Three Steps to Better Prepare Your Teams for Disruptive Events

Contingency Planning Process ImageEmerging market executives can’t predict the future, but they can plan for disruptive events.  For executives, what if you had already built a contingency plan for the US housing bust in 2007? What if your strategic planning team had a framework that suggested the emerging-markets financial crisis of 1997 was imminent – in 1996?  2015 could be a year to remember for similar reasons, in that the business environment documented in strategic planning assumptions is not the one we will likely be living in by year’s end.  2014 has already been characterized by change at a breakneck pace; from upheaval in Crimea and political instability in Gaza to elections in India and Indonesia…imagine all the events that could impact business next year.

Emerging markets continue to underperform, exposing political volatility in countries like Brazil and Russia, and financial vulnerability in countries like China.  Mature economies such as Germany and Japan are muddling through at best. Too many regional and country leaders at multinational companies are hoping to do the same, enshrining optimistic expectations about their markets’ growth and stability into their 2015 plans.

As volatility in emerging markets becomes the “new normal,” surviving and thriving amid uncertainty requires a more proactive approach.  Leading multinationals are increasingly looking to incorporate scenario and contingency planning into their strategic planning process in an effort to better prepare their teams.  As many multinational company leaders are wrapping up their strategic planning process, now is the time to implement this process.

To anticipate and plan for the events that could impact business, business leaders should undertake the following three-step exercise:

  1. Identify – Disruptive event assessment
  2. Prioritize – Risk prioritization
  3. Plan – Contingency plan building

The imperative for contingency planning is only growing stronger as global risk increases.  FSG clients not only receive detailed recommendations on how to respond to a specific disruptive event by using our contingency planning framework, but also customized support on all three steps of the process.  This methodology of prioritizing events based on their likelihood, velocity, and impact allows scarce resources to be deployed most effectively, and can lead to breakout overperformance while competitors flounder.

To access the full report on the Global Contingency Planning Process, FSG clients can visit the client portal. Not a client? Contact us to learn how we can be a part of your strategic planning.

E-commerce Strategy Vital for B2C Companies in China by 2020

Over the last two weeks, I have been bombarded with e-commerce news from China. Amazon set up shop in China’s Shanghai free trade zone to give Chinese customers access to its products from its global supply chain and to help SMEs in China to export their products to customers in other countries.  Amazon’s biggest competitor, Alibaba, has unveiled plans for an initial public offering that values the company at $US 155 billion, one of the largest listed in the US and one of the biggest stock market debuts ever. Chinese real estate conglomerate Dalian Wanda formed an alliance with two Internet giants, Baidu and Tencent, aiming to become the largest O2O (online-to-offline) e-commerce platform in China.

Each of these movements reflects the increasingly fierce competition in China’s e-commerce market. As many multinationals initiate their 2015 planning, I believe all of them need to think deeper about their e-commerce strategy for China.

China’s e-commerce market is now bigger than America’s

China already has the world’s largest Internet user population, representing 22% of the world’s total in 2014. It has also overtaken the US as the biggest e-commerce market in the world and is set to be worth US$ 541 billion by 2015. These facts make China an ideal location for expansion, as 49% of its population made an online purchase last year. This figure is set to rise to an unprecedented 71% by 2017, so expanding into this profitable international market is becoming more and more inviting for online businesses.

Making the e-commerce decision a part of your “go deep” or “go wide” decision

This decision will be integral to your China 2020 “go wide” or “go deep” strategy, and it can’t be ignored because local companies are already making deep inroads and leveraging the current prevailing online platforms. See the chart below to get a sense of how important online sales are going to be in future. Something else worth mentioning is that online research will have a tangible impact on offline sales, as well.

China E-Commerce 1

Companies that delay the development of their online channels now will forego a significant portion of this enormous market. In the future, they will have to scramble to take market share away from their faster-moving peers.

