Building a presence in today's growth markets: The experience of privately held companies

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It’s no wonder that privately held and midsize businesses in the United States, Europe, and elsewhere are looking abroad to grow — emerging markets are leading the world’s growth, presenting significant opportunities for investors. In fact, the growth gap between emerging and fast-growing markets (EFGMs) and the world’s mature markets has never been wider. The countries outside North America, Western Europe, and Japan account for about only half of global GDP, but since 2007 have accounted for over $2 trillion worth of growth — far more than the $200 billion of the mature economies, according to Economist Intelligence Unit (EIU) figures.

At the same time, the risks of doing business in EFGMs are declining. Across a range of business risks — from inadequate infrastructure to hard-to-interpret laws and difficult-to-navigate bureaucracies — there are fewer uncertainties associated with doing business in most of those markets. The EIU’s Business Environment Index, which has tracked a detailed set of operational risks across 59 countries since 2002, shows sharp drops in risks pertaining to economic volatility, political instability, infrastructure (from ports and roads to broadband connections), and banking systems.

This paper, which draws from interviews and a survey of executives in privately held businesses in North America and Western Europe, explores how private companies are turning to emerging and fast-growing markets that, in the recession year of 2009, contributed to only half of the world’s GDP but accounted for all of its growth.

None of the executives interviewed for this research regret their decision to move into the EFGMs. All say that the more experience abroad they gain, the more the perceived risk of doing business there diminishes for them. And while their near-term impetus for investing away from home might be immediate growth via market penetration in countries with a rapidly expanding middle class, the executives we spoke with also expect to reap the longer term benefit of greater global competitiveness, with more opportunities to outsource and to develop a lower cost base as the world’s economic center of gravity moves to the south and east.

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Building a presence in today's growth markets: The experience of privately held companies

  1. 1. Building a presence in today’s growth markets The experience of privately held companiesOpportunities andchallenges in the BRICsand beyond
  2. 2. Building a presence in today’s growth markets The experience of privately held companiesThe surveyThis publication was created in cooperation with the Economist Intelligence Unit(EIU). The f indings presented in the main report are based on a survey and analysisconducted in 2010 by the EIU on behalf of PwC. A total of 158 corporate chiefs,directors, and senior executives of non-f inancial private companies from aroundthe globe and across 17 industries participated in the survey. They representcompanies with annual revenue ranging from US$100 million to US$5 billion;58% of respondents work at f irms with annual revenue of US$500 million or more.Two-thirds of the respondents are either C-suite executives or board members.The interviewsIn addition to the survey, in-depth interviews with f ive executives were conductedfor this report. We thank the following individuals for their valuable contributions:Robert Koch, CEO, Koch Enterprises; Bill Kozyra, CEO, TI Automotive; Jochen Meissner,CEO, Goss International; Gus Ramirez, CEO, Husco International; and David Whittleton,COO, Arup Group.We also interviewed f ive PwC partners from around the globe, who shared theirinsights about the opportunities and challenges that private companies face inemerging and fast-growing markets: Humphrey Choi, China; Ray Headifen, Indonesia;Rama Krishna, India; Abelardo Macotela, Mexico; and Carlos Mendonça, Brazil.To the interviewees and the 158 individuals who participated in the survey,we extend our appreciation and gratitude.
