Indonesia’s Workers Demand Higher Wages

Indonesia’s increased demand for workers calls for creative solutions and higher salaries. There is a limited pool of skilled workers in Indonesia, especially for positions that require English language proficiency or technological skill. Liberalizing investment policies and increasing FDI will continue to put pressure on the pools of both skilled and unskilled workers. MNCs are struggling to retain the talent that will be key to long-term growth in Indonesia.

In Frontier Strategy Group’s view:

  • MNCs need to launch rigorous training programs for both skilled and unskilled employees. Partnerships with local universities, trade schools, and government institutions should be set up to build a pipeline of qualified new hires.
  • Creative incentive packages are the key drivers of talent retention. Selected examples FSG has observed include co-signing of car loans or mortgages and provision of scholarships for children study at foreign universities.
  • MNCs fearful of wage increases in China who are looking to relocate operations to South East Asia need to consider the long-term implications of high demand for skilled and unskilled workers in Indonesia.


4 Tips for an Anti-Corruption Strategy in Africa

In my last post Weeding out corruption critical to African growth prospects we looked at the current state of corruption in Africa and its impact on conducting business on the continent. Below are four tips for an anti-corruption strategy in Africa:

#1 Recognize nuance: corruption varies by country, sector and type of interaction (both public and private sector) – risk assessments and due diligence to highlight ‘red flags’ associated with important transactions are always worthwhile investments and should be built into the deal cycle accordingly

#2 Training and messaging is invaluable: consistently repeat the mantra to staff in-country, to management at HQ, to suppliers and other service-providers, and to government and wider stakeholders that the organization is not prepared to involve itself in illegal or unethical practices

#3 Uncover wrong-doing proactively: prevention is cheaper than cure, but self-diagnosis is also preferable to external investigation; publicizing whistle-blowing channels and regular self-auditing are invaluable tools in this process

#4 Prepare for the worst: even with the best intentions, and policies, wrong-doing will still be a realistic possibility somewhere in your business footprint in Africa; the worst time to be crafting a coping strategy is on the fly so proactively prepare a corrupt incident crisis management and business continuity strategy to cover for that eventuality


Brazil’s Next Frontier – What Keeps LATAM Executives Awake at Night?

Brazil’s shock interest rate cut may have raised concerns about impending inflation; however, senior executives continue to view Brazil as a tremendous opportunity for their businesses.

The opaque operating environment leaves executives asking the questions such as:

Senior executives are executing on aggressive growth targets

60% of our clients face growth targets in Brazil above 20% for 2011

…With more hurdles to success on the ground…

Brazil’s ranking in the 2011 Ease of Doing Business Index is 127, indicative of “Custo Brasil”, or the high cost of operating in the country

… And limited insight on where they should invest

There are 27 states in Brazil, and yet most MNCs have yet to expand beyond São Paulo and Rio de Janeiro

Executives are under pressure to justify and mitigate thin margins and long payback periods to impatient corporate centers. Brazil’s business environment is high cost compared to regional standards, due to cost of labor, regulation, taxation, and infrastructure.

Executives struggle to understand their true market opportunity and create a strategic plan for expansion because Brazil’s growth is increasingly found in regions that are largely unknown by multinationals and in customer and industries segments with few reliable data sources.

To fill this void, Frontier Strategy Group is launching Fronteiras Brasileiras, a comprehensive solution designed to support senior executives at Western MNCs to prioritize, manage and execute on growth opportunities in Brazil.

Monitoring the Global Economic Recovery

In a stable year, Q3 is a time MNCs use to adjust strategic plans and finalize budgets for 2012. However, 2011 is not a stable year. Volatility in the global economy has generated significant uncertainty in all planning processes. GDP growth projections for 2012 in Argentina range from 1.2% to 6.5%. For Russia, executives are making decisions based on GDP forecasts that range from -8% to 5.4%. These figures are critical to budget allocation, target setting, and strategic planning for 2012, and will continue to fluctuate in the coming weeks and months.

It will be increasingly difficult for MNCs such as Apple (Nasdaq: APPL) and General Electric (NYSE: GE) that have large exposures to volatile markets to manage through various scenarios. Through working with over 200 of the world’s most progressive multinational firms, Frontier Strategy Group understands what matters most to executives operating in emerging markets. In response to the economic slowdown Frontier Strategy Group launched FSG Monitor, and online resource  for senior executives around the world to track the impact of the economic slowdown on their business performance in real-time.

For a limited time, FSG Monitor is available to the public, for anyone to access and view our proprietary intelligence platform.

Click on this link to view FSG Monitor yourself, or contact us for additional information.

Scenario Planning for Emerging Markets

In my previous post on the topic of strategic planning, we took a closer look at the personal and professional risks that executives face through the strategic planning process.  In this post, we will focus on another thorny question: Is my strategic planning process putting the business at risk of being blindsided by unforeseen external events and volatility?

The 2008 economic crisis demonstrated that today’s seemingly safe bets can take a sudden turn for the worse tomorrow.  Today, the headlines are again dominated by dark clouds.  Monetary crises, commodity bubbles, political instability, labor unrest, and even armed conflict dominate today’s headlines.  Furthermore, many executives have learned the hard way that crises hundreds or thousands of miles away can have a very real impact in their markets.

