A change in gear
By Stefan Wagstyl
Published: May 12 2010 03:00 | Last updated: May 12 2010 03:00
As chief executives emerge from recession they are seeing some unfamiliar names scurrying around the global corporate landscape.
In Europe Geely, the Chinese carmaker, is finalising a $1.8bn (€1.4bn, £1.2bn) acquisition of Volvo, the Swedish manufacturer. In Africa, India's Bharti Airtel is set to become the world's fifth-largest mobile phone operator through the $10.7bn purchase of the regional assets of Zain, the Kuwaiti telecommunications group. In the US, Reliance Industries, India's biggest private sector company, is completing a $1.7bn joint venture with Atlas Energy after narrowly failing in Europe with a $14.5bn bid for LyondellBasell, a Dutch chemicals group.
Meanwhile, after last year's slump, exports from emerging economies are recovering at break-neck speed, rising last month in China, for example, by 30 per cent.
Companies from emerging economies are back on the move. They "have come out of the crisis better than developed world corporates", says Chris Hemmings of the PwC consultancy.
These groups are climbing up the value chain with new products, services and brands, ranging from high-technology Chinese electronics to Indian cars and Brazilian financial services. As Edward Tse of the Booz consultancy writes in a recently published book: "China is no longer exclusively a source of low-cost manufacturing. It is realising its potential to be far more: a source of global competitors in every aspect of business on the global stage."
The same applies to India and, to a lesser extent, Latin America. For global corporates, this is an even bigger shift than the emergence of Japanese groups as international investors 25 years ago. The new challengers are moving faster and more aggressively than did the cautious Japanese.
The new multinationals are coming from countries more open to foreign investment than Japan was in the 1980s. Hundreds of international companies are already firmly established in markets such as China, India and Brazil; developed and emerging world companies are competing head on across a range of industries - and co-operating extensively through joint ventures. But the rivalry is becoming more intense, embracing the developed as well as the emerging world.
For portfolio investors, too, the game is changing. Once investing in emerging markets mainly meant backing a particular economy's growth potential or its capacity to export commodities. No longer. Now it means investing in businesses already ranked among the world's largest in their industries, such as SAB Miller, the South African brewer; Cemex, the Mexican cement group; or Huawei, China's biggest telecommunications network equipment group. It means investing in new technologies, brands and ways of doing business.
Competing with emerging market companies is nothing new for developed world multinationals. While they faltered in the worst recession since the 1930s, they are recovering rapidly. The number of emerging markets companies in the Financial Times Global 500 may have nearly doubled from pre-crisis levels of 68 in March 2007 to 119 two months ago - but the majority are still from the developed world.
Western, Japanese and South Korean multinationals retain huge reserves of talent, technology and capital. Many have been in emerging markets for decades, including Unilever, the Anglo-Dutch consumer products group; General Electric, the US conglomerate; and Siemens, the German engineering group. Others have joined more recently, among them Microsoft, the US software giant, which has established its biggest development centre outside the US in Beijing; and Cisco Systems, the computer network group, which has set up "a second headquarters", Cisco East, in Bangalore, India.
Davin Chor of the Singapore Management University argues against over-generalising from the weaknesses of a few high-profile American companies, such as the carmakers. "One shouldn't be too bearish about American companies going forward."
The same applies to European companies. The biggest cross-border acquisition this year so far is the planned $35.5bn purchase by British insurer Prudential of AIA, the Asian business of US group AIG - a more conventional case of a developed world company moving into emerging markets.
Equally, some emerging market companies were battered during the crisis - notably over-borrowed Russian resources groups such as Rusal, the aluminium group; and some Mexican companies, including Cemex. "There are huge disparities in performance within sectors and within countries," says Alok Kshirsagar of McKinsey consultancy's Asia Centre.
But there is no doubt which way the economic winds are blowing. "From my new base in Hong Kong, the shift from west to east is clearer than ever," Michael Geoghegan, chief executive of HSBC, one of the world's biggest banks, said last week. "In developed markets, the risks of double-dip recession and stagnation haven't gone away. In contrast, recovery in emerging markets looks secure." said Mr Geoghegan, who this year moved from London to Hong Kong.
