Many multinationals are currently working on their mid- to long-range plans, projecting risks and opportunities through 2020 and beyond. Because of the volatility in emerging markets, long-range planning can seem like an exercise in trying to anticipate things that are impossible to predict. In fact, our research shows that often long-range plans are structured as static exercises that don’t sufficiently take into account changes in local conditions and dynamics on the ground that might indicate emerging risks or opportunities. This means that many long-range plans have become obsolete rather quickly, requiring regular updates and refreshes.
However, today market conditions in EMEA seem to have stabilized, the worst of the oil price crash and the currency depreciations experienced in the region seems to be over, and companies are increasingly looking to the next few years to deliver a meaningful improvement in performance, if not a return to historic growth rates from before the global financial crisis. Despite the objective stabilization in macro conditions across a number of EMEA markets, we caution this may be an overly optimistic approach. Below we suggest five key things executive teams need to keep in mind when building or refreshing their EMEA long-range plans.
- Market conditions will stabilize, but a substantial improvement is unlikely
Our forecasts show stable, but not accelerating, growth across most EMEA subregions and major markets over the next three to five years. This is supported by the absence of major global growth drivers that can accelerate overall growth beyond current levels. This means targets will need to be relatively conservative, keeping in mind external sources of demand are unlikely to be major growth drivers. Instead, significant acceleration in performance will be almost entirely dependent on the actions companies take to position themselves ahead of competitors, and to capture untapped customer segments and opportunities.
- Your plan needs buffers for a severe downside
After years of severe volatility in EMEA, thinking about another crash is not something most executives enjoy doing. However, the reality is that there is substantial downside risk embedded in the global economy, with the US, China, and the eurozone all capable of prompting a significant slowdown in global growth with ripple effects across EMEA markets. This is less likely in 2018, but becomes a much more real possibility once you look at a five-year time horizon. As a result, MNCs need to ensure that their long-range plans have considered what would be the impact of another downturn on their ability to execute as expected, and build buffers into their expectations and strategies that would allow them to weather another deterioration in external conditions.
- Protectionism will largely mean rising costs of doing business
While protectionist measures by governments are likely to continue across both developed and emerging markets, executives should not mistake rhetoric in the US and UK with a real shift in how governments globally think about free trade and global integration. In most places where we’ve seen an uptick in protectionist measures, these have been driven by the needs of governments to raise more revenue (done through higher customs tariffs, new paperwork required, etc.), support local players to accelerate growth (preferential treatment of local players, localization pressures, etc.) or efforts to stabilize their currency regimes (import bans, capital controls, limits on access to forex). Most of these are not ideological, but tactical tools in governments’ toolboxes that are largely consistent with current rules and practice of global trade. As a result, MNCs should assume that such pressures continue and add higher costs to their operations, but do not fundamentally disrupt their ability to leverage global supply chains or to trade across EMEA’s emerging markets.
- Your profitability will remain under pressure
In addition to higher costs due to protectionism, MNC costs will rise in a range of other ways in the coming years. From the need for deeper localization, to higher credit costs as the US Federal Reserve raises rates, to rising demands from local partners and customers, MNCs’ margins will come under pressure. MNCs should approach these not as isolated cases to be dealt with on a one-off basis through cost cuts and other measures, but as more fundamental, broader shifts in the economics of doing business in emerging markets. Long-range plans should thus address more fundamental questions about cost competitiveness and cost structures across the whole region’s geography and the broader footprint of the firm.
- Customer preferences and price sensitivity will continue to evolve, requiring strategic shifts by MNCs
In a number of markets, the changes that have taken place over the past few years, such as public spending cuts, currency depreciations, removals of subsidies, and other reforms, have contributed to customers (consumers, businesses, and governments) becoming much more price sensitive and demanding in terms of the value for money they expect from multinationals’ goods and services. In the absence of a rapid rebound in growth and purchasing power, these habits and preferences will become entrenched, threatening MNCs’ competitiveness, especially for mid-priced offerings. Long-range plans need to address these challenges head on as they are unlikely to disappear on their own.
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