Bypass the retail bottlenecks in China

The Internet’s extraordinary reach in China offers companies a way to bypass the fragmented retail bottlenecks and expand their customer base in lower-tier cities. Companies that aim to capitalize on the growing consumer base in China’s lower-tier cities must develop an effective e-commerce strategy; those that depend solely on brick-and-mortar retailers for their expansion will be left behind. See the chart below to understand how wallet share increases from tier 2 to tier 3 and 4 cities.

China E-Commerce 2My recommendations to all B2C companies are as follows:

  • Build a strong fan base by leveraging social media platforms and engaging with opinion leaders
  • Leverage multiple websites to capture browsing shoppers, i.e., open more than one Internet channel to capitalize on Chinese consumers’ online shopping habits. However, make sure that you are cognizant of the effect your online channel is having on your current distribution partners
  • Choose e-tailing partners beyond Tmall to target the right customer by adopting a hybrid model with complementary approaches may be worth exploring too

FSG clients can access the full report on China’s E-Commerce Market on the  client portalNot a client? Click here for more information about our China research.


From the MNC Conference Room to the Classroom – and Back Again


FSG has just published a report, Resilient Targets, Aligned Budgets, expanding on our resources supporting our clients on the strategic planning process.  This new report (which I will cover in more depth in a separate post next week) includes contributions from not only FSG researchers from around the world, but also a group of nine international relations graduate students from Johns Hopkins SAIS.   We have had great participation in this FSG-taught practicum course.

First, the practicum students were given background instruction on corporate strategy and the particular challenges of engaging in strategy from the position most of our clients hold: a regional general manager at a large MNC charged with high performance expectations in emerging markets, but with far fewer resources at their disposal – and less predictable markets – than are usually enjoyed by strategists in the corporate center.

Next we taught FSG’s management best practices research methodology:

  1. Determining the true nature of the challenges our clients are facing and their root causes
  2. Establishing a contextual understanding of how companies generally try to address the challenge and why that common approach is falling short
  3. Searching for better practices through an interview-based research process that sorts practices companies are actually using into three types: average, resource-intensive, and elegant.

The practicum participants were Rebecca Freeman, Robyn Garfield, Nicholas Luter, Mike Nguyen, Ian Renner, Devon Swezey, Emily Tang, Sam “Ben” Walker, and Jing Jing Zhou.  They were taught by myself, and FSG research leaders Chris Moore, Ryan Brier, and Lauren Goodwin.

For their projects, the students applied the methodology above in teams of three to tackle three recurring client challenges: how to efficiently and effectively set targets, how to secure resources for the “big bets” necessary to contend with increasingly fierce local competition, and how to navigate conflicting signals when adjusting a plan mid-year.  To help answer these questions, several FSG clients generously offered their time in interviews to the students, and one FSG client served as a mentor to each team (special thanks to Jay Cummins at Nomacorc, Mark Van Genderen at Harley Davidson, and Tomas Hakala at Wartsila).  The practicum culminated with lessons in the form of case studies, presented by the student teams to a panel of judges, including their mentors.

This is the second year that FSG has partnered with Johns Hopkins School of Advanced International Studies (SAIS) to offer a graduate-level practicum, Management Challenges in Emerging Markets.  To read our inaugural press release, click here.  The practicum would not have been possible without support from Roger Leeds, SAIS professor of International Economics and Director of the Center for International Business and Public Policy.  The course has offered SAIS students great exposure to the real-world management challenges faced by senior executives in emerging markets.  Furthermore, it has allowed FSG clients to contribute to the students’ learning experience, and it has allowed the students to contribute in return to capturing case studies of interest to MNC executives.

To read the full report, FSG clients can visit the client portal. Not a client? Contact us to learn more about our network of experts and events.

The Ebola Scare – What Businesses Need to Know

Ebola has been dominating media coverage of Sub-Saharan Africa ever since a man stricken with the disease landed in Lagos in July. Despite the scary headlines, businesses must differentiate fact from fear in order to assess the virus’ potential impact on their West African operations. Here is what companies need to know:

Which countries are most affected by the disease?