Driving emerging market companies are their domestic economies. While developed countries' gross domestic product contracted 3.5 per cent last year and are expected to record sluggish growth of about 2.5 per cent in 2010, the emerging world avoided recession and is forecast to bounce back to a healthy 6.3 per cent this year. While policymakers in the developed world fret about stagnation, their emerging market counterparts worry about inflation.
The domestic demand surge is clearest in India, where incomes are rising from a low base. Companies reaping the rewards include Hero, a motorcycle manufacturer; Godrej, a producer of personal care products; and cement makers such as India Cements and Grasim. "What we find is that many Indian companies that focus on India itself have done extremely well," says Kwok Chern-Yeh of Aberdeen Asset Management Asia.
Asia - and especially China - is living in a credit boom that contrasts sharply with the scarcity blighting western Europe, the US and, to a lesser degree, eastern Europe and Latin America. While there are concerns the boom could end in a bust, for now, Chinese companies have cheap finance.
By contrast, the emerging market companies that have suffered are those in countries that followed the developed world into recession - notably Russia, where 2009 output fell 7.9 per cent; South Africa, (down 1.8 per cent); and Mexico (down 6.5 per cent), the laggard of Latin America. Russian tycoons who borrowed heavily before the crisis have been forced to sell assets to cut debts, most notably Oleg Deripaska, Rusal's main shareholder.
The most visible - and most controversial - element in emerging multinationals' expansion is corporate acquisition, seen by many directors as the fastest way to advance. Li Shufu, Geely's poetry-writing founder, says the Volvo takeover is the perfect antidote for what his own and most other Chinese carmakers lack: technology, research capability and a reputation for quality and dependability.
While the overall quantity of capital flowing from the developed world into emerging economies is still far greater than that going in the opposite direction, in corporate acquisitions it is a different story. Last year, for the first time, takeovers by emerging world companies of developed world groups exceeded takeovers going the other way - the former valued at $105bn, the latter at $74.2bn, according to Dealogic, a business data company.
"In the next few years we will see a growing number of acquisitions in Europe and the United States by companies based in emerging markets, es-pecially in Asia and South America," says Rodolfo De Benedetti of CIR, an Italian conglomerate. "These companies today have considerable financial resources and good management, and are interested in entering new markets and acquiring competitors."
As well as the developed world, new corporate investment is being targeted at other emerging markets - often challenging western groups. The race for natural resources is particularly tight, with China and India leading the way. Not to be left out, Vale, the Brazilian miner, last month paid $2.5bn for a half-share in a remote iron ore deposit in Guinea. For South African companies, raised on links with the west, investing in Africa is a new "orthodoxy" says Jacko Maree, chief executive of Standard Bank, the country's biggest.
Alongside acquisitions, partnerships matter in a globalised world, with scores of joint ventures already set up between developed world motor groups and their emerging market counterparts. In the latest case, Peugeot Citroën, the French carmaker that has lagged behind other foreign groups in China, this month announced a joint venture with China Changan to supplement production capacity it already has in the country.
However, the terms of trade bet-ween developed and emerging market groups are changing, with power shifting to the emerging world. "We are seeing a bit of a pendulum shift. Five or 10 years ago, a multinational would tell you what to do . . . now working together is a true joint venture," says McKinsey's Mr Kshirsagar.
Cross-border deals are not easy. First, timing is crucial as companies that made big-ticket acquisitions just before the crisis found to their cost - notably Tata, India's biggest business group. In 2006-08, it bought Corus, the European steel group, for £6.7bn in India's largest foreign acquisition; and Jaguar Land Rover, the UK carmaker, for $2.5bn. The assets plummeted in value during the recession, leaving Tata managers struggling to restructure their acquisitions.
Next, the cultural gaps between emerging economy owners persist. Chinese managers feel as alien on the Tyne in north-east England as western executives do on the Yangtse. According to Tarun Khanna and Krishna Palepu, authors of Winning in Emerging Markets, a study published last month: "Securing and instilling global standards and capabilities throughout an emerging markets-based organisation is a difficult, long-term task."
