Emerging Markets Insights

Amid many worldwide headlines, our analysts made note of the following articles impacting business in emerging markets:

Outlook for China’s Economy Just Keeps Getting Worse - CNBC

“Macroeconomic outlook in China continues to worsen. Though most economists still predict a gradual slowdown rather than a sudden deceleration, companies need to be prepared for a worse-than-expected 2013.”
-Shijie Chen, Practice Leader for Asia Pacific Research

Brazil oil licenses raise record R$2.8bn - Financial Times

“Some good news for Brazil’s long term outlook; long awaited oil license auctions went smoothly and raised $1.4bn USD. The auctions are necessary for opening vast oil fields for exploration and exploitation. The development of these fields could provide a major boost to Brazil’s long term economic outlook.”
-Clinton Carter, Director of Research and Product Development for Latin America

UAE benefits from influx of capital from emerging markets – The Economic Times

“Political stability in the UAE amid regional instability has led to increasing proportions of capital inflows compared with the rest of the MENA region.”
-Sam Osborn, Senior Analyst for Global Analytics

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Having spent here now a couple of days meeting with a variety of stakeholders and seeing the capital, my first impression has given room to a more nuanced picture.

Most people I have so far spoken to confirm that Angola is an extremely difficult place to do business. Laws and regulations change constantly, it is very bureaucratic, the country has a major talent gap, and corruption (fondly called ‘gazoza’ by the locals) is publicly accepted and openly discussed. It is incredibly expensive and challenges abound. One executive I met, a veteran of setting up factories in difficult markets, summarized this fittingly: “Nigeria is junior school, while Angola is university.”

However, what strikes me more than all the challenges I have heard about is the opportunity that one can literally find on every corner of the street. Yesterday, I visited the national registry of companies, a place bustling with activity. It registers 30 local and international companies on an average day and a total of 4,000 in the first four months of this year!

The roads are filled with large 4x4s, mainly Hyundai, Toyota, Mitsubishi, Mahindra, some Chevrolets and to a lesser extent Land Rovers and BMWs – the latter being driven vastly by government representatives. Portuguese brands and companies are dominant, building on long established trade routes and cultural proximity. Modern retail outlets are primarily Portuguese, with the exception of South African Shoprite. A 1-bedroom apartment in downtown Luanda costs between 5,000- 10,000 dollars a month and you have to pay 1 year rent in advance.  Meanwhile, a Hugo Boss and Nike shop caters to Luanda’s affluent consumer class.

But it is not only the rich. Despite its many faults and flaws, the government is actively pursuing a policy that will see wealth trickle down in the next few years. Initiatives have been rolled out to allow the informal economy be included into the formal sector. Companies doing business here are obliged to commit resources for training local Angolans. An array of protectionist measures are being put in place to protect those that want to produce locally and add value to the country. The government’s motivations are, of course, ambivalent. A country born in times of the cold war as a communist regime (a fact today largely downplayed by Angolans) has embraced capitalism. But the ideology of today’s government is difficult to grasp and requires some further studies.

Despite the country’s incredible development in the last ten years Anglo-Saxon MNCs are not yet widely present here. And if they don’t move quickly, they will miss out on all the opportunities that still exist in pretty much every sector.

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I’ve been hearing about the challenges my APAC executives face while drafting their go-to-market plan using social media as a medium to target the Chinese consumer. I recently spent around 10 days in China which gave me an opportunity to discuss this with them in detail, and also convey our strong opinion on the matter. I managed to consolidate both FSG’s opinions and our clients’ pain points to provide some frameworks to help companies finalize their social media plan for China.

I recently noticed that a number of big department stores have been closed or scaled down, primarily due to the increased competition coming from the Internet (as compared to the number of stores which I observed several years ago).  Social media is expanding its penetration of Chinese Internet, which is already the largest in the world. Many companies have started thinking about how to build social media into their business strategies, similar to what many MNCs did for the Internet 10 to 15 years ago.

Chinese social media platforms are generally more interactive and users can share content in a greater variety of formats to a wider audience, therefore drawing more user contributions. Sina Weibo, a Chinese mircroblogging platform, is more user friendly and contains more features than Twitter to attract new users, retain elite users, and encourage all users to contribute more content, leading the platform to be more interactive.