  3. 3. As little as several years ago, investing in more than is focused business-planning that’s tailored to each one foreign market at once was relatively uncommon submarket and administrative region; a blanket among our private-company clients. The norm was strategy won’t work. In this respect, midsize private to venture into a single country, typically in Western companies enjoy an important advantage over Europe, and test the waters there before moving their larger, better-resourced public counterparts: into a second country. Now we’re beginning to see faster, more-eff icient decision making. F lexibility a number of clients take a bolder approach, entering and agility are very helpful qualities to have when multiple markets simultaneously. Even for them, doing business in EFGMs. however, “testing the waters” remains a standard For these and other reasons discussed in the following approach, with companies often f irst setting up a sales Rich Stovsky pages, many private companies have been meeting off ice to feel things out before further committing with success in EFGMs. They are apt to only increase US Leader themselves in a particular country or region. Another their presence there in the coming years, given that Private Company Services popular route is to form a joint venture, sometimes EFGMs’ macroeconomic fundamentals now look health- via a company’s current network — for instance, by ier than those of the heavily indebted developed world. leveraging a distributor or supplier. This publication shares some of the stories of privateAt the turn of this new century, we saw only a handful It stands to reason, then, that of the 158 private- Joint ventures and other strategic alliances can be companies that are doing business in EFGMs, with CEOsof US private companies pursuing business abroad. company executives surveyed for this publication, particularly important for midsize private companies, describing how they’ve overcome challenges to suc-A decade later, that’s no longer the case. A signif icant all say they have or are considering establishing which generally lack the resources of large public cessfully establish themselves in those markets. It alsonumber of our private-company clients have an inter- operations in EFGMs. And while the desire to keep companies and therefore don’t have the luxury of shares the insights of PwC partners in Brazil, China,national presence these days or are seriously consider- manufacturing costs down is a key factor in why learning the ropes of a new market slowly. Regional India, Indonesia, and Mexico regarding what they viewing one. For some, it’s a way to control costs. For even private companies are going abroad, they are less partners who understand the local market and as the top opportunities and diff iculties for foreignmore, however, it’s a way to make up for lost revenue interested in making goods in EFGMs than they customs, as well as have good relationships with key businesses in their countries. I hope that this on-the-at home and a path to growth. are in selling them there. This shift in focus ref lects government off icials, can help mitigate the risks ground knowledge, coupled with the survey f indings how rising wages in EFGMs are not only making of doing business in an EFGM.Companies seeking growth abroad are setting their summarized in the pages to come, proves helpful new consumers out of the workers in those countries,sights on emerging and fast-growing markets (EFGMs), In especially large, complex markets such as China to you in plotting your company’s growth strategy for but also making those individuals more costly forwhere economic conditions are rebounding more and India, where there are many submarkets that the new decade and beyond. foreign manufacturers to employ.quickly than in mature markets. At present, the EFGM can vary widely in their differences — including tax, Sincerely,landscape is dominated by the BRICs — Brazil, Russia, Although rising consumerism abroad, coupled with regulatory, and legal differences from one regionIndia, and China — but a second tier of rapidly develop- sluggish growth at home, is the biggest impetus for to the next, as well as among municipalities — lever-ing economies, including Indonesia and Mexico, are private-company investment in EFGMs (82% of com- aging local expertise is particularly critical. So, too,catching up. panies surveyed cite market growth opportunities as the top reason for EFGM investment; 51% cite theWhile all of these markets have their share of chal- economic slowdown), there are other powerful mo-lenges — ranging from infrastructure to regulatory tivators as well. Some are negative, such as increaseduncertainty — private companies are increasingly competitive pressure in home markets (cited by 49% Revenue growth Internationally active US private companies consistentlyf inding that the rewards outweigh the risks. Our project higher revenue growth than their domestic-only peers. of companies surveyed). Others are positive, including All international marketersongoing research1 shows that US private businesses Emerging markets EFGMs’ lower cost base (45%) and access to other Domestic onlyoperating abroad — particularly those active inEFGMs — consistently project higher revenue growth nearby major markets (42%). Data derived from PwC’s quarterly Trendsetter Barometer Business Outlook surveys. * Emerging market data began to be collected in 2009. 14.3%than their domestic-only peers, as well as report An additional lure is the introduction of policy reforms 14% 13.6%higher gross-margin increases. They’re also planning aimed at creating friendlier business environments 12.9% 12.3% 12.3% 12.2%greater capital investment, operational spending, in EFGMs. Brazil, for instance, has implemented a sys- 12% 11.8%and M&A activity. tem to reduce the complexity of complying with 10.6% corporate tax rules, while Mexico looks poised to pass 10% 9.7% 9.6% 9.4% 9.4%1 PwC’s quarterly, survey-based Trendsetter Barometer Business Outlook anti-monopoly legislation in 2011. 8.5% 8.5%reports: http://www.barometersurveys.com/trendsetter 8% 7.9% 7.8% 7.7% 7.6% 7.5% 7.4% Meanwhile, private companies are growing more 6.8% adept at dealing with the challenges in EFGMs as their 6.1% 6% 5.5% exposure to those markets increases. Consequently, 4.9% 4.8% 4.5% EFGMs are beginning to appear less risky to many 4% of those companies. For instance, three-quarters of 2.1% private businesses investing (or planning to invest) 2% in just one or two EFGMs characterize China as * * * high-risk, whereas this view of China is held by only 10 10 10 09 09 09 09 08 08 08 41% of companies investing (or planning to invest) 20 20 20 20 20 20 20 20 20 20 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q in f ive or more EFGMs.