Ebola particularly has affected small markets within West Africa. These include Guinea, Liberia, and Sierra Leone –poor economies whose governments have not been able to deal with the outbreak effectively. As of late August, about 2,000 deaths were reported in the three countries, and the WHO expects many more people to be infected with the virus.

To date, Senegal reported one death, and Nigeria reported seven deaths. Lagos State so far has proven to be quick and effective in its measures to contain the spread of the disease. In fact, various infected patients were released successfully after treatment. However, after Ebola has spread to River State in Nigeria and it remains to be seen how effective that state government will be in containing the outbreak.


  • Above: A map published in the BBC highlights affected areas. Most multinationals operating in the region are present in the three largest economies: Nigeria, Ghana, and Côte d’Ivoire. All countries are on high alert, but are not facing the epidemic to the same degree.

    What are the economic repercussions?

    On Sierra Leone, Liberia and Guinea: The African Development Bank expects a 4% reduction in Sierra Leone’s GDP, the economy is currently growing at 14% The Liberian government estimates it will lose up to US$30 million to fighting the disease. The worst-hit sectors in all three countries are agriculture, services, and mining.

    In Nigeria, the panic over the Ebola outbreak is estimated to cost the country US$2 billion in Q3. Aviation, hospitality, and tourism, and trade will be most impacted. Restaurant visits in Lagos are likely to decline by 50% this quarter as people avoid crowded places. If the crisis extends into Q4, the economic loss could reach US$3.5 billion.

    The government closed Côte d’Ivoire’s borders with Liberia and Guinea. The western part of the country is one of the most fertile regions for cocoa, Côte d’Ivoire’s primary export. Border closures restrict the movement of international cocoa exporters and statisticians who calculate output forecasts for the upcoming October harvest. As a result, traders and exporters will not have accurate forecasts to predict the current cocoa crop, which could adversely impact exports and weigh on Côte d’Ivoire’s GDP growth.

    In Ghana, the impact of the disease is less direct but still felt by businesses. As the local representative of an international organization put it:

    “A lot of businesses and embassies in Accra are devoting a LOT more time to Ebola. ‘Freaking out’ would be a good way to put it. While they are not changing strategies, they are definitely losing productivity as they’re putting all kinds of people just on monitoring what’s going on in neighboring countries, having daily briefings on Ebola news, etc. As an example of what I’m talking about, a friend at a Western European embassy in Accra whose portfolio is legal and justice advisory was spending 12 hours a day just sending reports back to his home capital on Ebola news.”

    What does this mean for businesses?

    Multinationals should expect commercial activity to be marginally subdued this quarter and next as business and consumer demand slows because of the restricted movement of goods and people.

    However, as in all crises, some sectors of the economy also benefit. On the one hand, governments across West Africa are spending a larger than planned part of their 2014/2015 budgets on healthcare, and on reactive and preventive measures to contain the disease.  Companies selling materials used for the screening and treatment of the disease will see a spike in sales. Companies selling products widely perceived to protect from potential infection, such as hand sanitizers and antibacterial soap, will also benefit.

    The sectors directly related to the fight against Ebola are not the only ones that will benefit from the crisis. E-commerce, already increasing in popularity in the last three years in Nigeria, has received a real boost as people avoid public places.

    What should I expect?

    It is very difficult to predict if the disease will spread further and companies need to monitor the situation closely.

    However, FSG believes that a further spread is unlikely as governments have implemented tough measures to try and contain the disease. We expect the health crisis to begin to subside towards the end of the year as these measures take effect. The economic repercussion nonetheless will be felt in 2015, particularly in Sierra Leone, Guinea, and Liberia.

    Should the crisis worsen, governments are likely to pass tougher measures that will hamper logistics and productivity further.

    What should businesses do next?