Finally, there can be political barriers. Chinese state-controlled companies have run into trouble in the US over perceived political and security risks. A $2.2bn bid for 3Com, a US network technology company, from Bain Capital and Huawei, the Chinese telecoms equipment-maker, failed in 2008 when Washington objected. In Europe, the ambitions of Russian state-run energy group Gazprom to expand into the European Union have been contained by political concerns.
But as Japanese companies found 25 years, ago these barriers can be overcome. Even before the crisis the corporate order was changing, with companies from China, India, Brazil and other emerging economies forging ahead in global industries. Their advance has now become a charge.
Additional reporting by Geoff Dyer in Beijing, James Lamont in New Delhi, Kevin Brown in Singapore, Richard Lapper in Johannesburg, Adam Thomson in Mexico City and Jonathan Wheatley in São Paulo
Asian groups making inroads at home and abroad
Huawei
With its library and conference rooms grouped around tropical plant-filled patios, the Chinese telecommunications equipment maker's airy, Norman Foster-designed headquarters in the southern city of Shenzhen could compete with those of any global technology company. This is appropriate for a group that is now the world's second-largest telecoms gear maker, with $21.8bn revenues and a 14.2 per cent global market share in 2009, behind Ericsson.
Unlike banks, automakers and other Chinese companies muscling into global top ranks on the back of the country's 1.3bn population, it owes its rise mainly to overseas success. "They have grown despite their home market, not because of it," says Duncan Clark of the BDA telecoms consultancy in Beijing.
With fat credit lines from state banks allowing it to offer generous financing to telecoms operators, Huawei has been highly successful in emerging markets besides its own, and is also making inroads into developed markets.
Competitors attribute its growing market share to lower prices but many customers acknowledge that it offers greater flexibility. Where some equipment makers have been marketing complete systems, Huawei is willing to customise according to operators' demands.
Increasingly, however, it is meeting hurdles. Despite years of effort, it has yet to land a big order in America. Since Ren Zhengfei, the secretive founder and chief executive, is a former People's Liberation Army officer, the US continues to have security concerns over Huawei equipment.
With reassurances that it is owned by staff rather than the state or military failing to convince, it has begun a campaign to win greater trust. Huawei has put a managing director in Washington and is making efforts to engage the media.
AirAsia
Once a failing state-owned Malaysian airline with just two aircraft, AirAsia is now one of the few indigenous companies in emerging south-east Asia with a brand that resonates across the region.
Tony Fernandes, chief executive, bought it in 2001 with the aim of making it the home airline of the 10-country Association of South East Asian Nations, an economic and trade grouping with 580m consumers and a combined economy bigger than India's.
Nine years after Mr Fernandes bought it for a token M$1 plus M$40m debt, AirAsia boasts more than 90 aircraft, joint-ventures in Thailand, Indonesia and Vietnam, and a network that extends beyond Asean to China, Sri Lanka, Bangladesh and India.
AirAsia X, a long-haul affiliate, flies to the UK and Australia, as well more distant parts of India and China, bringing the group into direct competition with developed country airlines such as British Airways, Qantas, Singapore Airlines and Virgin.
Starting with just $250,000 in cash, Mr Fernandes relaunched AirAsia as the region's first real low-cost airline, copying the no-frills model pioneered by Southwest Airlines of the US and Ryanair of Ireland.
The company has grown rapidly because of a rigorous focus on keeping down costs through lean staffing, multi-tasking, and high aircraft utilisation rates, boosted by low levels of congestion at many Asian airports. As a result, its costs are widely regarded to be lower than those of Ryanair, regarded for many years as the global leader in cost control.
Chris Tarry, a UK-based aviation analyst, says AirAsia is probably one of only three budget airlines in the world making sustainable profits.
"The model for the future," says Mr Fernandes, is for AirAsia "to go to the Middle East, to Korea, and [more comprehensively to] China and India".
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