  4. 4. Table of contentsPreface 6Where private companies are goingThe BRICs and beyond 7Why are they going there?The successful experience so far 10The risk landscapeHow it’s changing 14Top risks when investing abroad 19What to do now 22Country snapshots 24Brazil 26China 34India 42Indonesia 50Mexico 58
  5. 5. Preface Where private companies are goingIt’s no wonder that privately held and midsize businesses This paper, which draws from interviews and a survey The BRICs and beyondin the United States, Europe, and elsewhere are looking of executives in privately held businesses in North Americaabroad to grow — emerging markets are leading the world’s and Western Europe, explores how private companies aregrowth, presenting signif icant opportunities for investors. turning to emerging and fast-growing markets that, in theIn fact, the growth gap between emerging and fast-growing recession year of 2009, contributed to only half of themarkets (EFGMs) and the world’s mature markets has world’s GDP but accounted for all of its growth.2never been wider.1 The countries outside North America, None of the executives interviewed for this research regretWestern Europe, and Japan account for about only half their decision to move into the EFGMs. All say that theof global GDP, but since 2007 have accounted for over more experience abroad they gain, the more the perceived$2 trillion worth of growth — far more than the $200 bil- risk of doing business there diminishes for them. Andlion of the mature economies, according to Economist while their near-term impetus for investing away fromIntelligence Unit (EIU) f igures. home might be immediate growth via market penetrationAt the same time, the risks of doing business in EFGMs in countries with a rapidly expanding middle class, the Companies are going where demand is Among survey respondents, most com-are declining. Across a range of business risks — from executives we spoke with also expect to reap the longer- growing — and they are going there in large panies planning investments in the BRICsinadequate infrastructure to hard-to-interpret laws and term benef it of greater global competitiveness, with more numbers. All of the 158 survey participants already operate in those countries. Like-diff icult-to-navigate bureaucracies — there are fewer opportunities to outsource and to develop a lower cost have already moved to establish operations wise, companies investing in EFGMs suchuncertainties associated with doing business in most of base as the world’s economic center of gravity moves to the abroad or are planning to do so in the next as Mexico or Poland already have opera-those markets. The EIU’s Business Environment Index, south and east. three years. The most frequently mentioned tions there.which has tracked a detailed set of operational risks across destinations are the BRICs: Brazil, Russia,59 countries since 2002, shows sharp drops in risks 1 According to the International Monetary Fund, in 2008 the “emerging and India, and China. But the story of EFGM developing” category of countries accounted for 90% of the world’s growth;pertaining to economic volatility, political instability, ascendency is broader than just the BRICs: in 2009, when the mature economies shrank, these countries accounted for allinfrastructure (from ports and roads to broadband of the growth. Survey results suggest that six additionalconnections), and banking systems. 2 The rising economies of Asia, Latin America, Eastern Europe, the Middle East, markets — Mexico, South Korea, Turkey, and Africa—typically referred to as emerging markets—are described in this paper Poland, Indonesia, and South Africa — repre- as emerging and fast-growing markets (EFGMs). The commonly used distinction between emerging and mature economies still has considerable validity, especially sent the second wave of overseas investment. on a per-capita GDP basis. In this report, EFGMs encompass markets outside North America, Western Europe, Australasia, and Japan that are experiencing rapid development. Figure 1 Top targets for foreign 60% investment by private Who took the survey companies The survey, conducted by the Economist Intelligence Unit on behalf of PwC, was designed to discover why Q1: In which of these and how non-f inancial private companies are investing abroad. A total of 158 corporate chiefs, directors, 40% emerging and fast-growing and senior executives of non-f inancial private companies from around the world participated in the survey. markets are you doing or Two-thirds of the respondents are either C-suite executives (61%) or board members. They hail from considering doing business? companies either already operating in EFGMs or planning to establish operations there imminently. These (N = 158) f irms are mainly headquartered in Western Europe (47%) or North America (40%). They come from 20% across 17 industries and represent a range of company sizes, from US$100m to US$5bn in annual revenue; 58% of respondents work at f irms with annual revenue of US$500m or more. a a le nd t lic an a a nd y ea o a l a na zi yp ke bi in ric si si di ic hi ra ub or w hi la la ne us nt om ex In Eg r C Af i B C ai Po Tu K Ta ep ge R do M Th ol h h R Ar ut ut In C ch So So ze6 Private Company Services C Private Company Services 7
