireless-enabled pocket PCs to process check-ins. Gol's call centers employ the latest automated voice recognition software to handle high call volumes with a limited staff.

New technologies can help old companies get a second wind after economic liberalization. Gujarat Cooperative Milk Marketing Federation (GCMMF), India's largest dairy company, manufactures and markets a range of dairy products under the brand name Amul. Despite the fierce competition that has come with the opening up of India's dairy industry to big business, the enterprise has managed to stay ahead, in part because it has invested in the latest technologies. For instance, it can collect and process 6.5 million liters of fresh milk every day from close to 13,000 villages in the western state of Gujarat. Farmers bring their milk to collection centers, each located roughly five to 10 kilometers away from a village, twice a day. Thanks to a new milk collection system, GCMMF's field staff can weigh the milk, measure the fat content, and pay the farmer-in less than five minutes. That contrasts with the old system whereby employees took samples and performed fat-content tests days later at a central facility. Not only did farmers have to wait for a week to receive payment, but the lack of transparency led to complaints about fraud.

GCMMF employs satellite communication technologies to collect and track transaction data. A customized ERP system coordinates all the back-office functions and analyzes data in real time to forecast imbalances between the demand for milk products and milk supplies. Its technological infrastructure permits the cooperative to make 10 million error-free payments every day, totaling US$4.3 million (170 million rupees) in cash, and to coordinate large numbers of trucks and processing plants with military precision. That efficiency has enabled GCMMF to penetrate India's urban and rural markets deeply.

Take advantage of low-cost labor, and train staff in-house.

Many local champions have at their core a business model that taps a pool of low-cost labor instead of relying on automation. Consider, for instance, Focus Media, which has become China's largest outdoor advertising firm. It has placed LCD displays that it engineered in-house in more than 130,000 locations in 90 cities to create a national advertising platform. The company's screens are in office buildings, apartment blocks, retail stores, shopping malls, restaurants, hospitals, drugstores, beauty salons, health clubs, golf courses, hotels, airports, and airport transit buses.

Focus Media uses a decidedly low-tech solution to refresh and service all those LCD screens: a veritable army of employees who move from building to building on bicycles and replace, whenever necessary, the DVDs and flashcards that play the advertisements. Focus Media could link the LCD screens electronically-as any blue-blooded transnational company would-but it does not. Using people keeps the company's operating costs low while enabling it to offer clients a great deal of flexibility. For a small premium, Focus Media will allow a client to flash ads on office buildings nationwide on the week of a major product launch; or target only outdoor plaza locations on one weekend in one city; or use a mix of online, in-cinema, and shopping-center advertisements the day before Chinese New Year. Were Focus Media to use an automated system, the Chinese government could deem it a network-based broadcaster and regulate it as a media company, which might curtail its growth. Focus Media's bicycle-based solution fits well within an otherwise high-tech business.

At the other end of the labor spectrum, skilled talent is hard to find and difficult to retain in emerging markets. Successful companies such as Grupo Elektra, Gol, China Merchants Bank, and India's ITC invest heavily in in-house training. India's Apollo Hospitals, another case in point, has developed a good reputation by recruiting some of the country's best doctors and nurses. The quality of its services is a key differentiator, allowing the chain to charge patients 10 times what they would pay in a public hospital. Although the company employs 4,000 specialists and 3,000 medical officers at 41 facilities, it needs more people to staff new hospitals and to offer additional services. Recognizing that India's medical education infrastructure is growing slowly, Apollo Hospitals established a foundation in 1998 to finance new teaching institutes, including one that offers a postgraduate degree in hospital management and a nursing school. That's not all. In 2000, Apollo Hospitals and a leading Indian technology training company, NIIT, set up a joint venture to offer online medical classes. Medvarsity Online offers postgraduate courses in family medicine, emergency medicine, and health insurance. Apollo Hospitals has also introduced programs to train physiotherapists, medical technicians, and laboratory technicians. It provides nurses with medical training as well as communication and customer-service skills. Without all these investments in training, Apollo Hospitals would not have been able to sustain its growth.

Scale up quickly.

In many emerging markets, when a new business opportunity becomes apparent, several companies crop up to capitalize on it. The size of countries like China, India, and Brazil-particularly the large number of provinces and cities-allows regional players to flourish. However, only companies that operate nationwide can reap the benefits of scale. Many homegrown champions go after scale economies after generating economies of scope.

Expansion often entails mergers and acquisitions. Focus Media, for instance, faced many rivals scattered across China's cities when it started out in 2003. It pursued an aggressive acquisition-led strategy, which soon gave it the nationwide reach to attract advertisers and diminish the competitiveness of regional rivals. By scaling up quickly, Focus Media vaulted past two global leaders in China's outdoor-advertising industry: America's Clear Channel Communications and France's JCDecaux. In 2006, Clear Channel was less than half of Focus Media's size in terms of revenue, even though it had set up shop in China back in 1998. JCDecaux, which entered the country by acquiring two companies in 2005, doesn't report its China revenues. However, it operates in only 20 cities, compared with Focus Media's presence in 90. While Clear Channel and JCDecaux have made a few acquisitions in the past decade, Focus Media struck five deals between January 2006 and February 2007 in order to cement its leadership.