    • Outline a contingency plan: A contingency plan allows companies operating in the area to manage risks and seize opportunities as they materialize. A contingency plan helps, for example, to define alternative work locations for employees, outline strategies to deal with transport disruptions, and position marketing strategies to respond to the changing environment. For example, businesses can adapt packaging for consumption at home rather than in public places
    • Educate staff, both local and international: Given that this is a health crisis, MNCs need to articulate time and over again the need for washing hands and being vigilant health-wise to their local partners. Local staff should implement simple measures to protect themselves, while international staff should be educated about the disease and the relative difficulty of infection. It is important that employees travelling to the region are not stigmatized within the company, as this will lower productivity and decrease employees’ willingness to work in the region, thus impacting long-term plans for West Africa
    • Don’t generalize: Companies should monitor the situation closely on the WHO website, differentiate clearly the risks by country, region, and city, and reduce travel to affected areas. For example, while it is unwise to travel to quarantined areas in Sierra Leone at the moment, visiting Ghana and large parts of Nigeria is very low risk
    • Adopt a wait-and-see approach, but don’t change your plans: Most multinationals operating in the region have adopted a wait-and-see mode until the crisis subsides, but are not changing their investment strategies as the opportunity in the region’s larger economies is too big to ignore. In fact, companies should take advantage of the current uncertainty to position their business for growth once normality returns to the markets
    • Highlight your commitment to countries, despite the crisis. Healthcare companies can take the current outbreak as an opportunity to gain customer loyalty and market share by providing help and support where it is most needed
    • Prepare for trends that are here to last. The popularity of E-commerce has been enhanced by Ebola and is here to stay. Plan your e-commerce strategy for Nigeria now

For our latest research on Africa and the EMEA region, FSG clients can visit the client portal. Not a client? Contact us to learn how we can support your business planning in emerging markets.

Marina Silva Is Shaking up Brazil’s Presidential Race

The tragic death of PSB presidential candidate Eduardo Campos in August and the subsequent nomination of Marina Silva as his replacement have dramatically changed the landscape of Brazil’s presidential race. A runoff is now the most likely scenario, and all recent polls predict a victory for Silva over President Dilma Rousseff in the second round.


Why has Silva risen so fast in the polls?

There are several reasons that explain Silva’s meteoric rise:

  1. Silva’s popularity: Marina Silva obtained 20 million votes in the 2010 elections, and despite having a great disadvantage in terms of her TV airtime for political advertisements (see graph below), she has been able to capture most of the votes from undecided voters following her nomination as the PSB’s candidate.


  1. PSB’s “third-way” alternative: Silva has been able to garner support from both sides of the political spectrum thanks to her commitments to deepening social spending and orthodox macroeconomic management, as well as her promise of a more business-friendly administration. As a matter of fact, Silva’s main economic advisor, Eduardo Giannetti da Fonseca, is a recognized champion of Brazil’s macroeconomic tripod, established during the Fernando Henrique Cardoso era, and someone often associated with the PSDB. 
  1. Brazilian society’s willingness for change: Around 79% of Brazilians say they want change, not continuity, which favors Silva’s “third way” political message. Indeed, some voices within the PSDB, the only other party that could pose a threat to Rousseff in the elections, have already confirmed, although not officially, that their party would shift support to Silva in a second round in order to oust Rousseff from power.

What would a victory of Marina Silva mean for multinationals?

Most of Silva’s electoral promises are encouraging from an economic growth and business enabling standpoint. Measures such as restoring Brazil’s fiscal responsibility, inflation targeting and a truly floating exchange rate, would reduce inflation and allow for a gradual depreciation of an overvalued real, helping Brazil’s manufacturing and export sectors, and favoring domestic consumption.

More predictable and consistent policies, especially in the management of administered prices such as gasoline and electricity, and the tax code, would certainly stimulate domestic and foreign direct investment. This would especially be the case were the government to establish a clear roadmap for the passage of key reforms, similar to what Mexico has done under Peña Nieto.

Finally, Silva would maintain PT’s flagship social spending policies while doubling down on education and healthcare spending, which would bode well for the consolidation of the middle class and future productivity gains.