Until crystal ball technology improves, you have no choice but to plan for the worst and hope for the best in the markets that you oversee.  Executives at many companies are blindsided by macro shocks when they become overly focused on internal data and industry/competitor analysis.  Your strategic plan needs to lay out the foreseeable scenarios, key signposts, and leading indicators to monitor, and develop contingency plans accordingly.

One of FSG’s clients in the beverage industry has tried to shake its management of myopia by requesting rigorous analysis of the external variables that could impact the company’s market.  The findings of the resulting analytical exercise are used to develop a white paper that is presented to the business unit presidents every March, before the strategic plans for the following year are developed.

Such an exercise requires an investment of time and resources, but the benefits are twofold.  First, the strategic plan will more accurately reflect the reality of the markets.  Second, even if the scenarios developed in the white paper never unfold or if unforeseen events override contingency planning, the exercise forces managers to think more strategically, to get involved in the planning process, and thereby become personally and financially invested in the final plan.

In my next post, we’ll look at one more critical question every senior executive needs to be asking as they undertake strategic planning for 2012: Are mid- and lower-level managers placing enough priority on strategic planning, and am I doing enough to improve their planning capabilities?

Transferring Production Across Emerging Markets

(Source: Foxconn Website)

Foxconn is one of the most well-known emerging-markets based manufacturers. With labor prices increasing along with a string of suicides in it’s Chinese factories – the Taiwanese firm is looking to Latin America for new production capacity. The following is a cross-post from the China and Latin America blog which details Foxconn’s recent push into Brazil.

On August 6th, the Financial Times featured an article on Taiwan electronics firm, Foxconn (富士康科技集團), and its founder, Terry Gou. Foxconn controls close to half of the world’s outsourced technology products, including a number of Apple favorites (iPads, iPhones, etc).

According to the article, Mr. Gou recently announced a plan to place one million robots on Foxconn’s production lines. Automated production, he believes, will generate growth – the company made $80 billion in revenue last year, but is finding it hard to expand its market share.

Before Terry Gou ever announced his fondness for robo-employees, Foxconn was already seeking greater efficiency and market access through global expansion. In addition to production facilities in “greater China” (where it employs nearly one million people), Foxconn also operates in Europe, Australia, the United States, and Latin America. The company’s relatively new Latin American ventures (currently limited to Brazil and Mexico) provide greater access to local markets and close proximity to North American consumers.

Foxconn is now contemplating an additional investment of $12 billion in Brazil, which was first announced by President Dilma Rousseff during her visit to mainland China in April of this year. The company already operates at a limited capacity in the South American country, but the proposed investment would significantly expand production capabilities. New investments would offer Foxconn direct access to Brazil’s market and a means of avoiding the country’s notoriously high tariffs.

If the deal goes through, it would be Foxconn’s largest global investment. But the company’s leadership has hesitated in recent months.  Mr. Gou expressed concern about a culture in which “there’s all that dancing” and “as soon as they hear ‘soccer,’ they stop working.” Foxconn has asked the Brazilian government for certain labor and infrastructure guarantees and may eventually reduce the amount it is willing to invest.

Foxconn’s Mexico production is based near Ciudad Juarez. Its massive facility employs approximately 8,000 workers from nearby towns. The company’s presence was warmly welcomed by politicians in both Chihuahua and New Mexico, but faced controversy after a disgruntled worker set fire to the facility’s activities center.

Further expansion into Latin America – though certainly welcome – isn’t guaranteed. Foxconn’s founder seems to prefer Chinese manufacturing, even despite rising labor costs and the recent Shenzhen tragedy. Chinese laborers are thought to be very skilled, to tolerate more, and to work longer hours than many of their foreign counterparts. Mr. Gou believes that rising labor costs can be offset by a move to China’s cheaper inland provinces.

China’s remarkable distribution network is yet another advantage – shipments from China to the US are generally cheaper even than shipments from Brazil.

But as Foxconn and other firms look to expand market share, Latin America’s emerging markets are bound to receive more attention. Although fresh foreign investment in the country’s stock market has slowed (especially in the investor exodus this week), foreign direct investment in Brazil has increased steadily over the past year. As one of the fastest growing BRICS countries, its consumer market is attractive to investors. The country’s Mercosur affiliation also allows for tax-free export of certain goods to other member countries.

Mexico, for its part, boasts proximity to the US and a skilled labor force. Its manufacturing sector grew thirty percent in the first three months of this year and its share of US imports is also on the rise.

As for Mr. Gou’s cultural bias: if he ultimately decides to replace many of Foxconn’s workers with robots, futebol (fútbol) fanaticism and a proclivity for dancing should no longer be of tremendous concern.

The original post is titled: “Mr. Gou Goes to Latin America” and can be found here

Growth in Emerging Markets Takes Efficient Distribution Management

Luxury jewelry retailer Tiffany & Co. recently released its second quarterly results, notching a better than expected 33% boost in profits, driven by demand in international markets.  In terms of growth, Tiffany cited a 46% increase in sales to distributors in emerging markets.