Some local champions create regional entities to speed up organic growth. For example, Goodbaby has set up 35 companies, each operating in a Chinese province or a city, to strike local distribution agreements and to open new points of presence quickly. That has spawned one of the most extensive marketing and sales networks in the country: 1,600 stand-alone stores or department-store counters and 300 distributors. By 2010, the company plans to have opened 500 more locations. In addition, Goodbaby opened the first in a series of flagship stores two years ago. These sites offer a few foreign brands, Goodbaby's own products, and access to professionals who dispense parenting advice. By overcoming the distribution challenges of the Chinese market quickly, Goodbaby has laid the foundation for success.

Invest in talent to sustain rapid growth.

In market after market in emerging economies, invading multinational corporations encounter domestic rivals with the entrepreneurial zeal and the knack to keep growing quickly for a long time. They discover, to their shock, that there are great local managers in these countries. In fact, most transnational giants underestimate the management depth and capability of rivals that have the additional advantage of not needing to negotiate with headquarters in a distant First World city.

Many companies face the risk of meltdown when they grow at double-digit rates for years. There are no silver bullets to prevent that altogether, but smart organizations minimize senior management turnover and institutionalize management systems to tackle the complexities of rapid growth. Consider Russia's Wimm-Bill-Dann Foods (WBD), which five entrepreneurs founded in 1992 with borrowed funds. They leased a production line at the partially idle Lianozovsky Dairy Plant near Moscow to make fruit juices and decided to make a foray into the dairy industry. Since the short shelf life of dairy products limits their distribution to a radius of 400 kilometers, WBD had to manufacture products close to consumers. Between 1995 and 2003, the company acquired 19 dairy companies and created a national distribution system by appointing 100 distributors. However, by 2003, multinational companies such as Danone and Coca-Cola also built strong sales and distribution systems and capitalized on the growth of local retailers to storm the Russian market. Soon, Danone's dairy products and Coca-Cola's fruit juices were selling faster than WBD's products.

The founders of WBD realized that they needed to adopt a new approach in order to retain the company's leadership position. In April 2006, they hired a new CEO, who had worked with Coca-Cola in Europe for 20 years. To allow him a free hand, the founders moved into new roles as members of a supervisory board. They helped create a more powerful corporate center and a new company mission. Led by the new CEO, WBD focused on reducing costs; improving quality; and investing in its people, including executives. To ensure high quality at a reasonable cost, the company drew up detailed specifications for all of its products and raw materials, improved forecasting and demand planning, reengineered processes to eliminate bureaucracy, simplified its legal structure, and invested in information technology. WBD adopted a number of human resource management practices including a key performance indicator system, semiannual performance reviews, and individual development plans for the top 500 employees. It also linked salaries with performance and offered stock options to top managers for the first time. Finally, WBD brought in seasoned managers, many from multinational companies, even as it sought to maintain the culture of a Russian company. Partly as a result, WBD had around 34% of the Russian market for packaged dairy products in 2006, according to ACNielsen-more than double Danone's 16% share-and was one of the top three players in fruit juices, with an 18% share.

Like WBD, many national champions have used the appeal of ballooning equity valuations and the prospect of rapid career advancement to attract talent from multinational companies. Gone are the days when executives regarded working for a foreign corporation as something special; now they believe it is just as rewarding to work for a homegrown giant. Several executives have left multinational companies or jobs abroad to join local leaders. In China, for instance, Focus Media CFO Mingdong Wu used to work for Merrill Lynch; Ctrip chairman Jianzhang Liang is a veteran of Oracle, and CFO Jie Sun used to work for KPMG; and Shanda president Jun Tang previously headed Microsoft's China business, and CFO Yong Zhang came from PricewaterhouseCoopers.

How One Local Winner Wove Its Strategy

Many companies pursue one or the other of the success strategies just described. What distinguishes winners is their ability to pursue several, or often all, of them simultaneously and to execute them well. Ctrip, China's largest travel consolidator and online travel agent, has been able to do just that. Founded in 1999, the start-up recognized at the outset that online travel services such as Travelocity, Orbitz, and Expedia wouldn't do well in China with the business models they use so effectively in the United States. At the time, China didn't have a national ticketing system, such as Sabre, and it still lacks a secure online-payment system. Most of the country's hotels don't belong to a global or national chain, and most local airlines and consumers prefer paper tickets to electronic tickets. Ctrip therefore decided to focus on both off-line and online sales.