Home grown platforms like Sina Weibo, Wechat, Qzone, Renren and Kaixin have dominated the social media space in China. Most were started as imitations of similar platforms in the West but over time have evolved into something quite different with unique product and service offerings specific for Chinese users.

A company’s social media strategy could be rendered obsolete very quickly as the market is ever-changing, with new companies, business models, and user features continuously mushrooming . FSG has built a simple 5-step process for B2C companies to build an effective social media communication plan.  Social media is also not exclusive to B2C companies.  B2B companies can leverage social media in an indirect way to build positive brand image, enhance internal communication, and even drive recruitment efforts. This is definitely a space where the marketing heads need to zoom-in on now to ensure they capitalize on the opportunity.

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I have already discovered this on my first day of touching ground in Luanda. Even though I knew Angola’s capital is famously the most expensive city in the world, prices are even beyond one’s wildest imagination. A pretty average hotel room that already costs 450 USD a night when I booked it three weeks ago has just been increased to 490 USD. A small bottle of water costs 7 USD and pasta with tomato sauce 50 USD.

Cultural notions of time and reliability are different and as a result it is a challenge to schedule meetings. Calls are by far the preferred method of communication as people like the human interaction. On the upside, time is fluid and people are generally flexible. If they are late, they smile – no need for an excuse. But overall, this attitude makes it a challenge to commit to a time and date though, let alone keep a tight schedule.

But the Western business traveler (myself included) needs patience. After all, the country only emerged from a traumatic civil war a decade ago. Today, this is most obvious in the labor force where an entire generation did not receive the most basic schooling. This of course, presents various obstacles in everyday life.

Luanda’s skyline has changed dramatically in the last ten years

But Angola’s pace of change is nothing less than remarkable. The city is bustling with commercial activity. Everywhere you look there are huge construction sites and office towers are rising into the sky.  Local bank branches are on every other corner.  The roads are packed at most times of day with a considerable amount of expensive cars. There are business people of all colors and races, with a definitive majority of Portuguese, Brazilian and Chinese. People are very friendly and approachable. They like to enjoy life, to celebrate. And so I was warned before coming to Luanda that I would get little sleep because at nighttime, “that’s when the real business deals are struck.”

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As FSG’s clients increasingly look for expansion opportunities in the Commonwealth of Independent States (CIS), I took a two-week trip to Central Asia to find out more about the operating environment in the region. I traveled to Turkmenistan, Uzbekistan, and Kazakhstan and spoke with local business people, academics, bankers, and journalists. Here are a few highlights of what I learned during the trip:

Turkmenistan: A closed, state-controlled economy undermines potential opportunities for investment in the market. Oil and gas production, plus investment in infrastructure and construction are the main growth drivers. This is very visible in Ashgabat, the capital, a city re-built in white marble to dominate the surrounding desert (see photo). Despite the wealth that the capital city tries so hard to demonstrate, opportunities for multinationals are limited by a small domestic market, high level of government control of the economy, opaque political decision-making, and import restrictions. Because of this, the country is unlikely to present significant opportunity for multinationals in the medium term.

Turkmenistan: Turkmenistan’s capital, Ashgabat, is impressive in its white marble buildings, but seems to be largely populated by policemen, rather than by regular Turkmen

Uzbekistan: With its 30-million-strong population and a history of industrialization, Uzbekistan should be the economic driver of the region. Instead, it is struggling with a barely-contained economic crisis. Hidden inflation makes the black-market exchange rate 30% higher than the official one, getting access to foreign currency is extremely challenging, and in some cases, illegal, and shortages plague the economy. A policy of import substitution means that getting goods into the market could involve working with corrupt individuals or breaking the law, and repatriating earnings can be next-to-impossible. Not to mention the very real risk of government expropriation. Not surprisingly, this is resulting in deep poverty visible at every step in the country. Whether social dissatisfaction with the economic failures of the government will ever turn into a push for political change, and whether such change will come peacefully or result in violence, is one of key questions facing Uzbekistan in the medium term. In the meantime, Uzbekistan will present an opportunity only for companies with an extremely high risk appetite.