  6. 6. BRICs: Average, highest, and lowest growth from 1999 to 2009 Figure 2 Country Average real economic Highest growth (year) Lowest growth (year) “Mexico’s ranking on the FDI Confidence Index rose in 2010, Where the growth is growth 1999–2009 despite Mexico’s heavy reliance on the fortunes of the US China 10.0% 14.2% (2007) 7.6% (1999) economy. Our many free trade agreements with fast-growing India 7.2% 9.6% (2007) 3.8% (2002) economies such as China, Turkey, South Korea, and Indonesia Russia 5.5% 10.0% (2000) -7.8% (2009) may help reduce that reliance.” Brazil 3.0% 6.1% (2007) -0.6% (2009) — Abelardo Macotela PwC Mexico Six most-cited non-BRIC EFGMs: Average, highest, and lowest growth from 1999 to 2009 Country Average real economic Highest growth (year) Lowest growth (year) growth 1999–2009 South Korea 4.8% 9.5% (1999) 0.2% (2009) Indonesia 4.7% 6.3% (2007) 0.8% (1999) Poland 4.0% 6.8% (2007) 1.2% (2001) South Africa 3.5% 5.6% (2006) -1.7% (2009) Real annual GDP rate 2005–2009 EFGM Mature Turkey 3.1% 9.4% (2004) -5.7% (2001) 12% Figure 3 Mexico 1.9% 6.0% (2000) -6.1% (2009) China Poorer markets Source: Economist Intelligence Unit are growing fast; richer and more 10% mature ones are not Nigeria The mature economies are For other EFGMs mentioned by survey To attract foreign direct investment India those with high levels of respondents — such as Chile, Colombia, and encourage local growth, each of these 8% Vietnam market capitalization and Egypt, South Africa, and Turkey — about countries has stepped up investment Peru Bahrain liquidity, and are defined half of the investments would be f irst- in infrastructure. Argentina here as the United States, time ventures. These may represent the 6% In a testament to well-directed policy- Indonesia Canada, Western Europe, most exciting EFGM opportunities, for Iran making in recent years, all have a reasonable Poland Japan, and Australia. Size the following reasons: Philippines track record of macroeconomic stability Israel Singapore of bubbles denotes 2009 With the exception of Chile, all have and rode out the global economic crisis fairly Brazil 4% nominal GDP, adjusted for sizeable working-age populations, as well as successfully. Even Turkey, which suffered Russia South Korea Kuwait inflation. The vertical axis Hong Kong children who will soon reach working age.3 from its exposure to export markets, is Thailand Australia is the compound annual Taiwan The largest non-BRIC country, Indonesia, rebounding strongly. real increase in GDP from Greece has 161 million people aged 15 to 64 years 2% 2005 to 2009. (The five-year Spain France Norway (and another 33 million below 15 years old, 3 Chile has a population of just under 17 million but is of Mexico Lithuania Canada compound annual growth growing interest to companies due to a well-publicized US soon to be of working age). Ukraine Portugal Germany rate was used because 2009, strong business climate and impending membership in the Organisation for Economic Co-operation and Develop- 0% a recession year, was atypi- All are diversif ied economies not overly Hungary ment (OECD). Italy Japan cal.) Per capita GDP is GDP reliant on commodities, which means per person, adjusted for freedom from the boom-and-bust economic inf lation. All figures are cycles that often characterize commodity- 2009 GDP per capita in USD -2% based on EIU data. based economies. 0K 10K 20K 30K 40K 50K 60K 70K 80K8 Private Company Services Private Company Services 9