Chinese consumers prefer to deal with travel agents, so Ctrip has set up a call center where more than 3,000 representatives can serve 100,000 customers a day. To break into the corporate travel services market, where personal relationships dominate, Ctrip has cleverly developed a loyalty program for executive assistants. Although 70% of Ctrip's revenues still come from off-line sales, it has invested in a sophisticated, automated voice-response system so that it can offer 24/7 booking to consumers. The company has also developed a booking infrastructure that links its online and call center operations to a central database. A large team of researchers constantly updates the database while technical experts integrate it with the systems of Ctrip's airline and hotel partners that are slowly computerizing their operations. The database has yielded the company a formidable advantage since most rivals lack a similar system. In a classic move to use low-cost labor, Ctrip collects payments and provides delivery of paper tickets through couriers who get around China's cities on bicycles and scooters.

It's tough to operate in China's travel market, which comprises hundreds of cities in dozens of provinces, because of regulatory and licensing barriers. Setting up shop in each city requires a license from the local government, which usually owns a competing travel company. There's also the challenge of organizing sales teams and delivery services in many cities. Over the past 10 years, Ctrip has patiently overcome these hurdles and built a national travel business with 5,600 hotel partners and alliances with all of China's leading airlines. Recognizing that Ctrip is a widely dispersed organization, senior executives have created a companywide management culture, the Ctrip Way, and they emphasize the use of common business processes across the company. Ctrip has even established Six Sigma standards for customer-service operations and expects employees to meet them. Furthermore, the company has a strong management team with its cofounders still at the helm. Not surprisingly, Ctrip has beaten back several foreign competitors, such as Expedia's eLong.com and Travelocity's Zuji.com as well as Travelsky, the online portal launched by Chinese state-owned airlines and foreign investors such as Sabre in 2001. At the time, many believed that Travelsky would be the winner in China since it had government backing and priority access to airline tickets. However, it hasn't caught up with Ctrip, at least not yet.

Beating the Locals at Their Own Game

If multinational companies are to succeed on local champions' home turf, they have to fight on two fronts. First, they must emulate some of the local companies' strategies, as we said earlier. Second, they must develop other strategies that local companies cannot easily copy. That's tough but not impossible, as is clear from the recent experiences in China of three multinational companies, each from a different continent and industry.

Kentucky-based Yum Brands, which owns restaurant chains such as KFC, Pizza Hut, and Taco Bell, is thriving in China. The company has adapted in many ways in order to break into the Chinese market. It has customized menus to local tastes and has launched dozens of new items each year. It has also tailored store formats to consumers' behavior, and as preferences change, it modifies those formats. For example, Yum recently introduced drive-throughs to cater to China's growing car-driving population. Its marketing emphasizes educational content, not just food, so its restaurants appeal to parents' priorities. The company positions stores as fun places; for instance, a KFC outlet in China averages two birthday parties a day. In addition, Yum has grown faster than McDonald's. In 2002, KFC outlets in China numbered 766, compared with 538 for McDonald's; by November 2007, the gap had widened to about 2,000 KFC restaurants (in 420 Chinese cities and towns) versus about 800 McDonald's locations. The company is also expanding Pizza Hut, which has nearly 300 restaurants in China, and its local chain, East Dawning, which serves Chinese food. In fact, Yum opens an average of one new restaurant every day in China.

Yum uses its global expertise to differentiate itself from local players. A network of 16 distribution and two processing centers supports its expansion. To ensure consistent deliveries of quality raw materials, the company has adopted tough supplier-selection policies. Yum also uses its global reputation and resources to influence the Chinese government's policies regarding food safety and supply chain regulations. By doing so, it protects its local reputation, builds government support, and influences industry structure. The result is a combination not easily found in China: a family of quick-service restaurant brands that serve good-quality food in clean environments with local appeal. Yum's strategy is working: Its China business accounted for 20% of its global profits in 2006.

Yum may have set the pace, but Finland's Nokia came from behind to win in China. Five years ago, Nokia trailed Motorola in the Chinese market. It also faced stiff competition from local players such as TCL and Ningbo Bird, whose basic cellular telephones targeted midtier cities and midmarket and low-end customers. In the early 2000s, the local companies moved fast, opening retail outlets and distribution capabilities across China. Surprisingly, Nokia countered equally quickly by investing in a national sales and distribution network. It used a sophisticated IT platform, which provides near real-time information on sales volumes and competitor pricing, as well as an army of 3,000 in-store promoters to push products. Nokia also focused on areas where its Chinese rivals were hard-pressed to match its efforts. For instance, it accelerated product development and launched a stream of innovative cellular telephones. The company rapidly ramped up production of these products to high volumes and leveraged its bargaining power to keep costs competitive. Partly because of these factors, Nokia has become the market leader in China today.

The experience of South Korea's Hyundai shows that even late entrants can succeed in crowded emerging markets. The automaker's share rose from zero in 2002, when it entered China, to 7% in 2006; cumulative sales topped the 500,000 mark just 40 months after launch. Hyundai identified a consumer need that other automakers had overlooked, because it sent teams who spent months learning what Chinese consumers want. The company noticed that foreign players held the top end of the market and local players the bottom end, but no company offered a good-quality car at an affordable price. Understanding that China's new middle class wanted such a car, Hyundai refined the Sonata and Elantra models for that market.