Uzbekistan: Economic mismanagement has spurred poverty in Uzbekistan. Thousands of Uzbeks seek to work in Russia every year in search of higher salaries with which they support their families back home

Kazakhstan: The economic leader in the region, Kazakhstan is a natural extension of multinationals’ Russia presence. Its membership in the Customs Union with Russia and Belarus and its relatively open operating environment (Kazakhstan ranked 49^th in the World Bank Doing Business Survey in 2013) attract a growing number of Russian and multinational players. Almaty, the biggest city, is brimming with flashy shopping malls and a middle class that is not unlike the one you may encounter in Russia’s biggest provincial cities. Yet, Kazakhstan’s relatively small (16 million) and dispersed population and large territory drive up transportation costs. Beyond Almaty and a few other big cities, average incomes are low, and the real addressable market may be as small as 5 million people. This makes it critical for multinationals to think carefully about the most efficient way to capture Kazakhstan without overspending in the market.

Kazakhstan: Demand for luxury goods is thriving in Kazakhstan’s biggest city, Almaty

To find out more about each of these markets, including which foreign companies are most advanced in Turkmenistan, what it takes to buy a car in Uzbekistan, and whether Kazakhstan can be a viable hub for Central Asia, listen to our podcast Notes From the Field: The Central Asia Business Landscape by clicking this link to access the iTunes store.

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Here are several headlines read by FSG’s regional research teams this week with their commentary below:

Czech GSP: it gets worse - Financial Times Beyondbrics

“The Czech economy is unlikely to recover considerably until German growth picks up. The Czech Republic’s problems highlight the growing division between markets driven by domestic demand vs. by exports, with the latter likely to underperform. For more details on this trend, see FSG’s report Global Performance Drivers – Q1 2013.”
- Martina Bozadzhieva, Associate Practice Leader for Central and Eastern Europe

Joko Aims for June MRT Groundbreaking - The Jakarta Globe

“Companies should monitor the Jakarta MRT project since it will serve as a good proxy for Jokowi’s ability to get things done in the capital. If he cannot hit his self-imposed deadline for breaking ground in June or July, it will bode ill for the implementation of other difficult policies in Jakarta.”
- Adam Jarczyk, Associate Practice Leader for Asia Pacific Research

Mexico: Uphill battle joined in effort to restructure oil industry - Financial Times Beyondbrics

“This article illustrates the major hurdles president Peña Nieto faces in pushing through reforms to open the oil sector to foreign investment and private capital. Nevertheless, the article details the apparent resolve of the government to pursue the needed reforms.”
-Clinton Carter, Director of Research and Product Development for Latin America

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Currently on a research trip to South Africa and Angola meeting FSG clients and other international and local companies, I wanted to take a moment to share my latest insights (you can read Part I here):

Competition

After having spoken to various businesses in the last three days, a common theme I am hearing from the ground revolves around competition. While there is much talk in the media about competition coming from other emerging market companies, notably Chinese, Indian and Brazilian, the issue in Sub-Saharan Africa seems far more nuanced than that. While we are producing a major research piece on the topic in due course, here are a couple of initial observations:

• Competition from other emerging market companies: This seems to be particularly relevant in the technology sector where Asian companies such as Lenovo and Samsung are rapidly gaining ground. In the consumer goods sector, competition from other emerging market companies is less pronounced with the exception of Brazilian products coming into Angola and Mozambique, as well as South African FMCG companies spreading across the continent. For companies selling high-value products in the industrial sectors (for example machinery and trucks) competition from other emerging market companies seems less dangerous. That’s because overall, African consumers seem to be willing to spend more money for products perceived to be of better quality and having a longer lifespan alongside an adequate servicing infrastructure.
• Competition from other MNCs: By far the biggest threat comes from the same competitors companies face in developed markets. As the continent is becoming a more prominent business destination – approximately US$50 billion of FDI will flow into the region in 2013, which is more than 350% higher than a decade ago – more MNCs are moving in and competition is  increasing. Now is the time to set up a local presence, gain rapid market share and a competitive advantage.
• Competition from counterfeit products: An often underestimated competitive threat comes from counterfeit products or trademark infringements. This impacts all sectors. While counterfeit products have undermined profits for many companies, it also has serious reputational implications if the counterfeit product breaks or even becomes a health hazard. This is a particular challenge in the healthcare sector.
• Competition from the grey market: A major threat for exporters comes from the grey market. As unauthorized distributors bring in products from neighboring markets to sell them at a cheaper price than the authorized distributor, the established distribution partnership suffers and profit margins erode.