  7. 7. Why are they going there?The successful experience so far Market growth opportunities Figure 4 Bright prospects outside Economic slowdown in developed markets slow-growing, increas- Competitive pressures in your home market ingly competitive home markets are the main Outsourcing opportunities or lower cost base driver of private-company investments in EFGMs Closer proximity and access to other major markets Q6: Why has your company Better location to serve global clients invested in emerging and fast- Easier regulatory environment growing markets? (N=158) Better availability of talent Better access to natural resources While the pull is the lure of growth, the The need to follow competitors“Nearly three-quarters of India’s population push is the outlook at home. Burdened by aging populations, sticky wages, high A better environment for innovation resides in rural areas. There you have what cost structures, reluctant consumers, 100% 0% 100% remains a largely untapped consumer base.” deleveraging banks, and higher public debt Unimportant Important— Rama Krishna PwC India burdens, the mature economies appear to be stagnating. Stay and stagnate, or go and grow? For most executives, the answer is clear. To them, expanding abroad is Eighty-two percent of survey respondents increasingly viewed as a necessity, not just say that the opportunity to grow is highly an attractive option. important in driving their investment This shift in focus is evident in UK-head- Past three years Next three years Figure 5 decisions (see Figure 4). Despite the global quartered Arup Group, a building design Revenue growth downturn, companies’ performance and engineering f irm. Its COO, David Over 25% growth abroad beats domestic in EFGMs in recent years has been impres- Whittleton, admits that the company’s early growth — both now sive — and signif icantly better than that expansions abroad, which began with and in the future of their home markets. Ireland, were not necessarily part of a set 15% to 25% growth Q9&10: Over the past Eighty percent of respondents report aver- strategy. If the f irm won business in a coun- three years, what has been age annual revenue growth of more than try and saw the promise of more, it set up the average annual rate 5% in EFGMs in the past three years, while shop. But its approach to foreign investment 5% to 15% growth of revenue growth in your 40% enjoyed annual growth of more than has changed recently. The company has company’s home market? 15%. Performance is expected to improve identif ied Russia, for example, as a country (N=153) Outside your further over the next three years and sub- with market potential that demands a pres- 0% to 5% growth home market? What do you stantially outstrip that in companies’ home ence. Arup now employs roughly 75 people expect at home and abroad markets: 84% of survey-takers expect in Moscow and a similar number in St Pe- in the next three years? average annual revenue growth to exceed tersburg. It has also been looking at other Decrease (N=128) 5% in EFGMs where they have already leading EFGMs, expanding strongly in China invested; 57% expect revenues to grow (via Hong Kong), where it now employs 0% 15% 30% 45% 0% 15% 30% 45% more than 15% per year. roughly 600 workers. Home market Overseas market10 Private Company Services Private Company Services 11
  8. 8. Private-company EFGM success stories Because competition from EFGM f irms will Private companies that have already invested Volume“Chinese businesses are no longer in the shadow continue to grow, extending beyond EFGMs in EFGMs have generally found it rewarding, Husco seeks preference from suppliers by being into mature markets, the opportunity to survey data show. Smaller companies can be just a big buyer. “We want to be important to [our of their foreign counterparts.” face these competitors early — and to learn as successful as their larger counterparts when suppliers],” says Mr Ramirez. “So we work very— Humphrey Choi PwC China from them — can be seen as an advantage. investing overseas — as the executives interviewed hard to have exclusive relationships.” Even when EFGM competitors have years of experience for this research demonstrate. They are often Husco’s suppliers sell to the industry as a whole, in low-cost manufacturing, strong local more nimble than bigger, public companies when Husco strives to remain at or near the head of the Global competitiveness knowledge, and the relationships to compete it comes to drawing on peer networks, enlisting line. In every case, says Mr Ramirez, “We want Greater global competitiveness is another strongly with their Western counterparts local advisors, and collaborating with local partners. to be number one or no worse than second so that clear benef it of investing abroad. Much in cheaper segments. As they move up the we get priority.” For example, when Koch Enterprises, a US-based of that competitiveness stems from oppor- value chain they will pursue expansion company that manufactures aluminum die-casting Support tunities to outsource in EFGMs and to through acquisition, in search not just of parts, sought to move into Brazil, it