Hyundai was determined to bring its expertise and experience to China. China's laws require foreign automakers to enter into joint ventures with domestic firms. These arrangements often result in local enterprises' taking control. Hyundai retained operational control of its joint venture but created a healthy working relationship with its partner, Beijing Automotive Industry Holding Corporation (BAIC). For instance, it insisted that South Korean employees who worked in China learn Chinese. Hyundai minimized its up-front investment by using BAIC's functional but labor-intensive production line. It has kept costs down by forcing its South Korean suppliers to set up operations in China. Buoyed by its success in China's fiercely competitive market, Hyundai is building a $1 billion manufacturing plant in Beijing, which will start operations in April 2008 and will double the company's production capacity to 600,000 units a year.* * *

Globalization is clearly a double-edged sword. The advantages of being a transnational corporation in emerging markets have declined dramatically in recent times. Smart local companies have used the benefits of globalization to close gaps in technology, capital, and talent with their rivals from the developed world. Although the average local competitor is weak, transnational corporations would do well to rethink their strategies. After all, it often takes only one strong homegrown champion to shut a multinational out of an emerging market.

A version of this article appeared in the March 2008 issue of Harvard Business Review.

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How Local Companies Keep Multinationals at Bay

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The Idea in Brief If you're setting out to compete in rapidly developing economies, beware: Smart domestic enterprises are staving off the challenge from global market leaders. And they're seizing new opportunities before multinationals can. Consider: In China, search engine Baidu is used seven times more than Google China every day.

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In recent months there has been an increasing hostility in many cities and countries around the world against Uber, the ridesharing app group, the Silicon Valley offspring that is revolutionizing for-hire private transportation's way of doing business.

The traditional taxi system around the world hasn't had any significant improvements for decades, since its inception, almost a century ago. This system has essentially been resting in their laurels and hence, ripe for the taking.

Present technology lends itself beautifully for ordering a ride by mobile phone, and tracking the type of car, license number, driver's name, and the waiting time, among other amenities -for instance, to be located where to be picked-up through GPS technology.

As we all know, Uber's system only gives service to registered clients, who already have designated a credit card for the ride charge to take place -Uber does not accept cash as payment. On top of that, Uber's system relies on private cars, instead of owning an automobile fleet, gaining invaluable capital deployment and cost-saving advantages. Furthermore, once the ride ends, in addition to an email confirmation about the service provided -including the corresponding credit card charge- both the driver as well as the passenger are rated, thus providing very useful information for all parties involved.

In short, the reach and level of service that Uber provides is miles ahead of the traditional taxi system.

Unsurprisingly, most of the taxi establishment has reacted with great hostility towards the innovating company with such a powerful and disruptive business model, trying to block Uber's development wherever and whenever the taxi system can. This outright hostility has taken place all around the world, some recent cases are Germany and Mexico. Instead of accepting with lucidity and humility Uber's overwhelming superiority over the outdated taxi system -which truly requires a profound revamping-, the establishment mostly has reacted by resorting to legal procedures trying to stop the inevitable. In some extreme cases, even physical violence has been at play.

What should be the appropriate reaction from the established system and why?

The answer is humiliatingly simple and painfully obvious: the collective acceptance of new business models brought about by -relatively- new technologies and creative thinking. Granted, this ideal behavior could only occur in Utopia, since we human beings are rather complex creatures; a spontaneous fair sport spirit has not ever been a collective common trait among us. The desire to protect one's turf, even at the expense of everybody else is very common, yet an extremely unfair and harmful human characteristic.

On one hand, it is quite understandable that the status quo feels threatened by the new way of doing business and, up to a certain moderate degree, a hostile reaction makes some sense.

However, if history and logic are any valid guides, experience shows that all these types of episodes end up with the new technology (and/or way of doing business) prevailing over the old status quo. This is not an accidental result but a mere reflection of causation.

In an ideal world, whenever a new technology and/or a new way of doing business with a significant value added (in terms of Cost/Benefit) is implemented, society will rather rapidly adopt the new model. That's the essential way through which mankind has been progressing throughout time. Regrettably, the adoption time of new, significantly improved ways of doing business until now has rarely been short nor trauma-free; hence, there is significant room for improvement in both scores.

The process of substitution and displacement of old technologies and business models for new and significantly better ways of doing things has been very appropriately named by economists as creative destruction.

If creative destruction were not constantly at work, among many other things, nowadays we still will be relying in the vacuum tube system instead of transistors and microprocessors.

However painful the adjustment turns out to be-for a relatively small minority, in this instance the world's current taxi system-, it better be quick and well done. Nothing else will suffice.

The sooner the adjustment to the new and irreversible reality, the better. At the end of the day society is truly better-off with the new systems. That's what really counts.