FSG has found that one of the keys to success for high growth companies in emerging markets is taking a “tough love” approach with their distributors.

In terms of “love,” our benchmarking research has found that high growth companies are selling more than 50% of both revenues and volumes through distributors, compared to less than 38% and 36% respectively at average growth companies. High growth companies are also investing significantly more resources in managing their distribution relationships.  Measured in terms of full-time equivalents (FTEs), high growth companies are dedicating about five times more resource than low growth companies.  We have also found that senior executives at high growth companies are investing substantially more time personally working with distributors than their peers at low growth companies.

In terms of “tough,” high growth companies are much more likely to terminate relationships with distributors.  We found that the average tenure for distributors for high growth companies is about 7 years, compared to over 10 years at average growth companies.  When we asked companies what percentage of their relationships they have terminated in just the past 2 years, high growth companies told us that on average they had ended 17% of their partnerships, compared with 7% at average growth companies.

Although it may seem counterintuitive, it turns out that despite the significant extra investments that high growth companies are making as part of this tough love approach, their channels are much more profitable than those of low growth companies.  Simply put, growing the size of the profit pie means that the distributors’ appetite can be satisfied with a smaller piece.


Surfing the African technology wave

(Evidence of growing technology adoption, such as this mobile telephone sales booth in Swaziland, are increasingly ubiquitous in Africa)

The adoption of new forms of communication in Africa over the past decade – both mobile telephone and internet – has been nothing short of revolutionary. The continent is estimated to have produced over 316 million new mobile phone users since 2000, passing 500 million total subscriptions late in 2010, and its total internet user population is now estimated at almost 120 million. Previously, communicating over long distances was fraught with difficulty and expense; that outlook has been transformed. The significance of these trends for African economic development, transparency and democratization is profound; the opportunity for technology companies and indeed for businesses across many other sectors capable of leveraging such channels for advertising and delivery is no less significant.

An unmitigated success story

The growth and profitability of mobile telephone networks in Africa is by now a widely related success story. In addition to the staggering uptake figures recorded (and company results posted), what is equally exciting is the innovation and knock-on benefits this trend has generated throughout the continent. These include access to innovative financial services products for mobile users (trailblazed by the much-studied M-Pesa scheme in Kenya), better agricultural product pricing information for farmers, and Celtel/Zain’s unprecedented low-cost international roaming capabilities within sixteen countries that are the envy of both travelling Europeans and companies importing goods physically across borders in Africa alike. New high-speed underwater fiber-optic cables encircling the continent’s coastline are meanwhile dramatically improving access speeds. Mobile broadband internet subscriptions in African countries are expected to reach a cumulative 265m by 2015.

The attraction of capturing the African digital market and exploiting its potential for new service offerings is bringing bigger and bigger names to the table. Earlier this month, Google announced it would be training 1,000 Kenyans to act as ambassadors for its products. Its move follows those of Asian companies LG Electronics and Huawei, both of which have already established local academies to train product experts and source locally-relevant innovations and adaptations to their product portfolio in the region. Korean electronics giant Samsung has announced a particularly ambitious growth strategy for the continent, aiming to generate $10 billion in annual revenue in Africa by 2015 (a fivefold increase on current sales which would put the market on an equal footing with China). Samsung reported 31% growth in revenue to US$1.23bn for its Africa operations in 2010.

New trends, new opportunities

Recent results announced by Chinese handset manufacturer Huawei on tremendous sales of its affordable IDEOS U8150 Android smart-phone in Kenya highlight the appetite and with it the opportunity for selling technology products in Africa despite comparatively low income levels. Figures revealed in June by mobile internet browser development firm Opera meanwhile showed Nigeria as the world’s fourth most active user market, followed by South Africa in seventh place. Belying its terribly outdated labeling as the ‘dark continent’, the hunger for connectivity, and openness to new technologies and service models, are clearly as strong – if not stronger – in Africa than anywhere else in the world.

Reflecting this rapid adoption of technology, e-commerce is an increasingly influential segment of African customer retail, enabling exponential increase in product access and equally dramatic reductions in the continent’s often forbidding costs of sale at through more traditional retail outlets. Recent media coverage highlights its rapid growth in South Africa, often a weathervane for the rest of the continent: the country’s population spent more than R2bn (US$275m) online in 2010 excluding air travel and accommodation outlays. This entailed a 40% increase on 2009’s figure, with 2011 expected to see a further 30% increase. The traditional perception that African consumers abide by the “I buy what I see” principle appears to be shifting, and forward-thinking businesses will seek to move ahead of that curve in their local online offerings.

In a similar vein e-learning and e-health solutions could also offer significant acceleration capacity to combating some of the continent’s serious social service provision deficiencies. Cloud computing, virtualization and hosted services are all constitute growth segments for further expansion. As the past decade has shown, in this respect the African sky really is the only limit.

Interested in learning how your company can leverage new technology channels to sell to and grow in Africa? Contact to learn how we can help


Latin America Insulated from Global Shocks