Would Silva be able to execute on her promises?

While Silva’s policy aims are certainly appealing, most of the promises outlined above could very well end up becoming nothing more than a wish list is Silva is not able to form a coalition big enough to pass reforms in congress. As her coalition currently stands, Silva would only control around 80-120 votes in the 513-seat lower house. Silva has declared that she is prepared to partner with the “brightest” from all political parties and pass individual reforms through one-off agreements. However, given the tremendous number of political parties in Brazil, and its system of ingrained habits of patronage, her good intentions could become futile.

Additionally, some commentators see contradictions in her electoral promises, especially when it comes to doubling down on education and healthcare spending while at the same time reducing overall government spending. Silva maintains that she will be able to achieve these competing ends by making the government more efficient, but again, such efforts could also hit the given that around 49% of overall public spending is in hands of states and municipalities that she would not necessarily control.

Therefore, should Marina Silva win in October, she would have to lay out a very clear plan that explains how exactly she aims to fulfill all of her electoral promises. Otherwise, her government’s popularity could be short-lived.

If you wish to learn more about how this trend could affect businesses in Brazil, consider reading our full Q3 quarterly report, coming soon to the client portal. Not a client? Contact us for more information

What Makes Managing Talent a Challenge in ASEAN?

This is part two of a three-part series on Talent Management in ASEAN. View part one here.

ASEAN’s Market is Characterized by Scarcity  

ASEAN’s talent market exhibits the classic signs of an emerging market suffering from an increasing demand for talent and lack of supply.  Various studies have come to the same conclusion—the talent landscape across ASEAN can be characterized by overall scarcity; as reported by 70% of the respondents in a Deloitte survey. The region’s talent shortage is creating a vicious cycle that is likely to exist for the short-to-medium run. The lack of a steady talent supply and increasing demand are leading to competition for the same resources, which in turn results in challenges in attracting and retaining the right employees.

Development will be a Top Internal Priority for MNCs 

The distinctive characteristics of the ASEAN region have created unique management challenges that could only exist in very few parts of the world. It is growing at a pace that is much faster than that at which talent can be developed, its complexity (managing 10 countries) requires experienced professionals that don’t exist in the market, and its composition of as many cultures and languages as an entire continent erects further cultural complications. The focus for most MNCs (as shown in the table below) is going to be on developing the next generation of executives who can take up regional (not just national) leadership positions and will strategically execute plans set out by corporate teams.


ASEAN Talent Management Puzzle – Key Challenges MNCs Are Likely To Face

  • Regional Talent – ASEAN’s significant diversity causes regional leadership positions to be much more complex to handle. Moreover, given low mobility in the region, many executives only have strong market knowledge of their home country and have limited regional knowledge.
  • Attraction- Given the shortage of high-quality talent, expectations are growing from quality candidates for not only competitive compensation packages but also working conditions and benefits that not all MNCs are ready to provide.
  • Retention- Most organizations in ASEAN experience high levels of turnover predominantly at junior and operational levels. At these levels, salaries are comparatively lower, and extrinsic factors play an important role.
  • Regional Competition – ASEAN-based companies have been growing quickly; they did not go through any major job cuts during the last financial crisis, they are able to offer several mobility opportunities, and the size of the responsibility/portfolio is often comparable to what is offered by developed-country firms.

ASEANS_talent_management_puzzleWarning: Don’t Fall Into the ‘Buying’ Trap

Why make investments in talent and leadership if competitors can poach the best employees? Poaching rather than developing talent is ultimately a shortsighted strategy; it sends an unhealthy signal to employees that they need to change jobs in order to advance their careers. Companies that employ such a strategy will eventually lose their competitive edge, but local companies may want to follow it

In FSG’s latest work on the subject, titled Effectively Managing Talent in Southeast Asia, we highlight 10 issues that MNCs will likely face in ASEAN and 10 tactics that can used by MNCs to address those challenges.

FSG clients can access the full report here. Not a client? Contact us for more information.