A similar rejection by the status quo has been experienced by Tesla Motors and the current automotive distribution system. Tesla Motors, the innovative company which has only relied in electric-car technology for its automobiles, also decided to sell its cars directly-bypassing the traditional automobile dealers network-, additionally setting up an also self-owned independent recharging center system along the way.

In the US there are a handful of states where Tesla cars cannot be sold, under the allegation of the violation of some local laws and regulations. Beyond technicalities and some outdated commercial regulations, the plain truth, however, is that the establishment has been reacting to what it (correctly) perceives to be a major threat to the customary way of doing business.

Both cases, Uber and Tesla, are very similar manifestations of a common root: focalized resistance to change for the better. In all these type of cases, relatively minor interests are -albeit temporarily- placed ahead of the interests of society as a whole.

Labor unions are a perfect example of the challenges and astounding opportunities technology is presenting mankind. The labor unions came to existence in a very different world to our present realities. In those days -also roughly over a century ago- communications were not instantaneous nor almost cost-free, as nowadays. In addition, transportation costs were substantially higher at that time. In short, strict and rigid laws and regulations were required to avoid excesses and exploitation from employers. In that socioeconomic environment labor unions made a lot of sense.

At present, and already for several decades and counting, the socioeconomic environment

has been increasingly flexible and favorable to the workers aspirations, working conditions and remuneration structures, not to mention mostly well thought labor laws.

Thus, in today's world, from the workers' standpoint, most of the time labor unions are an anachronism, often at the losing end of things, instead of a social and legal structure that adds value.

That's the major reason behind the evident decline in significance and power labor unions have been increasingly experiencing during recent decades.

A great deal of the persistent stagnation and high unemployment the EU has been going through after the Euro crisis has to do with the marked rigidities in the labor front; an inflexibility championed by most -if not all- labor unions in the European continent.

Hence, the cost of maintaining the status quo in the labor front is costing the EU high levels of unemployment and a very painful economic stagnation.

The quicker we collectively advance in adjusting our typical labor mindset, including a flexible and open mind to new technologies and ways of doing business, the better.

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Uber, The Old Taxi System, and The New Business World

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In recent months there has been an increasing hostility in many cities and countries around the world against Uber, the ridesharing app group, the Silicon Valley offspring that is revolutionizing for-hire private transportation's way of doing business. The traditional taxi system around the world hasn't had any significant improvements for decades, since its inception, almost a century ago.

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Poor treatment of workers in Chinese factories which make Apple products has been discovered by an undercover BBC Panorama investigation.

Filming on an iPhone 6 production line showed Apple's promises to protect workers were routinely broken.

It found standards on workers' hours, ID cards, dormitories, work meetings and juvenile workers were being breached at the Pegatron factories.

Apple said it strongly disagreed with the programme's conclusions.

Exhausted workers were filmed falling asleep on their 12-hour shifts at the Pegatron factories on the outskirts of Shanghai.

One undercover reporter, working in a factory making parts for Apple computers, had to work 18 days in a row despite repeated requests for a day off.

Another reporter, whose longest shift was 16 hours, said: "Every time I got back to the dormitories, I wouldn't want to move.

"Even if I was hungry I wouldn't want to get up to eat. I just wanted to lie down and rest. I was unable to sleep at night because of the stress."

'Continuous improvement'

Apple declined to be interviewed for the programme, but said in a statement: "We are aware of no other company doing as much as Apple to ensure fair and safe working conditions.

"We work with suppliers to address shortfalls, and we see continuous and significant improvement, but we know our work is never done."

Apple said it was a very common practice for workers to nap during breaks, but it would investigate any evidence they were falling asleep while working.

It said it monitored the working hours of more than a million workers and that staff at Pegatron were averaging 55 hours a week.

Find out more

Watch Panorama: Apple's Broken Promises on BBC One on 18 December at 21:00 GMT or later on the BBC iPlayer.
BBC iPlayer
The poor conditions in Chinese factories were highlighted in 2010 when 14 workers killed themselves at Apple's biggest supplier, Foxconn.

Following the suicides, Apple published a set of standards spelling out how factory workers should be treated. It also moved some of its production work to Pegatron's factories on the outskirts of Shanghai.

But Panorama's undercover reporters found that these standards were routinely breached on the factory floor.

Overtime is supposed to be voluntary, but none of the reporters were offered any choice. In addition to the excessive hours, one reporter had to attend unpaid meetings before and after work. Another reporter was housed in a dormitory where 12 workers shared a cramped room.

Apple says the dormitory overcrowding has now been resolved and that it requires suppliers to retroactively pay workers if it finds they haven't been paid for work meetings.

Pegatron said it was carefully investigating Panorama's claims and would take all necessary action if any deficiencies were found at their facilities.

"Worker safety and well-being are our top priorities. We set very high standards, conduct rigorous training for managers and workers, and have external auditors regularly visiting our facilities to find areas for improvement," a statement said.

Dangerous conditions

Panorama also travelled further down Apple's supply chain to the Indonesian island of Bangka.

