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Competition Between MNCs from the North and the South


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Competition Between MNCs from the North and the South

  1. 1. view Strategy and growth Issue 15 reprintNavigating the risksand opportunities inemerging markets
  2. 2. By Harry Broadman Harry Broadman is Chief Economist and Leader of PwC’s Emerging Markets practice. and investment flows continuing between Navigating the risks and opportunities developed and developing economies, but there is tremendous growth in commerce in emerging markets among emerging markets (South-South). South-South trade now accounts for a sizable 20 percent of all global trade, and one-third of foreign direct investment outward flows originating from the South go to the South. Implications for strategy and operations What does this transformation mean for business strategy and operations of One question increasingly on the mind of a where the on-the-ground investment risks advanced country multinationals? They’re lot of corporate senior executives today is: generally are understated. At the other confronting a host of new risks and oppor- What are the risk/opportunity tradeoffs of extreme, consider Africa. Most corporate tunities as they aim to compete not only investing in emerging markets? Of course, managers whom I talk to in developed with their longtime rivals from developed emerging markets—a term that typically countries lack accurate information about countries but also with world-class emerging refers to all developing countries—are not market conditions on the African continent. market firms. Consider the athletic footwear a monolith. They are a very heterogeneous They don’t know that about one-half of the industry. Most of the major athletic foot- group. But the fact is that, as a whole, the population in sub-Saharan Africa lives in wear firms are headquartered in the North rate of growth in emerging markets for the countries where GDP growth, adjusted for but produce a majority of their output in past decade and a half has been twice that of inflation, has averaged more than 5 percent the South, especially in China. And, as it advanced countries, and this trend is unlikely per year over the last two decades, or they happens, a sizable portion of Chinese pro- to abate anytime soon. This is why there is don’t know that there is a burgeoning duction in this sector is exported to Brazil. increasing interest in emerging markets by African middle class (and I’m not refer- The result is that Brazilian athletic footwear companies in advanced economies, where ring to South Africa alone, by any means). manufacturers feel they cannot effectively growth has been much slower. Importantly, Indeed, a large number believe there simply compete against the Chinese—so much so these growth differentials reflect a secular aren’t any realistic investment opportuni- that Brazil believes these products are being transformation in the structure of the global ties in Africa. At the same time, people see dumped at an artificially low cost into the economy, not a cyclical phenomenon occa- African markets as fraught with excessive Brazilian market. Consequently, Brazil’s sioned by the current economic/financial risk. There are, of course, appreciable government placed a duty on imported crisis. This is a critical distinction that too few risks of investing in Africa—just as there Chinese athletic footwear. This ensuing corporate executives appreciate. are substantial risks of investing in Latin trade war among the governments of two America, Asia, the Middle East, the former large emerging markets has sideswiped the Understanding the challenges Soviet Union, and so on. But the perceived world’s major branded athletic footwear and rewards risks in Africa are grossly overstated. In companies, cutting their sales revenues and There are, however, significant mispercep- fact, according to recent data from the leaving these companies with little recourse tions about the challenges and rewards United Nations Conference on Trade and for remedies in the short run. of doing business in emerging markets. Development, Africa offers the highest In many cases, the risks are either highly risk-adjusted returns on foreign investment In light of all this, how do Northern multi- understated or grossly overstated. The same among all emerging economies. nationals move forward to exploit the new is true with opportunities. Take China, for opportunities arising in the fast-growing example. Many executives of large com- It’s not just advanced country CEOs who are emerging markets while mitigating the panies believe they should—and can—do pondering investment in emerging markets. risks? The first critical step is to ensure you business there.1 From my experience having Powerhouse multinationals out of Brazil, know your customers, your partners, the worked for two decades in China, the invest- China, India, and South Africa—among oth- particular government with which you’re ment environment there is far more nuanced ers—are themselves competing across their dealing, and other stakeholders. The best and complex than most investors appreci- own geographies. At the same time, such way to do this is to carry out tailored due ate. In my view, it’s a classic case of a place firms are becoming bona fide contenders for diligence, employing different types of market share in developed markets (North). lenses and techniques and especially by 1 For a recent discussion on China, see “Pearls, pitfalls, and Indeed, not only are the traditional trade using independent, verifiable sources. possibilities,” Marketmap, Issue 1, 2011.2 PwC View Issue 15