Commercial Strategy Remains Top Priority for Brazil Execs

Frontier Strategy Group recently held an executive breakfast event in São Paulo, Brazil which gathered over twenty senior-level leaders of Latin America businesses, representing many US and European-based multinationals.  The event provided an opportunity for our executive clients to gain a deeper understanding of how Brazil is likely to perform over the coming quarters, along with key scenarios for Brazil’s upcoming elections.  Ryan Brier, FSG’s Head of Latin America research and moderator of the event, provided practical advice on how to position Brazil and make the case for investment relative to other emerging markets in LATAM and on a global scale.  Below are several of the key takeaways from the event:

Key Takeaway #1: Realigning Expectations around Targets for Brazil Will be Crucial Moving Forward
  • Confidence around the ability of multinationals to hit their 2014 targets is at a new low. 66% of executives in attendance have low or no confidence in their ability to hit their 2014 top-line targets for Brazil, while 72% of executives in attendance had low or no confidence in their ability to hit bottom-line targets. This is the lowest level of confidence that FSG has seen since it began polling clients around targets in 2011
  • Many executives voiced concern around rising costs in an environment of mediocre top-line growth, with several stating that they were forecasting flat or declining bottom-line growth this year despite an increase in top-line revenues. Rising energy and logistics cots were among the top reasons cited for this trend
  • Despite this poor performance, only 31% of the executives in attendance expected their 2015 targets to be lower than their 2014 targets, underscoring the need to realign corporate expectations around the potential for Brazil over the coming years
Key Takeaway #2: Executives Are Hopeful for Political Change, but Skeptical over Its Potential Impact
  • Executives are increasingly optimistic that Dima faces a serious challenger in Marina Silva, with many citing strong desire for change among the pragmatic voto útil as possibly providing a boost to Silva over Aécio Neves
  • The consensus was that a Silva victory would likely lead to a near-term boost in investment, which could serve to blunt the impact of declining government spending in 2015. However there was also a fair amount of skepticism that Silva would be able to tackle many of the structural reforms that multinationals feel Brazil requires
Key Takeaway #3: Setting the Right Commercial Strategy Remains the Top Priority for Executives
  • 42% of the executives in attendance reported that their top internal challenge over the next 18 months would be to set the right commercial strategy. This was in large part due to the fact that the top external challenge cited by executives was expected weak customer demand
  • For most executives, setting the right customer strategy went beyond rethinking customer segmentation and commercial resource allocation to also include ensuring that the targets they set for their teams were realistic in order to avoid a deterioration of morale among commercial staff

If you are an FSG client and would like more information about future events, please contact your client services director.  Not a client? Click here for more information about our services. 

Preempting & Solving Future M&A/JV Issues in China Now

It is becoming particularly difficult to design partnership models in China, a market that’s rapidly changing and will be dramatically different in two to three years. However, given the size and scale of China, it’s likely that M&A will continue to become a recurring critical issue for MNCs, so it’s worth it to get it right. I recently participated in a teleconference with FSG clients, comprised of general managers and heads of strategy for Asia-Pacific and China. I have included several key takeaways from the conference below.

  1.  Partnerships in China are a “marriage of convenience” and never a “match made in heaven.” In order to succeed with a partner in China you need to have an open mind, a willingness to engage like you have never been engaged before, flexibilities to deal with whatever is thrown at you, and determination to stay the course.
  2. Strategic alignment with local partners is utopian in China. At the simplest level, Chinese companies want know-how while foreign companies want market access. If MNCs are not careful about the potential know-how loss, this marriage will be dissolved in a flash or alternately maintained but milked to your detriment.
  3. Always give yourself options when selecting partners: try to approach partner selection by giving yourself options. At the very least, this helps your negotiation position and also ensures your ultimate selection is more considered.
  4. The transaction process is often unpredictable in China and rarely is completed on-time. That’s why it is sensible to try to run discussion in parallel rather than end to end. Don’t let impatience or frustration lead to unnecessary compromise or poor deals. 
  5. It is critical to manage headquarter expectation: Managing expectation of key stakeholders is critical and this requires clear, consistent, and frequent communication. Despite the limitation of written agreements, one of the best strategies is to commit intentions to writing and get all parties to sign. This tactic can be applied not just externally but also internally with headquarters. MNCs can conduct post-venture reviews of the partnership and evaluate best practices for future acquisitions.