Apple says it is dedicated to the ethical sourcing of minerals, but the programme found evidence that tin from illegal mines could be entering its supply chain.

It found children digging tin ore out by hand in extremely dangerous conditions - miners can be buried alive when the walls of sand or mud collapse.

Twelve-year-old Rianto was working with his dad at the bottom of a 70-foot cliff of sand. He said: "I worry about landslides. The earth slipping from up there to the bottom. It could happen."

Panorama tracked down a gang who collect tin from the area where Rianto was working. One of them said they sold tin to a smelter on Apple's list of suppliers.

Johan Murod, who runs one of the smelters on Apple's list, said 70% of the tin that is exported comes from the small-scale mines.

"At the smelter there's everything from both large and small scale mines. It's all mixed. There's no way to know what is legal and what is illegal."

Apple says it is a complex situation on Bangka with tens of thousands of miners selling tin through many middle men.

"The simplest course of action would be for Apple to unilaterally refuse any tin from Indonesian mines. That would be easy for us to do and would certainly shield us from criticism.

"But that would also be the lazy and cowardly path, since it would do nothing to improve the situation. We have chosen to stay engaged and attempt to drive changes on the ground."

Watch Panorama: Apple's Broken Promises on BBC One on 18 December at 21:00 GMT or watch later on BBC iPlayer.

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Poor treatment of workers in Chinese factories which make Apple products has been discovered by an undercover BBC Panorama investigation. Filming on an iPhone 6 production line showed Apple's promises to protect workers were routinely broken. It found standards on workers' hours, ID cards, dormitories, work meetings and juvenile workers were being breached at the Pegatron factories.

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Bangladesh factory collapse toll passes 1,000

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The death toll from Bangladesh’s worst industrial accident passes 1,000, as recovery teams continue to find more bodies in the wreckage.

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There will not be great anxiety in the EU if Theresa May suggests the UK uses tax to "regain competitiveness" in the context of Brexit (Tax haven threat starts week of talking tough, 16 January). The UK is already a tax haven, and oversees large quantities of tax dodging. Of the 15 worst tax havens identified by Oxfam's recent report, Britain is responsible for four, including the top two of Bermuda and the Caymans.

We also need to know if what the chancellor said to Welt am Sonntag on becoming "something different" repudiates last September's legislation. By this the Treasury can require transnational companies to publish the OECD's country-by-country reporting data, showing if there is disjunction between the sites of their economic activity, and where their taxable profits are declared.

Such data can hold transnationals to account on profit-shifting and tax avoidance. The previous chancellor argued that EU partners should act multilaterally to require its publication. It will be extremely unfortunate if, with decreasing EU co-operation, the government fails to implement this legislation to require such publication in company accounts, limiting the temptation to cheat to hide profits. Tax is a moral as well as a legal issue.
Rev David Haslam
Methodist Tax Justice Network

* If the UK was to pursue a tax haven strategy it could spark a new global race to the bottom on corporate taxation, helping no-one except the tax avoiders. The UK corporate rate is already falling quickly. It stood at 28% in 2009 and is set to fall to 17% by 2020, mirroring and exacerbating a global trend. Poorer countries stand to lose the most from this vicious cycle as they are twice as reliant on corporate tax revenues to pay for key public services. Interestingly, companies are not pushing for a tax cut, with a recent PWC survey showing 71% of UK businesses oppose a cut to corporation tax because it risks damaging public trust in business. The corrosive role of tax havens in facilitating tax avoidance is not something to be emulated. As the UK plans for a future outside the EU, the prime minister should stake out a global leadership role on tackling tax avoidance and clamping down on tax havens.
Charlie Matthews
Head of Advocacy, ActionAid UK

* Theresa May's negotiating stance, with its no-so-veiled threat to turn Britain into an offshore, low regulation tax haven, resembles nothing more than the person holding a gun to their head, shouting: "If I don't get my way I'll pull the trigger!"
Dr Richard Carter
London

* Philip Hammond has suggested that the UK could transform its economic model into that of a corporate tax haven if the EU fails to provide it with an agreement on market access. This echoes the prime minister's pledge to give the UK "the lowest corporation tax of the world's top 20 economies" .

Tax policy and national corporate tax rates in the EU are set by national governments, and is beyond the scope of the EU. During the negotiations with the troika of the European Union, the European Central Bank and the IMF in advance of Ireland's financial bailout in 2010, the Irish government resisted any demands to change Irish corporate tax policy in exchange for financial assistance, given that corporate tax policy remains an entirely domestic competence.

Currently in the EU, the effective corporate tax rate in the likes of Bulgaria, Cyprus, Estonia, Lithuania, Latvia, Ireland, Hungary, Malta and Romania are lower than the UK's rate of 19% (which is set to be lowered to 18% in 2020). Any member state is free to unilaterally change their corporate tax policy at any time. Equally, the UK government can change its corporate tax policy as and when it wishes, regardless of the status of article 50, and regardless of the UK's membership of the EU or of the single market.

