Emerging Markets Insights

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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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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Starting now, companies will face increasing workforce risks in Indonesia. Wages will rise by 15-30% over the next 12 months, and a new regulation will be implemented that restricts companies’ flexibility on staffing.

In this podcast, Adam Jarczyk, Associate Practice Leader for Asia Pacific Research, discusses these risks in detail and explains how you can use a 2-pronged approach to limit their impact on your business.  For further information on managing Indonesia’s workforce risks, be sure to read Managing Indonesia’s Workforce Risks in 2013, a blog post also authored by Adam Jarczyk.

To listen to or download the podcast, click on this link to access the iTunes store.

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India’s budget does not propose any grand plans or major reforms, disappointing several groups that expected the finance minister to combat decade-low growth with a radical plan. However, multinationals have welcomed the realistic and well-balanced strategy

FSG View:

Relatively Neutral Budget:

• Given the historical trend of overpromising and under-delivering, India’s newly appointed Finance Minister P. Chidambaram has set the budget for a relatively neutral course with no radical proposals, focused around increasing the planned spending, cutting down on subsidies, and encouraging investment

Increase in Planned Spending:

• Companies should be encouraged by the government’s plan to increase the size of their overall expenditure by 16.4%, the majority of which will come from an increase in planned outlay, while reducing non-planned spending, which entails interest payments, subsidies, and defense

Decrease in Subsidies Bill Difficult:

• Subsidy cuts during a pre-election year are going to be difficult, but the government expects cuts in its petroleum expenditure. Last year, the government’s subsidy target was 1.9% of GDP but the revised estimates are over 2.5%

Historical Trend:

Overpromising and Under-delivering:

• The Congress Party Government has consistently set unrealistic targets in a bid to keep voter confidence high; a maneuver that was not given much importance during the days of high-growth, but one which could backfire given the current slowdown
• With the general elections coming-up in 2014, the government’s actions and performance are likely to receive closer scrutiny from both voters and the private sector

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FSG’s research talent keeps a close eye on not only worldwide headlines, but also region-specific news for more locally-driven insight.  Here are a few articles highlighted by our research team:

Is Africa much richer than we think? No one knows – CNN

“This article is very timely as Nigeria is about to rebase its GDP this year which is likely to make the country into the biggest economy in Sub-Saharan Africa, surpassing South Africa. Many countries are expected to follow suit. This means that the continent could in fact be much richer than we think. MNCs should invest now to get ahead of the curve.”
- Anna Rosenberg, Senior Analyst for Sub-Saharan Africa Research

 

House deal see Agus named BI govenor – The Jakarta Post

“While Agus’ approval as the BI’s new governor may prove positive for Indonesia’s monetary policy, it is not a good sign for the country’s fiscal policy. This is the second time that a reform-minded finance minister has been pushed out in less than three years. If Agus’ replacement does not have his predecessors’ penchant for reform, it will bode ill for the future of Indonesia’s economy.”
- Adam Jarczyk, Associate Practice Leader for Asia Pacific Research

 

Argentina extends price controls for 60 days (Reuters, article in Spanish)

“As FSG predicted, price controls on a wide range of consumer staples in supermarkets will be extended another two months. The Argentine government introduced the measures for 60 days in February in order to dampen inflation and preserve purchasing power for key electoral demographic groups in the run-up to the election. FSG expects the controls to be extended again until after the elections.”
- Clinton Carter, Director of Research for Latin America

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This blog entry is the first of a six-part series on China which will cover China’s productivity growth, portfolio management, geographical coverage models, talent management, post-merger integration and sales force effectiveness.

Is China Losing its Competitive Edge?

Many multinational companies are re-assessing China’s competitive advantage as a manufacturing base since labor arbitrage is becoming less compelling. Although China’s productivity gains (as measured by TFP growth) outpaced other major economies in the first decade of the 2000s, this rapid growth was interrupted by the financial crisis in 2008 and has been slowing ever since.  This is largely due to overcapacity and a “crowding out effect” caused by the massive fiscal package that Beijing put in place to offset the effects of the global financial crisis.

We believe that China is gaining momentum in higher value-added industries such as heavy machinery, information technology, and medical devices, but losing competitiveness in low value-added manufacturing to other low-cost Asian countries, even when it comes to serving the domestic market. In a workshop that I have run recently, we discussed the possibility that “Made in Bangladesh” apparel will begin to flood the Chinese market in a few years.

As China continues climbing up the value chain, more and more of its companies are expanding abroad to other emerging markets. This leads to interesting dynamics on talent requirements, intellectual property, and portfolio management.