I’ll be participating in more conversations around this topic in the next 2-3 months and look forward to sharing additional highlights.

FSG clients can access all of our China research through the client portal. Not a client? Click here for more information about our China research.

Even Good Monetary Policy Cannot Solve Europe’s Problems

Mario Draghi, European Central Bank President Photograph: Mario Vedder/AP
Mario Draghi, ECB President (Image: Mario Vedder/AP)

After the European Central Bank (ECB) cut interest rates into negative territory in June, we asserted that central banks act when expectations miss to the downside. Once again, today was the rule and not the exception. The ECB cut interest rates further, notably lowering the interest rate on the deposit facility to -0.20%. In addition, it announced purchases of private sector asset-backed securities (ABS) and covered bonds. In the midst of markedly below-target inflation, downward revisions to eurozone real GDP growth, and geopolitical tensions in Ukraine, Europe desperately needs a boost. While these measures will help to hold the euro to a more competitive value, they confirm that the eurozone’s growth will not impress in the next 1-3 years.

Is this quantitative easing (QE)?

Any outright central bank purchase of assets, whether government or private sector, constitutes quantitative easing. However, the size and nature of the monetary policy tools announced today will not make up a similar program to that introduced by the United States Federal Reserve in 2012. While the size of the program remains undetermined, ECB President Mario Draghi stated that the central bank’s intention is to restore its balance sheet back up to 2012 levels. This would suggest a ballpark of € 1 trillion in monetary fusions, about half of which could be ABS and bond purchases. Other estimates suggest a much smaller program of around € 100 billion. Compared to monetary infusions of US$ 13 trillion, this program is much more modest, particularly considering that only a small portion of available ABS is built from loans made to the SMEs that constitute the core of European growth.

Why asset purchases?

The ECB is attacking precisely the right eurozone problem: contracting credit. Outright asset purchases, along with the ECB’s previously announced targeted long-term refinancing operations (TLTROs), are intended to improve the flow of credit from banks to the private sector. This year’s rate cuts are designed to encourage banks’ participation in the TLTRO program right away, as opposed to holding out in hopes of further cuts. Within the eurozone’s still fragmented banking sector, this new channel of funding to the private sector is meant to open a new channel of funding to households and businesses, improving their ability to invest in additional capacity, hire more workers, and boost eurozone growth as a whole.

Will this monetary policy work?

The ECB has gone about as far as it can go within the confines of European monetary policy, and it is too little too late. There is no hope for repeating a US-like quantitative easing program, as political opposition to pan-European sovereign bonds is too high. Draghi’s statements today asserted that there is no scope for further rate cuts. And, where further purchases are concerned, the ECB is limited to the highest quality debt, the European market for which is comparatively small and illiquid.

Therefore, although the ECB has taken the right measures, Draghi’s statements encouraging fiscal activity confirm this point: monetary policy in Europe has reached its limits, and it is too little too late. Japan’s failure to act quickly or sufficiently to ease monetary policy during its 1990s recession is a staunch example of what is to come for the eurozone. Deflation is taking a strong hold in many countries, which will cause companies to struggle improving profitability or investing in additional capacity. Demand for products throughout EMEA will remain muted as a result, failing to compensate for a slowdown in major emerging markets such as China and Brazil. We thus are urging our clients actively to manage expectations for growth, which will not improve notably for the next 1-3 years.

If you wish to read more about the increasing financial risk in the eurozone FSG clients can read our latest report: Eurozone Financial Weakness.  Not a client? Contact us for more information.