solicited recom- Husco has helped domestic Chinese companies get develop a lower cost base there. As Jochen market share but also of technology, know- mendations from its automotive customers and into the automotive components business. F irst, Meissner, CEO of Goss International, how, and established brands. For Western eventually acquired a struggling local f irm. Goss, it provides expertise: Although Husco doesn’t make a global printing and publishing company manufacturers, keys to competing success- meanwhile, started its operations in China by the parts itself, its executives know the processes based in the United States, notes, moving fully with these f irms include eff iciency, launch­ ng a joint venture with a Chinese f  rm, Shang- i i required to make them, as well as what capital into China helped Goss’s mature business strong supplier relationships, and the con- hai Electric, which is now Goss’s parent company. equipment is necessary. “It typically takes two or “lower the overall cost structure.” Goss’s stant quest for improvement (as in, for three years to take [new suppliers] up the learning experience highlights another benef it of instance, lean manufacturing processes). Nimbleness and leveraging relationships aren’t curve,” says Mr Ramirez. Second, Husco provides global expansion: visibility to the next useful simply in helping companies get an initial suff icient volume to ensure a viable business oppor- generation of global investors. The company foothold in EFGMs. They can also be helpful tunity for the local company. “The combination was bought out by Chinese investors after in coping with business challenges brought on of the two is critical,” says Mr Ramirez. establishing operations there. by success in those markets. Gus Ramirez, CEO of US-based Husco International, which provides Diversification The journey to greater global expansion components for off-road vehicles, relates his In cyclical markets, the drawbacks of a brittle also involves going up against a more global experience of meeting the challenge of rapid supply chain become apparent — as do the advan- group of competitors. A sizeable majority growth in China, where his f irm supplies a large tages of f lexibility. Husco has suppliers in Europe, (74%) of respondents say that subsidiaries Chinese equipment manufacturer: “The growth India, China, North America, and South America. of foreign multinationals are their main rates are just incredible,” he says. “The challenge Many have similar capabilities. If one stumbles, competitors in key EFGMs. Yet local compa- of staying on top of the demand is certainly unlike another can often take over. “That’s the game of nies and locally based multinationals that of any other country we have ever worked in.” manufacturing,” says Mr Ramirez. “You’re always are also cited as main competitors by large juggling. If one ball falls, you better be nimble minorities (49% and 42%, respectively). Husco meets the challenge by cultivating suppliers. enough to put another ball in the air.” At the moment, many companies still operate The recession of 2008 and 2009 created turmoil in a two-tier market, and local competition in the small universe of companies supplying criti- Building relationships is mainly at the cheaper end. Mr Meissner cal automotive components, with demand dropping F inally, suggests Mr Ramirez, it is diff icult for notes that in China, “We compete on two by as much as 80% in some cases. After pulling Westerners to overestimate the power of personal different levels. There is the so-called import back, many found it diff icult to f inance the ramping relationships in Asia. In North America he allows segment, where we face our traditional up of operations in response to renewed demand. his staff to manage supplier relationships. Not Japanese and German competitors. But there Luckily, Husco has experience in dealing with ex- in Asia: Every visit is spent paying personal calls is also a domestic segment, where we have treme market cycles: “We deal in a cyclical business on the owners and senior executives of as many a number of Chinese competitors.” in cyclical markets. We go down hard and come suppliers as possible. back hard,” says Mr Ramirez. “That’s the nature These factors don’t completely solve the problem of [the] industry.” of keeping up with demand in hot markets. To respond quickly to these f luctuations in But they do help Husco manage its business better demand, Husco focuses on four factors: when the company inevitably hits a snag.12 Private Company Services Private Company Services 13

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