Stay tuned for more valuable insights as I meet more companies on the ground…

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Continuing the discussion from my previous post on ASEAN strategy, here are some additional points to consider:

1. Country-Level Analysis Not Enough:

a. As the region matures and companies increase their focus on it, executives need to conduct in-depth provincial analysis in order to understand where the specific demand-side opportunities lie and where there is the ideal supply-side support

b. In a market where affordability is a key challenge faced by all MNCs, executives ought to conduct their opportunity analysis on a provincial basis, to focus their investments towards the top choices

c. While provincial data is not available for many indicators, companies can begin with macroeconomic analysis by looking at gross domestic product, per capita wealth, population, and some expenditure patterns

2. Keep Your Focus on the Hot Spots: 25% of the Provinces Hold 75% of the Wealth

a. Wealth in Southeast Asia remains highly concentrated thus companies looking to expand in the region should focus their efforts on the top-tier provinces, which make-up for more than 75% of the GDP of the entire region

b. Depending on the specific province, companies will have to adopt different tactics in order to access end customers, who are likely to have varying consumption patterns as a function of their location and source of wealth

c. Companies could also conduct consumption pattern studies to get a better idea of their expenditure habits (use expenditure or food vs. non-food figures)

*Source: Frontier Strategy Group Analysis; Individual Government Statistical Publications

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Currently on a research trip to South Africa and Angola meeting FSG clients and other international and local companies, I wanted to take a moment to share my latest insights:

Today I spoke to a seasoned and very impressive South African executive running a 22.7 billion rand turnover FMCG company out of Johannesburg. He wants to remain anonymous but here is his advice to MNCs entering Sub-Saharan Africa:

1. Build strong partnerships: Value business relationships and continuously invest in them. Personal relationships are a key component of business success in the region.
2. Blend corporate culture with an entrepreneurial spirit: “Seize opportunity, if it presents itself. Even if the opportunity lies outside of a company’s core business competencies.” For example, acquiring a local business in a different space will enable a company to better understand the market to then move in with the core business at a later stage.
3. Believe in the long-term opportunity: The opportunity in individual African markets might seem quite small but, “the size of the prize might be big over a longer period of time. If you are not in the game now, it will only get more difficult.”
4. Find the right people to run your local operations: Make sure your managers fit in from a cultural perspective, and most crucially, make sure they and their families want to be in the market, “if the wife is not happy, it does not work.”

This last point was echoed by another executive from a leading South African industrial company who shared with me this Roman analogy which reflects his company’s talent strategy:

When in Rome…

One reason why the Roman Empire grew so large and survived so long – a prodigious feat of management – is that there was no railway, car, airplane, radio, paper or telephone. Above all, no telephone. And therefore you could not maintain any illusion of direct control over a general or provincial governor. You could not feel at the back of your mind that you could ring him up, or that he could ring you, if a situation cropped up which was too much for him, or that he could fly over and sort things out if they started to get in a mess.

You appointed him, you watched his chariot and baggage train disappear over the hill in a cloud of dust and that was that. There was, therefore no question of appointing a man who was not fully trained, or not quite up to the job; you knew that everything depended upon him being the best man for the job before he set off.

And so you took great care in selecting him; but more than that you made sure that he knew all about Roman government and the Roman army before he went out.

Stay tuned for more valuable insights as I meet more companies on the ground…

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Listen as Rich Leggett, CEO of FSG moderates a discussion with Dan Kornfield, Director of Strategic Research on the topic of global workforce planning.  Regional executives engaged in high-focus workforce planning outperform their peers in profitability and market share growth.  Hear highlights from FSG’s latest research in this field, with management lessons on identifying critical capability gaps, smarter hiring, redeploying the people you already have, and avoiding staff overstretch.

The full podcast is available for download here.

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