Emerging Markets Insights

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…

Share/Bookmark

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:

1. Build strong partnerships: Value business relationships and continuously invest in them. Personal relationships are a key component of business success in the region.
2. 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.
3. 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.”
4. 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…

Share/Bookmark

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.

Share/Bookmark

Corruption is a perennial issue when operating a business in Russia. Russia ranked 133^rd out of 176 countries in Transparency International’s Corruption Perception Index in 2012, indicating that operating in a compliant manner in the market remains challenging.

However, all too often the conversation about corruption in Russia at the corporate headquarters and regional levels is about a general anxiety about perceived levels of corruption, rather than a pragmatic conversation about the realities of where and how corruption occurs. This results in EMEA (Europe, Middle East, and Africa) executives being asked to “prove” that any further investment in the market will not lead to increased corruption exposure – a task that is clearly impossible and leads some highly risk-averse companies to underinvest in the market.

All too often, as well, companies would not discuss corruption with their local teams and partners, assuming instead that it is understood that corruption is not acceptable. Sometimes this attitude is the result of fears that even raising the issue could expose problems that could disrupt the operations of their Russia business. Other times, it’s the result of a perception that, if no corruption issues have come up, then there must be none. Both of these attitudes are dangerous as they lead companies to ignore the question until it’s too late to prevent or remedy compliance violations.

Instead, EMEA executives should take a leading role in managing how corporate compliance standards are implemented and interpreted at the local level in Russia. They should act as intermediaries, providing training and leadership for their local team that addresses honestly the specific situations in which their business could run into corruption and how those should be handled by employees at all levels. They should select, train, and support country managers who have a full understanding of how to manage the business compliantly and can serve as role models for the rest of the Russia organization.

The perception that companies with no presence in the market are safe from corruption risk is inaccurate – in fact, companies may be held liable, for example, for their distributors’ corruption, especially after recent changes to Russia’s compliance laws. Instead of ignoring the issue until it comes up, companies should openly and frequently raise it with partners, providing them with training and support to ensure partners understand exactly what practices are acceptable. Due diligence, including explicit compliance provisions in contracts, and frequent monitoring are just a few of the other tools executives have in their disposal to ensure the compliance of their Russian partners.

With all the right practices in place, corruption shouldn’t be an impediment to further investing in the market and taking advantage of its growth potential.

For additional content on protecting your business in Russia from corruption, FSG clients can read a full report on how to manage compliance in Russia here.

Share/Bookmark

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

Share/Bookmark

Nigeria is changing rapidly. The size of the economy may expand 40-60% overnight, new online sales channels are booming, and the security situation is deteriorating:

• Rebased GDP figures, to be released later this year, are likely to make Nigeria the largest economy in Sub-Saharan Africa, surpassing South Africa. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach as growth rates slow because the economy is expanding from a larger base
• Ecommerce is booming on the back of Nigeria’s large consumer base increasingly shopping online. MNCs should tap into this fast growing channel to reach consumers
• A new militant Islamist group emerged in the North of Nigeria, changing the security situation for MNCs, as foreigners are now being targeted. Companies operating in the North have to implement strategies to mitigate risks. Companies operating in Lagos and the South are not in danger from this group

Trend #1: GDP Rebase to Impact MNCs Performance Targets

Nigeria will surpass South Africa as the continent’s largest economy when GDP is revised upwards between 40-60% in October 2013. If GDP increases by 40%, Nigeria’s economy would swell from US$275bn to US$385bn. South Africa’s economic output is US$378.9bn. New GDP figures will be calculated by using prices of goods and services from a 2008 base year. Currently, Nigeria’s GDP is calculated by using 1990 figures, which do not account for the rapid development of the services, telecoms, and entertainment industries. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach if they are calculated on a GDP multiplier basis. Executives must communicate changes in GDP forecasts to corporate to set expectations about performance in the Nigerian market. Companies should consider revising growth targets down to reflect revised GDP growth rates. Targets should be revised down using a new GDP growth multiplier, but not in real dollar terms.