This position only further exposes the lack of any meaningful Brexit plan on behalf of the UK government. In order to be taken seriously by the EU in the upcoming negotiations, the government ought to focus on matters which actually pertain to EU membership. To do otherwise is to mislead the public and to waste time, and the government needs to be held to account when they do so.
Barry Colfer
Cambridge
Topics

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A race to the bottom on corporate taxation | Letters

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There will not be great anxiety in the EU if Theresa May suggests the UK uses tax to "regain competitiveness" in the context of Brexit (Tax haven threat starts week of talking tough, 16 January). The UK is already a tax haven, and oversees large quantities of tax dodging.

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The European Commission has stepped up efforts to tackle tax avoidance.

It has published measures to "hamper aggressive tax planning".

One proposal is for tax authorities to share information on multinationals among themselves, as agreed in the OECD deal signed by 31 nations on Wednesday.

However, the UK Chancellor George Osborne said he wanted to "see that information made public," in line with the Conservative Party's manifesto.

The Commission said it was currently looking at the issue of public country-by-country reporting and will publish its findings the spring.

Billions of euros are currently lost to tax avoidance every year, according to the Commission.

The proposals come amid criticism of Google's £130m deal with UK tax authorities to settle a back tax bill.

On Wednesday, 31 OECD members signed an agreement reached last October laying out new rules to stop companies using complex tax arrangements to avoid paying corporation tax.

The idea is to make it harder for firms to hide money in tax havens or play one country's tax authority against another.

And the European Commission says its anti tax avoidance package also calls on EU members to take a "stronger and more coordinated stance against companies that seek to avoid paying their fair share of tax".

Key measures

The key points laid out in today's Commission statement include:

measures to block the most common tax avoidance methods

a recommendation to member states on how to prevent tax treaty abuse

a proposal for member states to share tax-related information on multinationals in the EU

a new process for listing third countries that refuse to play fair

The Commissioner for economic and financial affairs, taxation and custom Pierre Moscovici said billions of tax euros were lost to tax avoidance every year: "Money that could be used for public services like schools and hospitals or to boost jobs and growth.

"Europeans and businesses that play fair end up paying higher taxes as a result. This is unacceptable and we are acting to tackle it".

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The European Commission has stepped up efforts to tackle tax avoidance. It has published measures to "hamper aggressive tax planning". One proposal is for tax authorities to share information on multinationals among themselves, as agreed in the OECD deal signed by 31 nations on Wednesday.

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Global firms such as Starbucks, Google and Amazon have come under fire for avoiding paying tax on their British sales. There seems to be a growing culture of naming and shaming companies. But what impact does it have?

Companies have long had complicated tax structures, but a recent spate of stories has highlighted a number of tax-avoiding firms that are not seen to be playing their part.

Starbucks, for example, had sales of £400m in the UK last year, but paid no corporation tax. It transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business.

Amazon, which had sales in the UK of £3.35bn in 2011, only reported a "tax expense" of £1.8m.

And Google's UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m.

The art of paying less tax

Multinationals such as Google, Amazon and Starbucks have been criticised by the Public Accounts Committee over tax avoidance

Stung, Starbucks plans to change its arrangements and pay UK corporation tax

Global firms' tax pay 'an insult'
Everything these companies are doing is legal. It's avoidance and not evasion.

But the tide of public opinion is visibly turning. Even 10 years ago news of a company minimising its corporation tax would have been more likely to be inside the business pages than on the front page.

What changed? And is "shaming" of companies justifiable and effective?

Momentum has been growing for the last few years.

In September 2009, the Observer ran with the headline: "Avoiding tax robs our public services, declares minister". The paper reported that the government was planning to say tax is a "moral issue" and that it was "determined to end avoidance and evasion."

October 2010 - and the Vodafone case - saw the Daily Mail report: "Vodafone closes Oxford Street store at £6bn tax protest".

A few months later and the focus moved to Sir Philip Green's business empire. "Crisis? What crisis?" reported the Mail, which said the TopShop boss was "enjoying" a Barbados holiday while thousands of campaigners laid siege to his UK stores.

Barclays Bank was the next target - in February 2011 the Daily Express reported on the "raid" by tax protesters, who shouted: "Dave and George do your sums." Later that same month, the Guardian ran with the headline "UK Uncut: 'People are starting to listen to us'".

Withdrawal of custom

Another impact of tax shaming is that some people, such as 45-year-old self-employed businessman Mike Buckhurst, from Manchester, boycott brands.

"I've uninstalled Google Chrome and changed my search engine on all my home computers. If I want a coffee I am now going to go to Costa, despite Starbucks being nearer to me, and even though I buy a lot of things online, I am not using Amazon.

"I'm sick of the 'change the law' comments, I can vote with my feet. I feel very passionate about this because at one point in my life I was a top rate tax payer and I paid my tax in full," he says.

To some extent, the shift is down to the recession, according to Dr Stuart Roper, a corporate reputation expert at Manchester Business School.