  3. 3. To be sure, carrying out world-class due with an oil company in Vietnam because For more ways corporations can managediligence can be more difficult in emerging that’s a high-risk, high-return market. If risk while exploiting opportunities, seemarkets since, by definition, their institu- the B2B performs well, the two companies the graphic below.tions are nascent and their information could replicate the relationship elsewhereframeworks less developed. I frequently see in Southeast Asia or in another region. This list, of course, is not exhaustive. Butcompanies rely on self-proclaimed experts it illustrates the type of tactics that, ifin the local economies, only to discover that Business-to-government agreements or adopted, can significantly reduce a firm’sthese people themselves are not the best public-private partnerships are another exposure to risks.people to have relied upon. The ability to avenue. A multinational engineering andperform world-class due diligence comes construction company recently signed a Adapting to changefrom having done it repeatedly throughout 15-year master service agreement with the The industrial landscape of the worldchallenging parts of the world so there is government of Gabon to become an anchor market has changed unalterably. But this isthe capacity to recognize similar problems investor and provide management and just the beginning. There will be multiplewhen they crop up, and the information is technical support to the government as it growth nodes from here on out and not justcollected and interpreted by parties who develops a national infrastructure master between the advanced countries and theare independent to the transaction and are plan. Similarly, a major beverage multina- emerging markets—but within emergingmutually trusted by all sides. tional has formed a partnership with a large markets. The effect on companies from private foundation, three African govern- the developed world will continue to beSuch due diligence can be applied in a ments, and a project management entity profound. Adopting an investment strat-number of ways by foreign investors to that provides for local fruit farmers to sell egy informed by accurate information andeffectively mitigate risks and maximize juice to the beverage’s supply chain, substi- trusted partners with deep local insightsopportunities. One approach is to establish tuting for juice imports. Win-win solutions and experience is the best way to navigatebusiness-to-business (B2B) alliances. For like these expand the bottom line and also the risk-opportunity tightrope. But the big-example, a multinational electric power fulfill legitimate objectives on the part of a gest risk in emerging markets could be justcompany might establish a B2B agreement government to spur growth and create jobs. ignoring them.Five more ways corporations can manage risk while exploiting opportunities1Prevent, control, and 2 Know the local and 3 Watch operating model 4 Bring local talent into 5 Be a modelcontain losses related regional jurisdictional efficiency amid pressure the business and take of absoluteto corruption. nuances. to sustain profits. leadership to the streets. business ethics. PwC View Issue 15 3
  4. 4. ContactHarry G. Broadman1730 Pennsylvania Avenue, NWSuite 600Washington, DC 20006 USA+1 202 312 more insights on business issues you care about, visit View magazine request additional copies of View or to comment: firms help organisations and individuals create the value they’re looking for. We’re a network of firmswith 169,000 people in more than 158 countries who are committed to deliver quality in assurance, tax andadvisory services. Tell us what matters to you and find out more by visiting us at© 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms,each of which is a separate legal entity. Please see for further details. This con-tent is for general information purposes only, and should not be used as a substitute for consultation withprofessional advisors.The information contained in this document is for general guidance on matters of interest only. Theapplication and impact of laws can vary widely based on the specific facts involved. Given the changingnature of laws, rules, and regu­ations, there may be omissions or inaccuracies in information contained lin this document. Before making any decision or taking any action, you should consult a competentprofessional adviser. Although we believe that the infor­ ation contained in this document has been mobtained from reliable sources, PricewaterhouseCoopers is not responsible for any errors or omissionscontained herein or for the results obtained from the use of this information.