Trend #2: Ecommerce Is Growing – Get Ahead of the Curve

Nigeria’s Ecommerce market is expanding rapidly: Online sales grew 25% in 2011 to N62.4bn, up an additional N12.5bn from N49.9bn in 2010. Total investment in the sector is estimated at N2.4bn, but this figure is expected to double by 2014 as Nigerian consumers shop more online. The trend is fueled by deepening internet penetration and an uptick in purchases made with mobile phones. In Mastercard’s 2012 online shopping behavior survey, the share of purchases made with mobile phones increased to 30.3% up from 8.0% in 2011.

Ecommerce allows companies to reach a wide consumer base, even without having a local presence in the market. It also makes buying global brands more accessible for consumers in tier 1 but also in lower tier cities.

MNCs can capitalize on growing online sales by partnering with local Ecommerce providers and by offering internet shoppers exclusive deals and differentiated products.

What you need to know when building an Ecommerce platform for Nigeria

• Payment methods and cash-on-delivery: Despite attempts to reduce Nigeria’s reliance on cash, the economy is still very much cash-based as credit card penetration remains limited. Allow customers to pay cash on delivery alongside other payment methods
• Human contact: Nigerians value human interaction when shopping. They like to touch, feel, and speak about the product. Have customer relations managers call customers after the item has been reserved online to make sure the customer really wants the product. Allow customers to touch and see the product on delivery
• Online deals: Offer good online deals to highlight the appeal of online shopping and build recurring customers as Nigerians are very price sensitive and will compare prices
• Trust: Nigerians are very suspicious of buying online considering high levels of cybercrime. Once trust is established through the steps outlined above, customers will shop online for your products with fewer reservations
• Challenges: Nigeria’s Ecommerce industry faces various challenges including poor infrastructure, road congestions, power blackouts, the high cost of internet, and cybercrime

Trend #3: The Security Situation in the North Is a Threat to MNCs

A new militant Islamist group called Ansaru emerged in the North of Nigeria, changing the security situation for MNCs in the region for the worse. Companies operating in Nigeria’s commercial centers including Lagos and the South are not in danger from this group.

Ansaru, a more radical breakaway group of Boko Haram, came to the forefront in 2012. The movement is heavily influenced by Al-Qaeda in the Islamic Maghreb (AQIM) and motivated to fight French and Nigerian military intervention in Mali. Ansaru’s agenda is far more international than Boko Haram’s. It is being manifested for the first time with the systematic kidnapping of foreigners. Boko Haram’s grievances are primarily local and come down to skyrocketing unemployment and poverty in the North of the country (60-70+%). It primarily aims to weaken the government which it blames for the precarious economic situation. But as security forces vehemently cracked down on Boko Haram militants, weakening its leadership, the movement fractionalized, creating a more radical offshoot. Companies should monitor closely whether attacks against foreigners are increasing and prepare for insecurity in hot spot regions.

Share/Bookmark

(This post is adapted from FSG’s report on how the Syrian Civil War impacts the MENA business climate. The report is part of FSG’s monthly series on managing volatility in the MENA region and is available for FSG clients here.)

Seasoned Middle East executives are confident in steady sales growth rates regardless of sensational news headlines from the region. Companies that overreact to the region’s latest developments risk falling behind aggressive competition, especially from the Gulf and Turkey. However, Western multinational companies should avoid following the lead of their governments that are taking a wait-and-see approach on Syria.

Companies must adjust business plans for the Levant region and surrounding markets as the Syrian Civil War will not end anytime soon. Fighting has already led to more than 70,000 deaths, one million refugees, and two million internally displaced in Syria. The conflict will increasingly spill over Syria’s borders and hurt economic and political stability in Iraq, Jordan, Lebanon, Israel, and Turkey.

Planning ahead allows companies to weather short-term instability, while still positioning for long-term growth in the Middle East. FSG suggests that businesses consider taking actions across core functions:

• Human Resources: Mitigate risk for staff and local partners located in areas that are most vulnerable to spillover from Syrian fighting: Anbar province, Iraq; Jordanian-Syrian border areas; Tripoli, Lebanon; Bekaa Valley, Lebanon; southern Lebanon; northern Israel; and southeastern Turkey. Designate alternative locations for offices, outline emergency plans regarding whether employees should come to the office, and set up IT capabilities to allow people to work remotely.