If China Slows: Prepare for Disruption in EMEA Business

The dragon’s breath is losing steam – increasing wages, mounting social tensions and unprecedented political transformation are all putting strains on the Chinese economy. GDP growth figures for 2014 have fallen from 7.5% to 7.3%, with downside scenario forecasts for 2015 slipping even closer to 6.5% on an annualized basis. The risk of a sharp, sustained Chinese economic slowdown is thus already high on the agendas of Asia Pacific executives, but Frontier Strategy Group’s latest analysis shows that a China slowdown scenario poses systemic risks globally.


In Europe, the Middle East, and Africa (EMEA) in particular, there are three ways in which a China slowdown will substantially impact regional economic growth:

  • A fading export market: China’s boom has provided a growing, reliable export destination for many European companies, but a slowdown will suppress top-line growth for industrial, technology, and consumer firms alike. The commodity-led economies of the Middle East and Africa could be harder hit. Chinese demand has filled the void left by Europe’s stagnant consumption. Reduced commodity exports would cut governments’ ability to spend, weakening an important growth driver for many of the world’s most dynamic frontier markets.
  • A pullback in foreign direct investment: One-quarter of all FDI into Sub-Saharan Africa since 2006 has come from China. However, recipients of Chinese FDI are less likely to be severely affected, because Chinese companies are more likely to focus on growth internationally if their domestic market weakens.
  • A trigger of financial-market instability: Depending on whether a Chinese slowdown surprises global financial markets, financial volatility would result in a flow of capital back to developed markets, causing significant currency volatility in EMEA and impacting the prices of goods imported from developed markets, hurting consumers across the region.

Taking these impacts into account, we have constructed an index that allows multinationals corporations to gauge how a China slowdown’s impact to EMEA economic performance could in turn impact their corporate portfolio.

In this analysis, countries are ranked based on their relative susceptibility to slowing demand from China as well as the extent to which they could be affected by the repercussions of a Chinese slowdown on the global economy. The results are striking.

  • #1: South Africa’s mining sector, already struggling with strikes and falling demand from the eurozone, will be severely hurt by a slowdown in Chinese demand for its exports
  • #5: Switzerland has a free trade agreement with China that has increased exchange between the two countries. The resulting increased economic relationship helps to diversify Switzerland away from the eurozone’s low growth, but leaves it more susceptible to a softening of Chinese demand
  • #6: 80% of Qatar’s exports are to Asia, much of them liquefied natural gas destined for China. Long-term demand for Qatar’s energy is at risk, with China already diversifying its energy sources by signing a long-term gas supply deal with Russia. However, a Chinese slowdown could accelerate this waning demand for its exports, decreasing government revenue and investment

Some economies would experience mixed results, with big winners as well as losers. For example, Turkey (#40 on our list) has been successful in diversifying its export partnerships away from China. It would still experience a slowdown in demand as a result of a Chinese economic slowdown, but the impacts would be less severe. In fact, producers in Turkey could benefit from less Chinese ability to invest in higher value-added production that might otherwise have presented more rigorous competition

The most successful firms are run by executives who constantly plan for destabilizing scenarios like a China economic slowdown, and develop mitigation plans to protect their businesses when such events unfold. In the China slowdown scenario outlined above (see infographic), executives can proactively identify and benchmark disruptions against their country revenue figures, allowing them in turn to stress-test their market prioritization assumptions and identify key markets for which adjustments in strategic planning may be required. Leaders responsible for global strategy should also reassess their investment priorities to identify countries that have strong growth fundamentals and are most resilient to external shocks.

EMEA’s corporate leaders will be increasingly challenged to craft business plans that protect their performance in a highly interlinked global economy that is susceptible to cross-regional contagion. If China slows abruptly, unprepared corporate executives will lose their footing, even outside the Middle Kingdom. Multinationals should plan for that contingency today.

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If you wish to learn more about how a China slowdown will impact your business you can access our full analysis here.  Not a client? Contact us for more information.