"We are in an age of deep public spending cuts and real austerity. And this [tax avoidance] is not a victimless crime, if you like. If this was six or seven years ago, pre-financial crisis, I don't think it would have had the same impact it's had now," he says.

War on Want's tax justice campaigner Murray Worthy says there has also been a change in public perception.

"As the public have got to understand better what corporate tax avoidance is, there is a clear sense of outrage that is going well beyond a small group of protesters - it's something that the public feels is really not right with the current system," he says.

Discussions of the ethics of tax avoidance are now everywhere. But a few years back, it was a hardcore gaggle of activists and campaign groups like UK Uncut that were staging sit-down protests in stores such as the Arcadia Group, Boots, Vodafone and Fortnum and Mason.

Journalists and newspapers are also doing their own investigations, argues Worthy, with the appearance of Google, Starbucks and Amazon before the Public Accounts Committee a result of stories by the Daily Telegraph, Reuters and the Guardian respectively.

In a report published on Monday, the committee's chairwoman Margaret Hodge said the level of tax taken from some multinational firms was "outrageous" and that HM Revenue and Customs needed to be "more aggressive and assertive in confronting corporate tax avoidance".

MPs also called for those who do not pay their "fair" share to be named by the government, but Prime Minister David Cameron and Chief Secretary to the Treasury Danny Alexander ruled it out, saying it would breach taxpayer confidentiality.

But just how effective is tax shaming anyway?

The idea that Starbucks would voluntarily pay more tax than it legally needs to seems extraordinary on the surface, and an argument for the effectiveness of tax shaming.

"Up until yesterday, I wouldn't have thought these stories had much effect. I thought companies would carry on doing what they were doing, but look over their shoulder, in terms of their reputation," says Michael Devereux, a tax expert at Said Business School, University of Oxford.

Corporate tax avoidance

Locating factories, service and distribution hubs and regional HQs in low-tax jurisdictions

Starbucks, for example, sources its UK coffee from a wholesale trading subsidiary in Switzerland

And Google operates in Bermuda and Ireland

Transfer pricing is when a division of a multinational in one country charges a division in another country for a product or a service

This means artificially high charges can be levied internally, to siphon money from a high-tax country to a low-tax one

Corporation tax: Easy to avoid? How do companies avoid their tax?
"Starbucks appears to be saying they don't think they owe any more money, but will pay anyway. If that's true, it's having a reputational effect - but it's a bit odd in terms of the tax system, we wouldn't want the tax system to be voluntary," he says.

Branding experts agree the reputational side of things is key, as it is hard to measure the direct impact of tax shaming on sales and profit.

Dr Sue Bridgewater, a marketing expert at Warwick Business School, says if a company with a strong brand damages that, it also damages its financial "value".

"Customers have very long memories and their emotional tie to a brand is a very important part of the loyalty," she says.

But Roper says even reputational damage is difficult to ascertain and can quickly dissipate.

Another impact of tax shaming is that individuals can boycott brands, but Roper says the number of people who take direct action is "relatively low".

What is more dangerous for companies is social media, he says - citing #boycottstarbucks, which was formed in the wake of the Starbucks story - because "a small number of people [can] activate and ferment dissent among another group".

But is tax shaming justifiable?

Amazon, Starbucks and Google are by no means unique in minimising their UK tax liability. And individuals often try to lower their own tax bill by exploiting rules in inheritance tax, or gifting to charity.

Is it remotely plausible that Google, Amazon and Starbucks would suddenly emigrate and stop trying to sell as much as possible to British consumers?

Is government too scared of multinationals?
Bridgewater says large multinational corporations have been using various methods of being "tax efficient" for decades, and it is "probably sound business practice".

"The issue arises when we feel that a company has crossed a line and what it does to be tax efficient is morally, if not legally, inappropriate," she says.

For a lot of companies, it is about fairness, according to Simon Walker, director general of the Institute of Directors.

"It is very frustrating for many companies who pay large tax bills that some multinationals are able to avoid doing so.

"The solution must be simplifying the tax system, not simply hectoring from Westminster. If these firms are immoral to take advantage of tax loopholes, then politicians are surely immoral for creating the loopholes in the first place. Taxes should be simpler to cut down on avoidance and relieve the burden our complex tax code puts on companies who do try to do the right thing," he says.

The director-general of the CBI, John Cridland, agrees the crux of the debate comes down to fairness.

"A company may be making good revenues but pay lower amounts of tax for completely legitimate business reasons. But if it's doing this by using so-called 'black-box' arrangements, where transactions are designed for no commercial purpose at all, other than to avoid tax, then the CBI does not condone it, even if it is legal," he says.

He says if the government wants a different result from the tax system, it must change the rules.

The pressure to do so has rarely been greater.
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Global firms such as Starbucks, Google and Amazon have come under fire for avoiding paying tax on their British sales. There seems to be a growing culture of naming and shaming companies. But what impact does it have?

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