• Logistics: Reorient shipping routes through Lebanon’s Port of Beirut and Jordan’s Port of Aqaba until at least 2015. Syrian ports are not viable supply chain options for transiting goods to other parts of the Levant, Eastern Mediterranean, Iraq, and Europe. Regionally, prepare for increased insurance rates and longer transportation times for the duration of the Syrian Civil War, which could last years without any major change in the environment, such as an international intervention.

• Sales: Reassess sales targets for your businesses in Iraq, Jordan, and Lebanon. The Syrian Civil War represents an immediate threat to economic stability in Jordan and Lebanon and political stability in Iraq. Emphasize a market share-driven strategy to position for long-term growth after political turbulence associated with the Syrian Civil War subsides. Your business can focus on a profitability-driven strategy in relatively stable and economically vibrant markets in the Gulf Cooperation Council like Saudi Arabia, Qatar, and the UAE.

• Marketing: Utilize social media tools to establish customer loyalty, recruit local talent, and reach new customer segments in the region. Even if the corporate office wants expansion plans to be put on hold, this is an effective way to maintain and create new relationships without the cost of a strong physical presence on the ground.

• Partners: Establish relationships with Syrian-run businesses that moved operations to nearby countries. These businesses will be positioned to reenter the market after the cessation of fighting. Egypt is an attractive destination for Syrian businesses looking to take advantage of low labor costs, reasonable cost of living, and the local textile industry infrastructure. Jordan is a natural destination for Syrian-run tourism companies that focus on the broader MENA region. Lebanon’s multi-communal society is attractive to Christian businessmen who fled Syrian cities like Aleppo, Damascus, and Homs.

Share/Bookmark

1.  Capital controls are back – Typically associated with emerging markets crises and Bretton Woods, the eurozone is developing its first set of capital controls. Capital controls will create a defacto new euro currency in Cyprus, where the local currency will not be able to buy the same goods and services as it would in the rest of the eurozone. Cyrpus imports everything, but money can’t leave to buy imports. When money can’t leave the country, it creates scarcity which drives inflation and an internal devaluation of the currency.

2.  Insured deposits are no longer untouchable – Even if deposits are insured, the Troika, comprised of the ECB, EU and IMF, made it clear that deposit insurance, and national law, is subordinate its demands. The appropriation of Cypriot deposits will make depositors across the eurozone think carefully about pulling cash out of banks if there is an indication of further banking sector trouble.

3.  National champion banks are in play – Spain, Italy, France and Greece have all protected their national champion banks regardless of the banks’ sustainability. In Cyprus, the Troika is breaking the two national champion banks into a good-bank/bad-bank structure that effectively kills off the second-largest bank and neuters the largest bank. Now that national champion banks are in play, creditors may pull back bank financing if the Troika indicates it is not satisfied with banks’ health.

4.  Senior bondholders suffer losses – While far less aggressive than the raid on deposits, punishing bondholders does impact the way banks capitalize themselves. If bondholders perceive risks to have increased across the eurozone after the Cypriot banks’ bondholders were wiped out, they may demand higher interest rates to refinance banks limiting the ability of banks to lend to customers.

5.  Germany makes the rules now – Eurozone decision making is now clearly in the hands of Germany which has contentious elections coming up this fall. German demands about the structure of the bailout look good at home but undermine the ECB commitment to do “anything it takes” and the broader European vision of cooperation.

What this means for your business: Expect any eurozone recovery to be pushed out further into the horizon as banks will be cautious about recapitalization, and as a result, lending. If lending can’t restart, the economic cycle will remain stalled. Also expect interest rates to increase in the short term outside of Germany while the probability of a eurozone default increases. For a more detailed analysis of the crisis and what it means for emerging markets, FSG clients may download the EMEA Regional Overview released today.

Share/Bookmark

Saudi Arabia’s economic growth is expected to be slightly lower in 2013 than in the previous year, but there are still positive trends in the market despite current global and regional economic environments.  Companies should continue to invest and identify new opportunities in Saudi Arabia for 2013; the Saudi Arabia government budget is nearly 20% higher than 2012′s plan, including a lot of non-oil sector opportunities.

Listen further as Matthew Spivack, FSG Practice Leader for the Middle East and Africa, explains how to better position your business for success by planning ahead of major developments, especially amid economic and political instability in other parts of the Middle East and North Africa.

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

Share/Bookmark

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

Share/Bookmark