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, formerly named São Paulo da Assunção de Loanda, is the capital and largest city of Angola
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.”
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
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…
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:
- Build strong partnerships: Value business relationships and continuously invest in them. Personal relationships are a key component of business success in the region.
- 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.
- 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.”
- 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…
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.
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
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
U.S.-based multinational corporations lost an estimated $50 billion as a result of currency volatility in 2012. As I referenced in my previous post, FSG projects currency volatility to increase in 2013. No longer can executives only rely on corporate treasury to manage these risks as the potential impacts on profitability and performance are too great.
To better understand some of the operational strategies that executives can use to reduce currency risks, FSG turned to one of our expert advisors, Professor Gordon Bodnar:
- GB: “I encourage companies to think about structuring their operations as much as possible to have flexibility to respond to unexpected currency movement. If currency moves in our favor, can you take advantage of not just increasing dollar price and dollar revenue stream by providing additional service? Same thing for operations on the downside, how are operations structured so that over the short-term you can make adjustments to the pricing or costs structure such that you see a devalued currency by 10% your costs rise by less than 10%”
- GB: “In markets with high volatility, the goal is an options type payoff. Companies often don’t want to do this, as anytime you are creating an option there is an upfront cost. However, the point is that the payment of the premium is necessary to get the payoffs you want…you have the ability to absorb and move across the profitability curve, leading to a higher expected payout”
Larger initial local investments give executives the flexibility to respond to FX volatility with operational rather than financial strategies.
This is obviously a more risky strategy, and Professor Bodnar was kind enough to share a wide array of less risky strategies that I’ll cover in future posts.
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Gordon Bodnar is the Morris W. Offit Professor of International Finance and Director of the International Economics program at The Paul H. Nitze School of Advanced International Studies. He is presently a research associate of the Weiss Center for International Finance and also teaches in the Wharton Executive MBA program at the Wharton School at the University of Pennsylvania. Dr. Bodnar is also the associate editor of European Financial Management, Journal of Asian Economics, and Journal of International Financial Markets, Institutions and Money. He has held appointments as a Research Fellow at the National Bureau of Economic Research and the IMF. He received his Ph.D. in Economics from Princeton University.
As an FSG Expert Advisor, Professor Bodnar is available to FSG clients for consultation on many business issues with key areas of expertise including corporate and risk management. Please contact your account manager for further information or contact us at sales@frontierstrategygroup.com.
Here are a few region-specific headlines read by our research analysts this week:
Regional Assembly Now Wants Work Permit Fees Eliminated – Daily Nation
“Work permits fees for citizens from the East African community could be abolished in the medium-to-long term, making it easier for MNCs to move local staff across borders. The current feesfor work permits vary according to country and profession. But nationalist protectionist polcies of some member states, notably Tanzania, stand in the way of greater integration.”
- Anna Rosenberg, Senior Analyst for Sub-Saharan Africa Research
Chile and the Copper Price Rout – Financial Times beyondbrics
“Chile’s concern about falling copper prices is certainly warranted given that copper remains the country’s chief export. However, as we note in our most recent Quarterly Market Review, falling copper prices may bring relief for non-mineral export sectors which have been negatively impacted by currency appreciation in recent months.”
- Christine Herlihy, Analyst for Latin America Research
MP3I Will Push Growth in Eastern Indonesia: Minister – The Jakarta Post
“While Jakarta undoubtedly wants to promote growth in eastern Indonesia via the MP3EI framework, this plan is unlikely to dramatically increase private sector investment in Papua and Maluku. Instead, the real sector will continue to focus its efforts on the infrastructure in Java (and to a lesser degree Sumatra, Kalimantan, and Sulawesi) over the short to medium term.”
- Adam Jarczyk, Associate Practice Leader for Asia Pacific Research
Continuing the conversation from last week’s topic on ways to protect your business in Russia from corruption, Matthew Spivack moderates a discussion on managing compliance standards in Russia with Martina Bozadzhieva, Associate Practice Leader for Central and Eastern Europe. This podcast summarizes FSG’s recommendations about the nine key practices executives should follow to reduce their Russian business’s vulnerability to corruption.
To listen to or download the podcast, click on this link to access the iTunes store.