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In addition to keeping an eye on global headlines, our analysts also keep an eye on several other blogs that frequently have insightful, value-added commentary:

FSG Expert Advisor James Bosworth wrote an interesting blog entry on Chavez’s legacy  - Bloggings by Boz – Foreign Policy, Latin America, etc.:

“Expert Advisor James Bosworth makes a persuasive case that President Chavez’s policies on crime and security, as much as his misguided economic policies, will be the lasting legacies of his rule.”
- Antonio Martinez, Senior Analyst for Latin America Research

The Financial Times’ Beyondbrics blog, centered on emerging market news posted about a new appointment in Russia – Nabiullina: Vladimir Putin’s new broom at Russia’s central bank:

Nabiullina’s nomination, likely to be confirmed, could result in interest rate cuts as the government seeks to boost economic growth and Nabiullina is unlikely to put up strong opposition to the Kremlin’s priorities.”
- Martina Bozadzhieva, Associate Practice Leader for Central and Eastern Europe

And lastly, from the The Jakarta Post – Expats to pay $100 monthly levy to Depok:

“If you are operating in or considering an investment in Depok, you should inquire about the draft legislation mentioned in this article, as it may have an impact on your cost base and staffing flexibility in the municipality.”
– Adam Jarczyk, Associate Practice Leader for Asia Pacific Research

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This blog entry is the second of a two-part series. Part one can be read here: Understanding the ASEAN Economic Community.

8 Key Changes All Executives Should Prepare For

1. All member states will gain economically from the AEC with real income expected to increase significantly
2. Overall exports will outpace imports in the manufacturing sector, easing integration into global supply chains
3. MNCs can find themselves in a more competitive position against local players in terms of pricing as production and transport costs are reduced
4. ASEAN + 1 FTA’s with East Asian neighbors (China, Japan, South Korea) will have notable impacts on the region
5. AEC is not just about lowering tariffs; infrastructure improvements, better intellectual property rights protection, harmonized investment laws, and easier movement of capital and skilled labor are part of the agenda
6. Overall trade in services will increase with imports of services likely to outgrow exports (in most sectors)
7. Growth is likely to be inequitable among member countries, thus companies should conduct in-depth studies in order to understand individual market dynamics
8. FDI should witness a surge as both inter-ASEAN and external foreign investments pour into the region

See graph below for results from a study by Ken Itakura on the impact of AEC on the exports and imports of the individual countries. Take all projections with a pinch of salt; they are a result of a simulation analysis that makes assumptions that might remain unmet

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Here’s a look at a few of this week’s global headlines with added commentary by our research team members:

Market Watch’s Post-Chavez Venezuela: oil’s next Saudi Arabia?:

“As Associate Vice-President for Latin America Clinton Carter is quoted in this article, oil production is unlikely to experience any increase over the short term, as a necessary shift toward investments in PDVSA are likely to continue to be secondary to the need to fuel social spending and support any post-Chavez government.”
- Antonio Martinez, Senior Analyst for Latin America Research

The Financial Times reports new property market cooling measures put doubt on China’s economic recovery:

“China has launched yet another round of of cooling measures, including a 20% capital gain tax on property sold in the secondary market, higher down payment and mortgages, to contain property prices. This is will impact property and construction related industries, which represent a big chunk of the Chinese economy, adding new pressure to the fragile recovery.”
- Shijie Chen, Practice Leader of Asia Pacific Research

Reuters had an article on Brazil’s industrial recovery:

“Any sustainable economic rebound in Brazil will have to be led by the industrial sector, making this heartening news for multinationals concerned about a seemingly interminable slowdown in Latin America’s largest market.”
– Ryan Brier, Practice Leader of Latin America Research

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What is The ASEAN Economic Community (AEC)?

Contrary to common belief, the goal of The ASEAN Economic Community is not just to form a free-trade area, but to create a highly integrated economic community by 2015, that focuses on four pillars, majority of which will impact multinational companies. See the graphic below for a simple analogy explaining the relationship of the ASEAN to the ASEAN Economic Community:

What is FSG’s View on the ASEAN Economic Community?

1. Multinationals across the board stand to gain from the AEC, either by directly participating in the growth story through their industry specific strategies or indirectly through the spillover effects of increased economic activity
2. The AEC is more than just a free-trade agreement; MNCs should soon begin to experience other benefits as the region begins to improve its infrastructure, have better intellectual property rights protection regulation and harmonized investment laws, and allow for easier movement of capital and skilled labor
3. Foreign direct investment should witness a surge as both inter-ASEAN and external foreign investments pour into the region to benefit from the access to the larger market, lower trade barriers, and increasing ease of doing business
4. It is unlikely that ASEAN can achieve its target of completely building the AEC by 2015. However, the deadline of December 31, 2015 does not indicate a magical date when the economic community suddenly ‘turns on’; it is already happening and therefore companies can benefit from the changes taking place right now

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