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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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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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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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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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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Sifting through a constant flow of news, our analysts have summarized the following few articles from around the world in this week’s Emerging Market View:

India Said to Plan Completing FY14 Asset Sales by December – Bloomberg

“Is this really possible? A great indicator for executives to follow closely. The Congress Government’s performance on this front will not only have an impact on the elections of 2014 but will directly impact India’s ever widening budget-deficit. Asset sales are a quick and efficient way to raise revenues.”
- Shishir Sinha, Analyst for Asia Pacific Research

Azevêdo Enfrentará Ceticismo de Ricos, Diz Consultor - Estado de Sao Paulo [Portuguese]

“FSG’s Associate Vice President for Latin America Clinton Carter argues that incoming Director-General of the WTO Roberto Azevêdo will start his mandate with skepticism from the developed world and unrealistic expectations from the developing world, given the support he received from major developing countries that have been the least receptive to stronger pushes for free trade over the last decade.”
- Antonio Martinez, Senior Analyst or Latin America Research

Turkey is Investment Magnet outpacing Emerging Market Peers – Reuters

“Investment capital is flowing into Turkey as the market remains one of the regional bright spots in Central and Eastern Europe.”
-Sam Osborn, Senior Analyst for Global Analytics

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The rise of the Southeast Asian (SEA) region is unquestionable, with the majority of the regional executives increasing their focus towards the region, not only due to the robust increase in demand but also its attractiveness as a potential manufacturing hub for all of APAC. However, discussions with corporate headquarters still remain highly country-focused, requiring regional executives to proactively “make the case” to move towards creating a medium-to long-term regional strategy for SEA.

1. Regional Mindset With A Country Specific Focus

a. Appreciate National Differences: Companies should not expect to have similar experiences across this region; each individual country will require in-depth analysis due to its varying economic maturity and wealth

b. Adopt A Scalable Regional Strategy: Executives should adopt a regional mindset, developing a long-term expansion strategy that accounts for the country-level differences but simultaneously leverages upon synergies and creates scale

Understanding country-level differences is paramount to forming a regional strategy when the same region has the world’s largest producer of rice, largest call-center outsourcing provider, largest producer of hard-drives, and largest coal exporter. See graph below to see the variations in the key economic contributors for the major ASEAN countries (as of 2011):

2. Communicate Strengths of the Region Back to Corporate

a. Region Provides for an Attractive Investment Climate – Many SEA countries are very MNC friendly and aggressively promote this feeling by providing long-term investment incentives to stimulate strategically important industries. Highly attractive investment incentives programs such as the Economic Transformation Program by Malaysia, MP3EI by Indonesia, Public-Private Partnership by the Philippines, and Zone-Based Investment Incentives by Thailand have become a popular tool to attract FDI dollars into the region

b. Easier to Manage than India – In terms of demand, the ASEAN region and its member countries share similar characteristics with India. However, doing business in SEA is widely agreed to be easier than doing business in India, which features: unpredictable policy making, high levels of bureaucracy, increasing corruption, differing tax regulations, and an acute lack of infrastructure improvements

c.  Profitability Game – Not Just a Top Line Growth Story – Companies have found SEA to not only have strong growth potential, but also the potential for higher margins compared to India and China.

i.  SEA is still relatively less crowded in terms of competition, both from MNCs and local companies. Relative cost of inputs remains lower in the region, especially for medium-to low-end manufacturing facilities.

ii.  The region’s strong consumption appetite, both from its growing middle class and the government, makes its growth somewhat resilient.

iii.  The region offers dual advantages for MNCs; it functions not only as a source of domestic consumption demand, but also as a production hub for exporting to the immediate region and beyond.

Executives needs to quickly adopt a regional-mindset, setting for themselves a clear vision for growth in the ASEAN region and planning for a future where the region not only functions as a leader for APAC but maybe for a scale which would allow for global leadership. Many large MNCs have already begun their quest for building businesses that have a common vision and strategy across the region.

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Our analysts are constantly speaking to clients and reading headlines from around the world to extract implications on the performance of emerging markets.  Here are a few articles our top research talent has been reading in this week’s Emerging Market View:

China Recovery at Risk as Factory Growth Eases – CNBC

“China’s economic recovery is weaker than expected and companies looking for a fast rebound will be disappointed. However do not expect aggressive policy from the government as employment is still relatively stable.”
-Shijie Chen, Practice Leader for Asia Pacific Research

Emerging Markets Gain From Central Bank Reserve Shift – Financial Times

“Even traditionally risk-averse central banks are now diversifying their reserves into emerging market bonds, a trend that is expected to increase in the future.”
-Sam Osborn, Senior Analyst for Global Analytics

China Manufacturers Survive by Moving to Asian Neighbors – The Wall Street Journal

“More production moves out of China and into Southeast Asia (ASEAN) – a trend only likely to become more common as we move towards the year 2015 and the formation of the ASEAN Economic Community is completed.”
-Shishir Sinha, Analyst for Asia Pacific Research

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Leadership constraint has been constantly identified as a top business challenge multinationals face in China. Rapid growth over the last twenty years has created a huge imbalance in demand and supply of experienced managers and leaders. Shortage of managerial talent has fueled wage inflation in China, and compensation for senior executives has skyrocketed as many companies compete for a small pool of managerial talent (see charts below).

*Source: Frontier Strategy Group Analysis, Mercer China Monitor Report, EIU

To make it worse, multinationals are facing increasing competition from local Chinese companies, which offer attractive financial packages and perceived better career development opportunities to attract seasoned Chinese executives working for multinationals. However, many Chinese executives who have built their careers working for multinationals often found it was difficult to adjust to a local company’s culture and experienced “reverse culture shock.”

*Source: Frontier Strategy Group analysis, 中华英才网 (ChinaHR.com)

Most leadership challenges in China can be attributed to either a capability gap or talent shortage, or sometimes a combination of both. FSG recently created a comprehensive framework to identify key leadership challenges and develop best practices to strengthen the leadership bench through retaining key individuals, leveraging global scales, strengthening the fundamentals, and adjusting to a new reality.

Senior Chinese managers are motivated more by symbolic recognition such as enhanced decision making power, rather than material recognition such as financial compensation. So it is important for multinationals to realize that seasoned Chinese leaders want to achieve “self-actualization” by creating a vision for the business and having an impact on other people.

Local Chinese managers are already commanding an equal if not higher compensation than their peers in developed markets, and yet they are subject to higher attrition risk due to strong demand. One solution is to tap into experienced managers in talent surplus areas, such as Western Europe, who are more willing to relocate to high growth regions like China for an “expat light” package.

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